Can Jewelers Follow The Profit Road?

A battle of quality versus quantity in the watch sector will sweep through the United States in 1998. What makes this unusual is that the Swiss are the ones pushing the quantity button.

Seeing America as the land of opportunity, the Swiss will continue their watch brand avalanche, even as jewelers pare down the number of watch brands they carry – opting for quality and profit rather than high volume.

This mounting problem has been swept under the carpet, until now. The clash of philosophies will likely result in a fair share of headaches, bruised egos and rude awakenings among retailers and U.S. distributors all year.

“A lot of jewelers may be waking up to the fact that it’s not how many watches you carry, but which ones make money,” says Samuel Getz, president/CEO of Coral Gables, Fla.-based Mayor’s Jewelers.

Jewelers’ newfound pickiness and their desire to carry hot, profitable watch lines could leave many newcomer brands out in the cold.

Developments on the supplier side could be even messier. Because of the weak economy in many European markets, Swiss watch manufacturers are putting even more focus on the important U. S. market. As these manufacturers strive to meet more ambitious financial goals, they will place greater pressure on U.S. watch distributors to open new accounts, some of which they wouldn’t have touched in previous years. Worried retailers say these “unscrupulous” jewelers could suck the life out of their “legitimate” businesses.

“The message is being sent to the rest of us,” says Tom Tivol, president of Kansas City, Mo.-based Tivol. “The Swiss want quantities of watches sold, and while they understand price, quality and image, these have become secondary issues. This is not just regulated to the lower end. It goes to upscale luxury timepieces.”

Despite these serious concerns, the growing popularity of watches in the U.S. is likely to bring new sales records in 1998. Retailers and watch suppliers together are close to breaking the robust U.S. watch market wide open – with exposure and sales. And in their eyes, X marks the spot.

Colored watches, steel watches and sports watches all will be admission tickets to Generation Xers’ wallets. Color dials will continue to brighten showcases, but will they sell? The jury is still out, and retailers are split. However, a continued color push may hammer home watch companies’ message, with Omega Speedmasters and Tiger Tudor watches as the nails.

Steel watches will pick up momentum, even more so than in previous years. Watch company marketing and advertising will spur younger consumers to spend their disposable dollars on understated and affordable steel watches that convey a particular image, fashion or trend.

Sports watches are still the king of the hill and the most profitable category, say retailers. But expect a retro trend around the corner.

Consumer attitudes. Marketing plans go far beyond Generation X buyers. The public at large is better educated about watches today and is interested in ownership.

Consumer awareness of watches will soar as major marketing campaigns hit their mark. The crystal ball says: the bigger the name on the dial and the bigger the marketing budget, the better the chances in the U.S. This is especially true for the caravan of newly-licensed watch brand names. Retailers will line up for them, but with caution. (See “Licensing: the road more traveled” on page 60.)

Fashion magazines likely will give the product more exposure. Seiko’s Arctura watch on the cover of last November’s Vogue and Cartier’s Tank Française gracing actor Pierce Brosnan’s wrist on Cigar Aficionado’s December cover are just two examples.

But even the best marketing plans may be upset by price competition, whether from straight discounting, the gray market or the Internet. Some stores are selling watches aggressively online. While the Internet can help retailers through its role as an educational and promotional tool, its role as a price undercutting tool is likely to be more prominent in 1998.

“Stores that continue to discount, moderately or heavily, are fooling themselves if they think their return on investment is fine,” says Tom Tivol. “If a store is to compete, it’s impossible to increase turn and volume of watch sales to make up for the normal discounting done on most fine watches. At 20%-40% off, watches become loss leaders.

“The majority of retail merchants cannot afford to discount that deeply. It cuts the financial heart out of a jewelry store. Various retail merchants are trying to deal with it by getting exclusive watch lines.”

More complications. As if discounting were not a big enough problem, jewelers also have to deal with a watch brand invasion rivaling that of the Beatles in the 1960s – though one with less fanfare and success. This invasion will run head on into a market that wants fewer, not more, brands.

“There’s a trend in the industry to carry fewer brands which you can support,” says Steven Rosdal, co-owner of Denver-based Hyde Park Jewelers. “In the near future, retailers will look for watch brands that are well managed, and have clean distribution and good service.

“It will be a smaller club. Watch companies that fit into that club will do well and build market share. And those who don’t will be in a large pool of brands fighting for position in the United States. There are a lot of companies out there whose distribution and management will work against them.”

Expect a revolving door of fashion watch brands, and a battle in the up-for-grabs middle market. Other watch brands will attempt to climb the upscale ladder, as Tag Heuer and Gucci did successfully.

The less selective distribution strategy of some watch companies is a counter-trend to recent years when brands cut back on outlets. The danger now, say retailers, is of the business being led into a danger zone of over-production in Switzerland and aggressive U.S. distributors and retailers ready to sell regardless of price.

This possible combination will test the word “partnership” in 1998. Retailers want their suppliers to address their true need – return on investment. Watch companies want loyalty, good promotion and salesmanship and prompt payment of bills. Both sides likely will be disappointed.

Retailers are more likely to encounter suppliers who want to push more product, while suppliers find choosier retailers. “People have this tendency to think, ‘If I don’t carry that watch brand, another retailer will,’ not realizing what a drain this could have on your business,” says Sam Getz. “It doesn’t amount to anything on the profit you have to make.”

Retailers will re-evaluate the watch brands they carry, seeking to eliminate overlapping styles in their showcases. They will opt for proven profitable brands that fit the image and goals of their store rather than wall-to-wall watches.

One retailer, as an example, says that while Concord and Baume & Mercier are great watch brands, there’s little need to carry both in the same store because they are gold luxury dress watch lines with similar price points and looks. That retailer recommends picking a watch brand with distinctive styling for each category and supporting it.

“I’m not interested in crossover styles,” says the retailer, who requested anonymity. “All that does is increase our investment and spread our sales dollars. For me to take in a line, I need it to operate on all cylinders, not just half of them.”

Although the crystal ball for watches in 1998 is a little cloudy, one thing is clear: there will be more watch brands and more difficult decisions for retailers to make.

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