27 May, 2018

Richemont Destroy £400m worth of Watches

In our previous article "Fighting Against Ubiquity" which you can read here, we explored the methods luxury goods manufacturers are employing to protect their long-term brand equity.

These methods can range from revoking licenses to destroying stock and Richemont did exactly that. After buying back their watches (ranging from £1,000-£20,000), they recycled any usable parts before destroyed their own timepieces.

The goal was to preserve the exclusivity of their brand. The cost? £400m but after taking into account the markup and RRP, the figure could be half. 

This could not have arrived at a worse time for Richemont, who recently completed a €2.7bn acquisition of Yoox Net-A-Porter, as the Swiss watch industry is still recovering from a downturn in sales caused by mounting issues and the newly-coined phrase 'triple threat'.

Issues Facing Richemont

Richemont's portfolio of watch brands is enviable, to say the least. IWC, Cartier, Montblanc, Panerai and more make up their portfolio of watchmakers.

However, these luxury brands have one common enemy, Ubiquity. 

What caused their products to become more accessible? Why did they resort to such an extreme measure to protect their brand? Here, we pick out the four reasons it happened.

Production

Even though the Swiss watchmaking industry experienced a downturn in sales, production stayed the same! This led to the market being overstocked. Usually, when a market is overstocked, a business can opt to discount their products through a sale.

This is not the case for luxury product retailers because it can harm the relationship they have with the manufacturer and also their status as a licensed retailer. 

Finally, for those retailers who are more interested in protecting their investment, they can use the grey market.

Grey Market

The grey market is different to the black market.

The Difference between Grey and 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.

Distributors in the Grey Market

These distributors in the grey market can sell luxury products at knock-down prices.

These practices are not illegal, they just go outside the manufacturer's authorised retail network. 

Luxury products can be highly sought after in these markets as they have a high markup, are easily transportable and are long-lasting.

Long-term Impact of Grey Markets

The only issue with grey markets are the long-term effects. They can irritate customers who pay full price for the same products they see heavily discounted in these un-approved channels. In addition, the retailers and wholesalers are also annoyed because they are paying more in the approved market. 

In extreme cases, clients can boycott the brand and this can destroy the market in an approved distribution channel.

What happens now is that retailers are buying products that are not going to sell which forces them to turn to the grey market. This makes the manufacturer become more accessible and they lose their exclusivity and appeal.

Non-approved selling in the Grey Market

How a luxury watch can go from an authorised selling channel to an unauthorised one depends on whether the watch sells and the self-interests of retailers.

For example, a retailer can buy a watch for £7,500 and 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.

That third party buyer can then sell the same watch for £12,500 and make their own profit as it's under the RRP.

Demand

The watchmaking industry has experienced a drop in sales which has been caused by many external circumstances. Some of which were out of their control.

For example, in China, the practice of officials gifting luxury products such as watches to fellow professionals became banned and this removed a lucrative market for luxury brands. 

These brands are responding in several ways. For example, luxury fashion houses are going more upmarket and also charging higher prices and this is aimed at closing the gap left by a key market. 

Final Words

Richemont is taking a stand against the pressures facing their industry. 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!

If you enjoyed the article then hit the share button. 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" by clicking the link below.

 
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Richemont Destroys £400m worth of Watches
Richemont Destroys £400m worth of Watches
Richemont Destroys £400m worth of Watches