Apple Watch or Rolex? Watch Industry Dynamics

If I were to ask you, what would you buy - Smartwatch (Apple/Samsung/Others) or Swiss Watch (Rolex/Omega/Others)? (keeping money for the time being)

Think for a moment, and then read the entire article.

I ran the poll on the same, and here is the result

So it is clear - the fight is between the Swiss Watches and the Apple Watch. Others are not in the race.

First - The Industry

The market for the world watch market is close to $70 Bn. (this include all sorts of watches)

Smarwatch Market - $20 Bn (units shipped 100 Mn in FY 19/20)

Luxury Swiss Watch Market - $ 20 Bn (units shipped 20 million in FY 19/20)

Rest - $30 Bn (not important)

So, why Apple vs the Swiss Watches?

Apple controls 30% of the smartwatch market by units shipped and 45% of the market by the value.

Last year, Apple roughly shipped 30-35 Mn watches, totalling the value $ 10 Bn (roughly $250 a piece).

Units now exceed the entire luxury swiss watch market. In terms of value, Apple will cross the swiss watch market in next few years probably. Hence the comparison :)

Luxury Watch Market

The luxury watch market is largely controlled by four groups.

1. Rolex
2. LVMH
3. Richmont
4. Swatch

Group Market Share by Value (Source: Morgan Stanley and LuxeConsult Report))

Look at the snap below and you will understand.

Now, if we look at the market share among these group brands then Rolex tops the chart with more than 25% market share by value. (Source: Morgan Stanley and LuxeConsult Report)

Rolex produces close to 1 Million Watches a year (estimated sales $ 6 Bn), Omega does around 500,000 watches a year (estimated sales $3 Bn).

So that means Rolex and Omega per unit price is around $6000+ (it retails for around $7000-$9000 range so that is basically dealer's commission).

Apple is no where near this number :)

So, what's happening in the Industry?

If we look at the units shipped YoY then it is declining but the value is not declining. Look at the chart below.

So to speak, the cheaper options (quarts watches) are the ones who is losing the market against the smartwatches. Mechanical watches are not losing market at all. That means people are still willing to pay the premium for the engineering and craft.

Quartz watches provide volume like smartwatches. Mechanical watches provide value to the companies.

That's the solution - sell more and more mechanical watches and be in the market.

Is that easy?

Oh no.

We saw that 20 brands (not companies) control 80% of the business.

For example - Rolex brand control 25% of the business. Tudor brand control 2-3% of the business. So, Rolex Group control 27-28% of the business.

But for these brands, the market is going to be limited in terms of units-wise. So the only mechanism they have is to increase the price.

How?

By controlling the supply. These brands do not expand (as per my knowledge). Infact, Rolex cut down on the production last year by 15%.

Right now, as we speak there is a acute shortage of Rolex watches world over.

In Mumbai, for example, Rolex have 4 boutique stores. Collectively, they have less than 10 watches for sale. Crazy...

Plus, a lot of these brands (like Maurice Lacroix or Corum) who have less market share will eventually make a loss and will be acquired by one of these 4 groups (Richmont, LVMH, Rolex or Swatch). Consolidation is happening but further consolidation will happen.

Maurice Lacroix (number 49) makes just over 50,000 watches a year and average retail price is just over $800. In this type of market, unlikely that they will make any profits.

See the comprehensive table below.

Verdict

I personally don't think the core industry has any risk from Apple Watch. Those who can afford Rolex, can afford Apple Watch (and probably have it too).

But it is unlikely someone wants to buy Rolex/Omega and then suddenly changes mind and settles for Apple Watch. Unlikely. Not happening.

There is going to be a supply constraint.

Consolidation will happen.

Price will keep on going up - especially for the automatic watches.

Low end quarts industry will be snatched by premium smartwatches to a large extent.

China and USA will continue to drive the demand for the luxury swiss watch market.

What else? Did I miss anything? Do comment your thoughts.

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