Saturday, June 28, 2014

A Cold Cup of Coffee...

Being an enthusiast does not make you an expert.  I played a little semi-pro soccer but I would not presume to give advice to Lionel Messi on his game.  But at a BaselWorld party I sat gobsmacked as a fellow blogger proceeded to give detailed feedback to the marking team of a watch brand (politely, mind you) of EVERYTHING that they were doing wrong, and how HE would do it, because of course, he came from "a MARKETING background"….

Now point of clarification, in fairness, if you ask one of us just what we think, we just might tell you ; )

So bearing all of what I just said in mind, I am about to share with you MY OPINION on the retail business in North America.  Fair warning -

YOUR FRIENDLY NEIGHBORHOOD RETAIL PARTNER IS BECOMING EXTINCT

Sounds pretty dramatic, doesn't it?

Well if you own a retail store you are facing increasingly taller odds of making it these days.
As a retail store, Brand X will expect you to carry (let's say) 24 pieces at any given time.
If you are a "New Jack", then most likely the best you can hope for is "terms".  Meaning that you were "sold" the watches on the understanding that you would settle the bill in what is sometimes  referred to as "30, 60, 90".  In other words, the brand is taking a bit of a gamble on you with the hope that if they let you have 24 pieces, you will pay for 8 of them in the first 30 day period, followed by the second 8 after 60 days with the whole account being "settled" at the 90 day mark (essentially a quarter of a year).

But more and more lately, it does not work that way.  Quite frankly, sales are soft.  Nobody is willing to pay retail, people more and more are shopping online or by phone.  And so now your friendly neighborhood retail partner is sitting on stock that hasn't sold, the brand is calling, calling, calling…
and something has to give.  So in most situations like this, the retail partner now must scramble because this represents the first falling domino.  If the retail partner can't pay the invoice, then one of three things will happen.  

1  If the BRAND is running like SWATCH, RICHEMONT, LVMH or ROLEX - let's just say they have entire departments that are focused on "collections".  The big groups get paid first, that is just the "law of the land".

2  If the BRAND is a mid-tier brand and can "carry" it, the BRAND will suck it up and the terms will extend out from 90 days, on to 180 days, and finally into a full year.

3  The retail partner is not big enough to get better terms, threatened with collections and litigation, to avoid going the bankruptcy route they will dump whatever stock they can.  Now contrary to popular belief, this is not limited to the most obvious approach - offloading the entire collection to a grey market web store.  

Step 1  
What will happen first is that the retail partner will phone their "best customers" with a "special offer".  Suddenly a watch that retails for $8,500 is suddenly 50% off.  And that is just for starters as there will be hemming and hawing back and forth, negotiations, requests for a "line of credit" from the store to help the customer pay for the watch, and so on.

Step 2
If this doesn't work, then there might be a call to a different retail partner to try and sell the watch to them, or swap it for an item a that might be more "sell able".  As a side note, in this instance it is a very, very dubious business practice on the part of the retail partner - and in my view it is theft.  They are giving away something that they have not paid for, and now the brand can't even get the watch back from the store, because the store has "traded" it.  Sorry, that is theft.  There, I've said it.

Step 3
If these two steps don't work, then the watch heads "deep south", meaning that it will be sold to a grey market web store.  And this has still not solved the retail partner's problem.  Remember, they bought the watch for "Keystone" which in most instances represents 50% off of the retail price.  But that is not what the grey market store will pay for it.  For a grey market store to be competitive they must sell the watch for AT LEAST 30% - 50% OFF of retail.  But they will be looking for the SAME 50% margin on what they paid.  So now, the watch that retails for $8,500 is being offered for $4,250 by the grey market store.  

Problem solved?  Not exactly.  Remember, the retail partner owes the watch brand $4,250.  They have sold the watch to the grey market for $2,125.  Meaning they still owe the brand $2,125.  And in the meantime they are trying to keep employees paid, pay the rent, keep the lights on…  I think you can see where this is heading.

So, who's fault is it?  In all honesty, it is both no body's fault, and every body's fault.  The brand has pressure put on it by shareholders to increase sales.  One of the metrics that the brand will look at is how many "doors" (stores) are opened in a 12 month period.  All doors are not created "equal" and when we speak about independent retail stores, the sad, simple reality is that it all comes down to cash flow.  The independent retail store needs to have different types of watches to remain competitive and they have to be ready to discount to not lose sales to the grey market and the bigger stores and chains.  They also have to pay rent, salary and keep the store open.  So the survivors of the independent retail game usually have a few things working in their favor:

1.  They own the building
2.  They move watches within 30 days - whatever it takes 
3.  They pay their bills - usually.  There are a few "bad actors" out there who will try to play games with smaller brands and mess them about.  This works for the retail store in the short term, but then they lose the brand.  Keep in mind that stores like these promote the idea that they can get you ANY WATCH you want at 30% off.  But when you've screwed a small to mid-tier brand manager over, he/she will not be too likely to let bygones be bygones. Even if that manager has moved to a different brand, they have made a point of sharing the "story" with as many fellow brand managers and brand reps as possible.  If you are a "bad actor" as a retail store, believe me, the people you screwed over will make sure that everyone knows it.  So when you go to big retail store X and they tell you they can't get a specific brand or model - the real reason is that they have "sinned" and it has not yet been forgiven ; )  

So, is there a solution?  Well, unlike my blogging colleague I am not going to presume to know for sure, but to put it succinctly - there is the potential for the retail store and the brand to work together and both be profitable.  Until they work out just how to do that, we will continue to be drinking cold coffee.

Enjoy your watches ; )

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