There has been an unprecedented surge in Rolex prices over the past 5 years; however, a recent decline is evident, as indicated by the Rolex Market Index on WatchCharts. This index, reflecting the financial performance of Rolex watches in the secondary market, comprises the top 30 Rolex models by transaction value. It illustrates the average market price (in US$) of these 30 watches over time, reaching $29.322 in April 2023. Subsequently, it has experienced a 6.7% decrease, settling at $26.995. In comparison to the peak in March 2022, prices for second-hand luxury watches are approaching a two-year low, having plummeted by more than 31%. The pertinent question now is the future trajectory of the market and the potential repercussions on sales for watches from other brands.
The growth in past years has been driven by favorable macroeconomic conditions and low-interest rates. This surge is closely tied to the rising value of the stock market and a significant increase in disposable income among investors. As a result, investors have begun diversifying into various assets such as watches, art, and cars. However, at the onset of 2022, these conditions shifted, leading to a plateau in the watch market values. Following a brief period of stability, then their values have been on a downward trend. Predicting where this decline will bottom out is challenging.
The elasticity of the demand
To comprehend the phenomenon at hand, let’s delve into the concept of demand elasticity. Demand elasticity measures how the consumption of a product changes in response to fluctuations in its price. Initially, luxury goods are often considered inelastic, akin to essential goods, indicating that consumers would purchase them regardless of price changes, signifying a rigid demand. However, for a segment of the clientele motivated by speculation and aiming for profit, such dynamics shifts, and the demand becomes elastic. In the realm of non-essential goods, even a marginal price adjustment typically results in a significant shift in demand.
Consider, for instance, the case of a gold GMT Master II, initially priced higher than its list price. In such situations, the allure of profit incentivizes purchases, leading to an upsurge in demand and subsequently driving prices higher. However, when the macroeconomic landscape undergoes a transformation, causing a cessation in the price escalation, a consequential shift occurs. As the price stabilizes, investors driven by speculative motives begin to withdraw from the market, triggering a decline in prices due to the fundamental principles of supply and demand. When the price nears the initial listing, the demand becomes even more sensitive. A slight decrease in value prompts a mass exodus of those who engaged in speculative buying, creating a self-reinforcing cycle of decreasing prices. This cycle persists until it reaches a point where the core group of customers, those who purchase luxury items without speculative intent and are impervious to demand elasticity, remains. Only then, does the downward spiral come to a halt.
The current scenario
Estimating the price at which the new equilibrium will be reached is a challenging task that extends beyond the scope of this article. However, it is essential to acknowledge that the landscape has shifted, with the cost of borrowing money no longer at zero. Consequently, only a limited number of individuals can genuinely afford to purchase a 40.000€ watch. Previously, the rationale behind such purchases made sense because borrowing money was essentially free, allowing individuals to generate a profit from the investment in the watch market. Now, with the cost of borrowing in play, the scenario has changed, making it less feasible for people to engage in such transactions, given the anticipated financial losses. While this argument holds for items like steel or less expensive pieces, the impact is mitigated due to the smaller scale of profit or loss involved.
Unsurprisingly, the Maisons have not merely observed the situation, but they have actively implemented strategies to mitigate the impact of declining prices on their brands. For instance, Richemont has been streamlining its distribution network by reducing the number of authorized dealers while simultaneously expanding its boutique presence. A stroll through Milan’s Quadrilatero della Moda reveals that Richemont boutiques have strategically relocated to more spacious venues. This approach enables brands to engage directly with customers, enforce stricter pricing policies, and reserve certain watches exclusively for boutique sales. Leveraging this exclusivity, brands can maintain control over discounts. Additionally, instead of relying on discounts, they can offer a premium customer experience, such as exclusive manufacturing site tours for top clients and personalized attention with complimentary accessories or straps.
Even in situations where discounts are necessary, all brands have capitalized on recent growth, ensuring that even with a 30% discount, prices remain comparable to those from five years ago. Furthermore, selling through boutiques eliminates the need to pay intermediaries. This, coupled with potential improvements in macroeconomic conditions, could halt the downward price trend and potentially lead to an increase. However, despite boutiques’ ability to influence the pricing of new watches, the market’s allure ultimately dictates secondary prices. Rolex, being owned by a non-profit foundation, operates independently of shareholder pressures and already announced the expansion in production, through the construction of two new factories. This future availability increase might diminish the appeal of other brands that initially benefited from Rolex’s scarcity and price hikes, leading to their depreciation in secondary market values. In order to avoid the occurrence of such a scenario, many brands, like Audemars Piguet, Jaeger-LeCoultre, Zenith and including Rolex, have already introduced “certified pre-owned” programs with the clear aim of influencing and stabilizing the secondary market. Watchype opinion In conclusion, I personally believe we are moving towards market dynamics reminiscent of historical trends in the watch market, particularly in the 2000s. During that period, acquiring a Rolex at a price close to the list one was feasible, except for highly coveted models like the Daytona, while other brands offered watches at discounted rates, even though nowadays they would be still higher than those seen five years ago. Going deeper inside Rolex references, if five-digit Rolex references have been following the rise in prices of the six-digit reference, they will also follow their decrease. On the contrary, I personally foresee a different fate for four-digit references. Considering their limited production and the fact that not many of them have been preserved in excellent condition over the years, they possess a unique rarity and intrinsic value. A brand that might be less susceptible to the aforementioned market dynamics could be Cartier. Given its historical association with jewelry, Cartier watches may be more resilient to market fluctuations due to their inelastic demand. In essence, these evolving market dynamics are likely to provide more favorables opportunities for true enthusiasts and passionate collectors.
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