The Cost of Brand Equity
In our previous article: Fighting Against Ubiquity, we explored the methods luxury companies use to protect their long-term brand equity.
They can range from revoking licenses and reduced production to actually destroying stock. Richemont stunned the world when they announced they had destroyed £400m worth of luxury watches.
The prices of the watches destroyed had ranged from £1,000-£20,000. However, they recycled any usable parts before destroying them.
Although the figure is quite astronomical, it has raised a fascinating question about the luxury market. The focus is on how they conduct themselves and the lengths they go to in order to be considered luxury.
After all, reputation is everything and Richemont reminded us of that. Now that you know what they did, it's important to understand why.
Why Did Richemont Destroy their Own Watches?
Richemont owns a lot of brands, it's actually enviable. Under their umbrella, you'll find IWC, Cartier, Montblanc, Panerai, Piaget and more.
It's incredible to own all of those historic watch brands but it makes the battle even harder. This battle is called Ubiquity and it's the state of being everywhere.
In short, luxury brands don't want to be accessible, it makes them feel common. This explains the reason why Rolex doesn't have as many stores as McDonalds and Ferrari doesn't produce as many cars as Apple does with their iPhone.
The case with Richemont is interesting because they were caught on the blindside in three different ways! They were: production, the grey market and demand.
The Swiss watch market is going through a period of recovery after experiencing a very turbulent 2015 and 2016.
Watchmakers were reporting a fall in sales and this culminated in the entire industry stomaching a drop of 10% in revenue and in demand for 2016 alone.
To put this into perspective:
- 2015 exports stood at 28.1m.
- 2016 exports dropped to 25.4m.
- 2017 exports dropped to 24.3m.
As you can see, the demand is falling but where are the unsold watches going? Well, with falling demand, licensed retailers were becoming overstocked and this created the perfect breeding ground for problem two, the Grey Market.
What is the Grey Market?
Before we get started, the grey market is very different from the black market.
A black market contains products of which are fraudulent or stolen. A law would need to have been broken in order for the products to appear there.
A grey market is perfectly legal. They contain genuine products but are found in non-approved selling channels which means the distribution channel would need to have been broken.
Let's throw in an example of how the grey market can work. Let's say that a licensed retailer could buy a watch for £7,500 and it has an RRP of £15,000.
If the watch does not sell, the retailer is out of pocket as they cannot discount it. They could sell to a third party for £10,000 and make a profit. Now, that third party buyer can then sell the same watch for £12,500 and make their own profit as it's under the RRP.
So, the licensed retailers would have broken the distribution channel to sell genuine watches at knock-down prices. Not illegal sure but it can seriously harm the relationship with the watchmaker, or Richemont in this case.
China Bans Luxury Spending
China went on a crusade to stop officials from spending lavishly on luxury products and this had a dramatic effect on the luxury goods market.
luxury brands were not braced for this change and experienced a serious drop in sales.
They responded by charging higher prices and going even more upmarket to help plug the gap.
Now that you know the reason why Richemont destroyed their own product, you can sort of understand it.
Richemont is taking a stand against the pressures facing their industry but it in such a dramatic way. This could not have arrived at a worse time for Richemont, who recently completed a €2.7bn acquisition of Yoox Net-A-Porter.
In the short-term, they will take a financial hit but in the long-term, their brand-equity will be preserved along with their retailers, clients and wholesalers.
Will other watchmakers take a stand? We don't know but when they do, we look forward to writing about it!
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If you want to read more about other threats to the Swiss Watchmaking Industry then check out our article Threats to the Swiss Watchmaking Industry.