Lemonade from Lemons: Rolex Certified Preowned

News broke today that Rolex has entered the pre-owned watch market. The brand even released a press statement, which scarcely happens (aside from the standard announcement of a new reference, ambassador or similar).

A screenshot from the Rolex press release regarding the certified preowned program. This post is not affiliated with or endorsed by Rolex, you can find the official web page at www.rolex.com.

I'm still digesting this news, but I have a few thoughts about how this will all play out and how the preowned space will evolve in response.

Side note: before we get into this I want to welcome all the new subscribers who joined, maybe following my "Watch of the Week" article on Hodinkee. Thank you for trusting me enought to read what I write. I take that trust seriously and it means a lot to me that you're sharing some of your valuable attention. Ok, back to the other topic: Rolex and preowned.

Let's begin with a major caveat.

Daily average seismic amplitude for the Cotopaxi volcano, 2015,

I've wondered if the impact of Rolex's announcement is akin to the experience of those standing near the Cotopaxi volcano in June of 2015. You feel some rumbling but you're not quite certain if it will amount to anything. A few months later, a major eruption happens (see graph of Cotopaxi seismic activity). Much remains to be seen, but if Rolex executes their preowned strategy carefully and fully, I do think we'll see a major change in how the preowned market operates. On the other hand, if Rolex bails out, then this whole thing will seem like a quirky experiment with no long-term implications. So, here are the major consequences, as I seem them.

Collectors

This development is a huge improvement in conditions for collectors. There is now a new option when it comes to finding a preowned watch. A truism in economics is that if you give people an additional option (subject to certain conditions) they can not be worse off because they can always keep doing what they were doing and not use that new option. Implicitly, I'm assuming that Rolex's entry to the preowned segment does not eliminate buying options like forums, independent dealers, eBay, etc. I think this is a reasonable assumption, particularly in the short run (I'll come back to this).

There are additional reasons to believe Rolex' entry is good for collectors. Advancing on an AD wait list for a desirable reference, such as a Submariner, has often required purchasing other inventory, including less desirable references, jewelry and even watches from different brands. Now, there is the possibility that a collector could establish a robust purchase history by buying a preowned Rolex at an authorized dealer. This makes the waitlist game more palatable, potentially (whether this happens is at the discretion of those practicing the dark art of wait list management).

I've previously written that there is a "lemons problem" when it comes to preowned watches. Economist George Ackerloff was the first to pay close attention to the fact that a lot of markets for "used" products are distorted by asymmetric information regarding quality. Before today, collectors faced an adverse selection risk: they might buy a watch with undisclosed poor condition issues or something similar. Perhaps the worst outcome would be buying a watch which had been stolen, sending it in for service, and then having the watch confiscated because the serial number had been registered by the victim. These are all situations in which a collector might unknowingly buy a "lemon" (ie low value) watch.

A numerical example might help flesh out this idea. Suppose there is a 20% chance that a preowned Rolex Day Date is stolen and that a stolen watch is worth nothing to a collector (because it is eventually recovered). Suppose further there is a 40% chance the watch is damaged in an undisclosed manner, in which case the Day Date is worth $20k to a collector. Finally, suppose there is a 40% chance the watch is exactly as advertised, in which case it is worth $40k. In these circumstances, a risk-neutral collector would be willing to pay the expected value of the watch, which is .2*0 + .4*$20k + .4*$40k = $24k. The lemons problem lowers the market value of a preowned Day Date: the bad outcomes hold down the market price of preowned. This was the status quo prior to today.

Now let's look at what happens when Rolex enters and certifies preowned watches. Assume they do not certify stolen watches, so that probability goes to zero. Assume they won't sell watches with undisclosed conditions, so that probability goes to zero. Consequently, the value of a preowned Day Date increases to $40k. This may be stating the obvious, but Rolex certified preowned watches will carry a higher price than what we see now in the preowned space, in part because the adverse selection problem is eliminated (Tim, IG handle @velociphile, posted a story showing this certification premium earlier today). Various guarantees and warrantees also have value which will be priced into a Rolex certified preowned watch.

You might naturally ask: how are collectors better off if they end up paying more for preowned? The answer is that collectors will, almost definitely, still have the opportunity to roll the dice and bear adverse selection risk. Unofficial channels for buying preowned are unlikely to go away. One reason: many collectors have built important relationships with their independent dealers and they will be unwilling to set those aside. In addition, eBay and other platforms will still have an element of convenience that a brick and mortar retail watch shop will be hard pressed to match. The fact is, a lot of collectors do not have a geographically convenient authorized dealer. So, collectors will sort themselves. Those that are looking for a low price, want convenience, and are willing to bear risk will still purchase through unofficial channels. Those that can pay a higher price, want a "sure thing" and want a buying history with a convienient AD will go through that channel. Everyone is better off.

Authorized Dealers

Let's face it: all those empty display cases, and even those cases occupied by "exhibition only" watches, are kind of odd.

These are not Rolexes you can buy.

I actually walked by an AD recently with two friends who are less familiar with collecting and pointed out all the empty cases. I explained the situation and one said "I thought they were closed"! The new certified preowned program will allow authorized dealers to, finally, carry Rolex in stock. The program will not allow dealers to sell preowned stock that is newer than three years in order to avoid a situation where dealers simply label new stock as preowned, thereby capturing a secondary market premium.

Nevertheless, it is much less likely that a collector will arrive at an AD only to find that there are no Rolexes available to buy. I don't think sales personnel enjoy the seemingly neverending task of telling visitors that the product they want is not available. Strictly speaking, they may still have to do this. However, the alternative they can now offer (a certified preowned Rolex) is far more likely to meet buyers' expectations.

Independent Channels

Without a doubt, Rolex's entry to the preowned market means there is more competition for preexisting channels like independent dealers and online sales platforms (forums, eBay, etc). Incumbents will likely need to adapt, but I believe there are plenty of ways to do so. There are more brands than Rolex, so shifting inventory in a different direction is a clear option. In addition, offering better terms or other perks will help offset the draw of Rolex preowned certification. Finally, indepedent players will almost certainly compete fiercely on price.

Pot Pourri

We needed more watchmakers before today's Rolex announcement. Now, we really really need more watchmakers. As far as I know, a CNC machine can not authenticate a Rolex watch. That's a process that requires a knowledgable and experienced watchmaker, there really isn't a great alternative. If authentication of preowned watches draws watchmakers away from manufacturing and / or service, scarcity and service delays will get even worse. There's really only one way to fix this: more watchmakers.

Somewhat unrelatedly, the certified preowned Rolex program is good for the environment. As I discussed in a recent post, buying a preowned watch has very minimal adverse impact on the environment. Certification of watches will make preowned purchases more appealing. Rolex deserves a great deal of credit for this important ancillary benefit from their new initiative.

Conclusion

It remains to be seen if Rolex' new certified preowned program is as impactful as it seems. We should know more by the end of 2023, when retailers beyond Bucherer are able to join. It is hard to know if uptake by authorized dealers is likely. Much depends upon the terms negotiated between Rolex and dealers. So far, little is publicly available. Nevertheless, assuming Rolex is able to succeed with this initiative, the brand will directly benefit through higher secondary market pricing for their older models, thereby relieving price pressure on new designs. It remains to be seen if other brands will match Rolex's preowned strategy, I would expect Omega to seriously consider doing so. Personally, I find it exciting that Rolex is making bold moves in order to address challenges for collectors. It is an encouraging development.

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