Edited by: Lavanya Goswami
From Watch enthusiast to Economist : A brief introduction
Have you ever wondered how the secondary watch market works? Or even how large it might be? Or are you just an enthusiast who appreciates the craftsmanship behind watches? This blog will take you through the “resale” market where watches worth thousands or even millions of dollars are sold every day. From understanding the economics behind secondary markets to considering watches as an alternative investment, this blog aims to take you from being a watch enthusiast to an Economist (or atleast just give you a basic understanding of Economics)
What is a “secondary” market?
For a better understanding of the secondary market, it can be further divided into the Stock exchanges or OTC (over the counter) markets. The secondary watch market would be an example of an OTC market which is decentralized, wherein dealers exchange goods amongst themselves.
The question arising now would be, why should one even get involved in a “secondary market” for watches and not just buy them from the store? People do not just view watches, especially those coming from luxury manufacturers as just ‘timepieces’, they are now often considered as investments or more-so as a status symbol . In accordance with this, it has become increasingly difficult to obtain such pieces even for the ultra-rich.
For the avid watch enthusiast, the secondary market provides the opportunity to buy such watches (in exchange for a premium) when there is a scarcity in the market. They can buy these watches almost immediately instead of getting on waitlists (some even lasting for almost 20 years!). This market also provides access to vintage watches which currently have a great upside in terms of growth and market penetration. Here’s a link to an article for those of you obsessed with the business side of vintage watches.
Understanding Market Forces
Let us take you through the market forces by understanding the case of one of the global leaders of luxury watchmaking - Rolex.
Although we have established that it is difficult to get a hold of most luxury watches through official stores, there are several economic and behavioral insights to be gained to understand the rationale behind it. It is important to understand that the demand for commodities like luxury watches work differently to that of Normal goods. Such goods are called Veblen goods. After a certain threshold known as the "snob value", the demand for these goods increases with the increase in their prices especially due to the “status” value associated with them. The graph below shows the comparison between the demand curves of Normal and Veblen goods.
First off, there’s a simple case of demand and supply. The advent of social media, online blogs and other forms of digital media dedicated primarily to watches, has fueled a steady increase in demand for luxury commodities such as watches by Rolex. The demand curve has thus ‘flattened’ due to greater access to information regarding the product, through advertising. While Rolex is not creating an “artificial demand” of its products by withholding its supply to the customers (as speculated by several netizens), it is also not ramping up its supply to meet the ever-growing demand in order to preserve the symbol and the lifetime value that its products offer to their consumers. This leads to the surge in activity in the secondary markets pushing prices up and creating that “availability” for the consumer who has a high WTP (Willingness to Pay) by charging a significant premium (some Rolex models are sold for double their MRP on the secondary market). The price of these “luxury” watches are also driven by global macroeconomic factors such as inflation and fluctuations in exchange rates.
Given that these watches are be
coming more and more attractive as a status symbol for those who can pay for it and the fluctuations in terms of prices (and the concept of “value” being a subjective notion- especially in the secondary market), can these watches be considered as an alternative investment?
Watches as an Investment ?
With the exceptional potential of luxury watches (from brands such as Rolex, Patek Phillipe and Audemars Piguet to name a few) holding, and more often increasing in value due to their collectibility, heritage and craftsmanship. A report by Business insider depicts an interactive comparison of prices of Rolex as compared to that of Dow Jones, Gold and Real Estate since 2011. The surprising winner out of the lot being Rolex. The Boston Consulting group also reported the tough competition given by luxury watches to the S&P 500, sometimes even exceeding the returns provided by the latter.
The graph below shows the findings from the BCG report.
The value provided by luxury commodities in terms of intrinsic value (craftsmanship and heritage) and the growing demand for status symbols such as these make it a real competitor to become a separate asset class. Does this mean it that luxury commodities such as these make for a good addition to your portfolio? We would say, it depends. No commodity comes with zero volatility and the recent, significant decline in the luxury watch markets bears evidence to that.
Future trends
Second Hand luxury watch prices have fallen by a drastic 31% as compared to their peak in the month of March, 2022. It is said to be a market correction to the boom in the industry, supplemented by the pandemic and a cryptocurrency run. A simple economic explanation for this could also be that, when the price of such commodities reach exorbitant highs, it incentivizes a lot of selling and in turn, the flooding of the market with inventories of the major luxury watch brands has also dragged the prices down.
BCG and CNBC reports also suggest a stabilization in the prices with a heavy influx of the younger generation picking up the passion for collecting watches and a stable baseline of the value that these commodities offer. With several indices coming up showing prices of watches and brands (in terms of sales) as listed socks, we are definitely set up for an interesting horizon in terms of consumer behavior and strategies deployment of such brands.