Saturday, October 27, 2018

The Real State of the Union

So another update from the FH squirts more ink into the water, further clouding the reality of where things stand. 

For the record, here are the numbers as reported -

Courtesy of the FH

So the short and sweet?  Exports are down.  But let's take a deeper dive, shall we?

Remember mighty Singapore?  They were up 25% last month!  Guess how they did this month?  Down 49.4%.  Un petit mystère, n'est-ce pas?

Not really.  Because what you will come to figure out if you dig even a little into the uncomfortable reality?  Sales, overall, are down.  Actually, let me re-phrase that.  Sales through traditional, traceable, "normal" channels are down.  And our old friend the Grey Market?  Boom times!

And this is where it gets even murkier - the rise of the "limited edition" / "collaboration" watch.  Not so long ago, a watch brand would not go near anywhere near such limited series.  Anything below a certain threshold would be dismissed out of hand.  It was more headache for smaller margins than they thought it was worth.  And interestingly enough, the margins now seem worth it.  What does that tell you?  Very simple, the brands realize that they need to grab ahold of any margins that they can.  There is a wee bit of marketing thrown in, but simply put, the realities are starker than anyone wants to admit.

And once again, if you think I'm full of it, ask the most recently departed CEO as to just how good real sales really are.  You can make a million watches, you can export a million watches, but if you don't sell a million watches?  Well that is a totally different story.

As a commentator on this sort of stuff, I find myself in a weird place.  I work with brands, both big and small as a consultant.  And I find generally that I have two types of clients - those who are ready to listen and self-reflect, and those who are not.  And in fairness, that is human nature.  

I think what is (for me at least) painfully ironic, is that in many ways we have already been here before.  And the brand CEOs who are frequently finding themselves right back in the same situation that they were before.  

The watch industry, as it is currently structured, is not sustainable.  It simply isn't.   It is currently predicated on some very unrealistic expectations that are based on some very general presumptions without any real hard analysis about population, real income, real levels of disposable income.  When you have a brand that proudly tells you that they only make 50 watches per year, priced at $45,000 each, it raises some very real questions, and this is a summary of one such conversation I had this past BaselWorld:

Q.  How many employees do you have?
A.  Ten
REALITY CHECK - Figure that the CEO is getting at least 100,000 CHF per year.  The other 9 must be making at least 50,000 but likely more.  So that's about half a million right there in payroll.

Q.  Do you sell direct to the customer?
A.  No, we work with distribution agents who then sell to retail partners.
REALITY CHECK - That means that the $45,000 retail is actually 30% coming back to the company.  If we go by the old UN rule of 7% production costs, that really translates into 23% (but it is likely less) which comes out to 10,350 per watch.  Let's multiply that by 45 and we come up with 465,750.  So right away, we have already. outstripped our payroll.  You are already operating at a deficit.

Q.  What do you do if you don't have enough stock?
A.  Well, we still haven't had a year yet where we sell completely through our stock.

Q.  How many foreign travel trips do you make?
A.  Oh, I am always on the road.  I typically have 2 trips to the Middle East, 2 trips to China, and several trips to other locations.

Q.  How many fairs do you participate in addition to BaselWorld?
A.  Probably 5 major fairs.
REALITY CHECK - SEE ABOVE, and the administrators have come in and taken everything.

But somehow, some of these brands magically keep going.  Up until recently it was Chinese money coming in.  But the Chinese have begun realizing that they were throwing good money after bad.  So several of those brands either did a Sleeping Beauty, or they have or are in the process of untangling themselves from these losing enterprises.

What next?  Investors, and by investors I mean money fund managers who (most likely) are passionate about watches and are convinced (often wrongly) that they can turn things around.

Every BaselWorld you see the third entity, the wealthy people who can't afford a Premier League football club, but owning (part or more) of a watch brand is a safer, slower way to flush their money down the toilet.  And up till now, several brands have kept going with what can best be described as a semi-annual search for new investors.  And for the smaller brands, they can probably float along for another 3 - 5 years.

But this year it seems that brands are finally hitting bottom.  And I truly do feel bad for all of the people that this is going to hurt, the midlevel employees.  It remains unclear whether the (now former) CEOs will land on their feet again and live to spend foolishly another day, but the number of brands pulling out of BaselWorld is a true sign, whether or not anyone wants to acknowledge it.  There is a very real culling happening right now.  Some people see it, others will probably only accept it when they are no longer in the positions that they currently enjoy.

What is interesting to me is that we have come somewhat full-circle from where we were in the 70s, then 2008, and we are really right back there again.  

But it's not all doom and gloom.  Because what I think is going to start happening is that the truly talented managers and leaders are now going to be sought after, boards and directors are going to realize that good things will take time, and that yacht sponsorships and celebrity partnerships will not pay the milk bill when wages are due.

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