Watch industry observers have spent a lot of time dissecting the unavailability of steel Rolex sports models this year (submariner, GMT, etc). These timepieces are presently impossible to buy at the manufacturer's suggested retail price (MSRP). You can acquire them outside official channels but only at a multiple of retail. For one summary of this topic check out episode 48 of Hodinkee radio below.
I've listened to a lot of explanations and, frankly, almost all of them miss the point. While I don't know everything I should about perlage I do know something about economics. And economics explains almost everything about this watch industry phenomenon.
The picture to the right llustrates the market for Rolex steel sports models. Demand and supply get their shape from the fact that people are less inclined to buy at a higher price. In ordinary circumstances the market would clear at the MSRP of $8,000 and Rolex would sell 500,000 watches at that price.
What is the market actually doing?
Rationing is a situation in which fewer than the "normal" amount of something is available in a market. As an illustration suppose there is a 20% shortage so that Rolex only brings 400,000 watches to market. What is the result?
Owners value the watches at more than MSRP because of the shortage. On the graph the price reaches $10,000. This is exactly what we are seeing in the grey and preowned markets. A key insight, though, is that this price exceeds not only MSRP but also the price Rolex would need to receive in order to bring 400,000 watches to market. Why? Because of the profit motive. A lower price and weaker profits are what we would usually expect if Rolex is bringing fewer watches to market.
Rationing is inefficient. The shortage creates a rent: buyers pay $5,000 more for a watch than they should ($10k minus $5k). Rolex doesn't require a $10,000 price to bring 400,000 watches to market. It would do so for $5,000. The inefficiency comes from the fact that both buyers and Rolex are losing because of the shortage. If 500,000 watches were available at MSRP then there would be a win-win: more buyers would get watches at a lower price and Rolex would sell more watches at MSRP.
It is important to note that neither Rolex nor ADs collect the rent because watches must be sold at MSRP through official distribution. Instead the rent is earned by those lucky clients who are, essentially, hand-picked by authorized dealers to receive a watch. Those who buy at MSRP are actually not spending anything. Instead, Rolex is effectively giving them $2,000 ($10,000 value minus MSRP), a 25% return on their purchase! This is probably the first reason that Rolex rations. An $8,000 watch is a huge expense. Buyers need a lot of reasons to pay that much and most of the watch industry, particularly marketing, is directed at giving them those reasons.
There is no practical reason to buy a Rolex. Time is better kept with a phone or a smart watch, each of which is less expensive. But rationing does not appeal to the practical or emotional reasons for buying a luxury watch. It has more to do with money. Even the most tight-fisted clients will see the logic of earning 25% on a watch purchase ($2,000 rent / $8,000 MSRP). Rationing is a marketing strategy. It overcomes the disappearing practical reasons for buying a luxury watch.
And who wouldn't continue to buy from a company that gives them $2,000 with each purchase? So we can also see that rationing is a loyalty play. Patek Philippe behaves similarly with the Nautilus, a model with a wait list 8 years in length.
Rationing creates no direct benefits for authorized dealers and Rolex. In theory, ADs sell at MSRP and they must sell at that price even if there is a shortage. Rolex charges ADs less than MSRP whether or not there is a shortage. But a closer look reveals many indirect benefits. First, we must acknowledge that authorized dealers also have an incentive to earn the 25% return experienced by potential clients even though their commitment with Rolex requires them to sell at MSRP. Perhaps there are some close relatives and friends who might be interested in splitting the $2,000 rent through purchasing at retail? Or perhaps there are unauthorized dealers who would do likewise? We can not ignore the possibility that ADs profit from rationing through "kickbacks." This also creates loyalty among ADs.
Uncertainty is also a very significant factor in the luxury watch industry. Even conservative brands like Rolex experiment with watch designs and features. Some work out well, such as the rainbow Rolex Daytona. Some do not work out well, such as the 11.59 design by Audemars Piguet, a reference which some observers have called a "disaster." Rationing helps manufacturers and ADs cope with this uncertainty. Would you like a better position on the waitlist? Take some of those undesirable models off the hands of an AD and maybe that can happen. Rationing is an insurance policy against unpopular designs.
Culturally Swiss watchmaking also does not follow the "work more" model. The industry originated in the Jura mountain region when lulls in agriculture during the winter offered time for a farming "side hustle": building watches. But once the weather improved farmers would put down the loupe and pick up the shovel. In the very origins of watchmaking there is a fixed limit to the amount of time allocated to watchmaking. Historically that limit would not change with the popularity of a particular watch.
I've listened to a lot of explanations and, frankly, almost all of them miss the point. While I don't know everything I should about perlage I do know something about economics. And economics explains almost everything about this watch industry phenomenon.
Horolonomics 101
Rolex is involved in rationing: a shortage which is, for the most part, manufactured and intentional. With this discussion I will explain two things: 1) what rationing does and, 2) why Rolex would do this. The TL;DR on what follows is that the shortage:- is inefficient.
- Creates profit for watch buyers.
- Builds loyalty among clients.
- Creates informal profit opportunities and loyalty among authorized dealers (ADs).
- Helps manufacturers and ADs deal with uncertainty in failed designs.
- Is an artifact of Swiss labor laws and the culture of Swiss watchmaking.
Buy and Pay the Rent
The picture to the right llustrates the market for Rolex steel sports models. Demand and supply get their shape from the fact that people are less inclined to buy at a higher price. In ordinary circumstances the market would clear at the MSRP of $8,000 and Rolex would sell 500,000 watches at that price.
What is the market actually doing?
Rationing is a situation in which fewer than the "normal" amount of something is available in a market. As an illustration suppose there is a 20% shortage so that Rolex only brings 400,000 watches to market. What is the result?
Owners value the watches at more than MSRP because of the shortage. On the graph the price reaches $10,000. This is exactly what we are seeing in the grey and preowned markets. A key insight, though, is that this price exceeds not only MSRP but also the price Rolex would need to receive in order to bring 400,000 watches to market. Why? Because of the profit motive. A lower price and weaker profits are what we would usually expect if Rolex is bringing fewer watches to market.
Rationing is inefficient. The shortage creates a rent: buyers pay $5,000 more for a watch than they should ($10k minus $5k). Rolex doesn't require a $10,000 price to bring 400,000 watches to market. It would do so for $5,000. The inefficiency comes from the fact that both buyers and Rolex are losing because of the shortage. If 500,000 watches were available at MSRP then there would be a win-win: more buyers would get watches at a lower price and Rolex would sell more watches at MSRP.
It is important to note that neither Rolex nor ADs collect the rent because watches must be sold at MSRP through official distribution. Instead the rent is earned by those lucky clients who are, essentially, hand-picked by authorized dealers to receive a watch. Those who buy at MSRP are actually not spending anything. Instead, Rolex is effectively giving them $2,000 ($10,000 value minus MSRP), a 25% return on their purchase! This is probably the first reason that Rolex rations. An $8,000 watch is a huge expense. Buyers need a lot of reasons to pay that much and most of the watch industry, particularly marketing, is directed at giving them those reasons.
There is no practical reason to buy a Rolex. Time is better kept with a phone or a smart watch, each of which is less expensive. But rationing does not appeal to the practical or emotional reasons for buying a luxury watch. It has more to do with money. Even the most tight-fisted clients will see the logic of earning 25% on a watch purchase ($2,000 rent / $8,000 MSRP). Rationing is a marketing strategy. It overcomes the disappearing practical reasons for buying a luxury watch.
And who wouldn't continue to buy from a company that gives them $2,000 with each purchase? So we can also see that rationing is a loyalty play. Patek Philippe behaves similarly with the Nautilus, a model with a wait list 8 years in length.
Rationing creates no direct benefits for authorized dealers and Rolex. In theory, ADs sell at MSRP and they must sell at that price even if there is a shortage. Rolex charges ADs less than MSRP whether or not there is a shortage. But a closer look reveals many indirect benefits. First, we must acknowledge that authorized dealers also have an incentive to earn the 25% return experienced by potential clients even though their commitment with Rolex requires them to sell at MSRP. Perhaps there are some close relatives and friends who might be interested in splitting the $2,000 rent through purchasing at retail? Or perhaps there are unauthorized dealers who would do likewise? We can not ignore the possibility that ADs profit from rationing through "kickbacks." This also creates loyalty among ADs.
Uncertainty is also a very significant factor in the luxury watch industry. Even conservative brands like Rolex experiment with watch designs and features. Some work out well, such as the rainbow Rolex Daytona. Some do not work out well, such as the 11.59 design by Audemars Piguet, a reference which some observers have called a "disaster." Rationing helps manufacturers and ADs cope with this uncertainty. Would you like a better position on the waitlist? Take some of those undesirable models off the hands of an AD and maybe that can happen. Rationing is an insurance policy against unpopular designs.
The Law Made Them Do It
In addition to all these benefits from rationing it is clear that Rolex shortages are also an artifact of Swiss labor laws. Those laws limit the work week to just over 40 hours and prohibit evening and Sunday work. From that perspective, even if Rolex wanted to end the shortage it probably couldn't. The Swiss government won't allow it to add another shift or extend the work week. Perhaps lobbying or paying overtime would allow for this but that would, in all likelihood, fritter away the benefit from ending the shortage.Culturally Swiss watchmaking also does not follow the "work more" model. The industry originated in the Jura mountain region when lulls in agriculture during the winter offered time for a farming "side hustle": building watches. But once the weather improved farmers would put down the loupe and pick up the shovel. In the very origins of watchmaking there is a fixed limit to the amount of time allocated to watchmaking. Historically that limit would not change with the popularity of a particular watch.
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ReplyDeleteI truly need to thank the creator for such a pleasant blog that helped me to comprehend why it is significant. Rolex 6234
ReplyDeleteThere are plenty of anecdotes of AD charging MSRP plus a service change to customers, especially in the Middle East and Asia. Listen to the Waiting List podcast for more.
ReplyDeleteI recently picked up a desirable Rolex GMT, without being on any list. The hookup was through a friend of a friend, so it's fair to say listing are ethereal and just there to placate unsuspecting customers.
A fantastic article; thank you for sharing!
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