Sunday, December 27, 2015

Numbers Don't Lie - Paying the Check

While we will wait for the results of December, it appears clear that 2015 was not what anyone was expecting.

Numbers don't lie.  And the simple truth is that at least per the FHS reports, the numbers for 2015 have not been good.  From December 2014 - November 2015 the export figures have dropped from 2% down to below - 3%

Courtesy of Federation of the Swiss watch industry FH
Now there is a very fascinating caveat that the Federation includes with these statistics that really bears greater consideration:


Statistics published by the FH are based on export figures and not on sales to the end consumer. There may be differences between these two types of results. In addition, FH statistics are the result of consolidating the exports of all Swiss watchmaking firms. It is not possible on the basis of these statistics to determine the business trends of a particular firm or group, bearing in mind that performance levels may differ from one company to another.

So while numbers may not lie, they also do not tell us everything that needs to be understood to comprehend just how bad it really is.  Because while we can see the export numbers are dropping, what is still unclear is just how many unsold watches are festering in distribution centers or retailers safes.  

The culprit?  Simple - overproduction.  Moreover, the naive refusal to realize that the business has changed and things are likely never going back to the way that they were.  

The previous logic vs the new reality:

1.  If you can sell 2,000 watches, then it is perfectly likely that you will sell 4,000 if you make that many.

Reality - It is entirely likely that you were never selling the 2,000 watches in the first place, and even if you were, a great many of those were sold through grey market at sometimes staggering discounts, thus actively devaluing your own brand.

Remedy - presuming that you really were selling 2,000 - incrementally increase that number by say maybe a few percentages - not 100%.  Scarcity creates desire, which in turn creates demand, which in the end will drive REAL sales.

2.  If you sell 4,000 watches (whether you really do or not) you will get your bonus!

Reality - If you are the top dog then yes, it is likely you will be enjoying the fruits of your bonus check, and only 6 - 12 months later will the reality wash across the books.  Meaning you will either have moved on, or been let go, but you still get your bonus!

Remedy - While companies should incentivize, the incentive should be based not only on sales to distributors and retail partners, but also reflect what the actual sell-through was at the retail level.  And this is an actual, knowable number as the brands are often forced to visit larger retail partners who are on "memo" and do a "safe count" to know exactly how many watches have really been sold, and submit an invoice that might actually get paid in 90 days.   

3.  If you sell your "overproduction" to grey market sources in countries that you do not have distribution, it will never impact the countries where you DO have subsidiaries and distributors.  

Reality - Stop competing with your own subsidiaries and distributors by overproducing and dumping the stock through grey marketers.  These watches are invariably picked up by larger online stores and will then be competing with your partners.  

Remedy - Accept the reality that even if 1 customer purchases a watch from your brick and mortar partner who purchased it through your subsidiary/distributor, there are 100 more who might have visited the same brick and mortar store, tried on the same watch, then called "St. Google" to shop for the best price.  And at the online grey market super store they have purchased that watch at a minimum of 30% off - frequently more.  As the manufacturer, stop playing these games with your partners saying "I don't know how our watches could have gotten there..."  

Of course you do.  

But that is just how to clean up moving forward, remember, in the NOW it is a very UN-Merry Christmas.  Remember that there are losses that need to be dealt with.  And it is usually the "supporting cast" that gets the "fuzzy end" of the lollipop.  

So who pays the bill?  While that is a metaphor, it is also a very stark reality because the people paying the bill are:

1.  Watch brand employees at the factory and headquarters level - several brands very quietly made several employees redundant with lay off notices the week before Christmas.  It would seem no goose for "Tiny Tim" this year.

2.  Watch brand managers in the various countries - many have been cut loose or know they are about to be.  Resumes punched up, hopes for a brighter future with a new "shot-caller", thus the cycle begins afresh in 2016.

3.  Watch distributors - they are the ones competing with their own "factories" who are over-producing and dumping product in the grey market.  When a customer can buy a watch for less than what you as the distributor can sell it for?  I don't think you need an MBA to figure that one out.

4.  Watch retailers - with the market flooded, that once loyal customer is now more likely to shop around, and to purchase through the grey market.  Sales drop, no longer able to pay the "most urgent" creditors, staff are let go until there is virtually nothing left.

5.  The brand - odd that I would put this last, but the place where the problem started will inevitably be the ultimate casualty.  Think I'm kidding?  I am not kidding.  

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