Rolex Is the King of Luxury Watches. Here’s How Watch Retailers Are Riding Its Growth.

There’s no “straightforward” way to bet on the strength of this world-famous brand, aside from buying a Rolex or two. But here’s what you could do instead.

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EquitiesTracker

10 min readAug 14, 2022

SECTIONS· The king of luxury watches
· Luxury: a key beneficiary of the HNWI megatrend
· Why you can’t buy shares of Rolex
· Safeguarding scarcity
· Watch collecting: an art, not a science
· The sales pitch for watch retailers

It’s said that when most people think of a luxury watch, they immediately picture a Rolex — even if they don’t know the brand name. That’s how well Rolex has managed to market itself, and its efforts have paid off handsomely.

There are about 350 Swiss watch brands, including well-known names like Longines, Hublot, and Cartier. Rolex — a single brand — owns 25% of the global Swiss watch market in value terms, even though it makes less than 6% of all Swiss watches. That’s an impressive feat, considering Rolex has had to fight for market share with conglomerates like LVMH Moët Hennessy Louis Vuitton (MC:LVMH), which owns Omega and Hublot, and Richemont (SWX:CFR), which owns Cartier.

Luxury: a key beneficiary of the HNWI megatrend

As we pointed out earlier in this report, the rich have a track record of growing their wealth — even during tough economic times. This has clear benefits for the global luxury sector.

In fact, luxury brands have been doing pretty well despite the prolonged COVID-19 pandemic. Lamborghini (XETRA:VOW3), for instance, recently reported its best half-year in history.

Rolex watches, for their part, have been selling like hot cakes. For example, the Rolex GMT-Master II “Batman” consistently sold for 170% above its original retail price in 2020, according to The RealReal, a top marketplace for consigned luxury goods. According to Morgan Stanley, Rolex even raised its prices by 7% last year — one of the biggest price increases in recent times.

As long as Rolex continues to be top-of-mind among luxury watch buyers, the company can continue riding demand from the growing HNWI class.

Why you can’t buy shares of Rolex

Unfortunately for investors, Rolex is not listed. Before he passed away, Hans Wilsdorf — the founder of Rolex — gave control of the company to a non-profit foundation. This decision paved the way for Rolex to stay independent throughout the quartz crisis.

Because it’s owned by a non-profit, Rolex operates without the pressure to merge with a larger company with “a range of interests and markets,” says David Liebeskind, a professor of management at NYU Stern.

So unlike public-listed companies, which face constant pressure to grow sales and revenue, Rolex has been able to stick to its strategy of “managing supply.”

“Managing supply”: The art of safeguarding scarcity

By making it as hard as possible to buy a new Rolex, Rolex safeguards its position as an ultra luxury brand.

Morgan Stanley estimates Rolex grew annual watch production from 800,000 in 2009 to 1 million to 2019, a measly compound annual growth rate of 2.5%.

Demand continues to be high for classic Rolex models, such as the Submariner, Oyster and Datejust. On the other hand, most of Rolex’s rivals constantly scramble to outdo each other with flashy new designs every year. All this speaks volumes about Rolex’s branding prowess.

Rolex is not the only privately held watchmaker. Many of the world’s most-sought-after watch brands are not listed.

Of the five most popular watch brands (Rolex, Omega, Breitling, Patek Philippe, and Audemars Piguet) on online marketplace Chrono24, all except Omega¹ are private.

Executives at Patek Philippe, Audemars Piguet and Richard Mille have previously said they enjoyed an advantage over public-listed rivals, as they don’t have investors pushing them to make more watches. As a result, they are able to produce low volumes, preserving their “Veblen” effect.

This strategy appears to be working today, as these brands — along with Rolex — have consistently grown their market share. Rolex watches continue to fetch higher prices on the secondhand market, a sign that demand is outstripping supply.

In the table below , we’ve listed the top 3 private and public Swiss watch brands, based on their share of industry revenue.

Unlike Rolex, Patek Philippe and Audemars Piguet are not as well-known among the general public. Still, both brands command a sizeable share of the Swiss watch export market in terms of revenue. Their high average selling prices are a sign buyers appreciate the “perceived value” of the watches they make. For these brands, less is more.

Watch collecting: an art, not a science

Where does all this leave investors? From our vantage point, there are only two ways to bet on the strength of Rolex and other privately-held luxury watchmakers.

The first is well-known: buy a Rolex or a Patek Phillipe. But this option is out of reach for most investors, given the steep price of a rare luxury watch.

And even if you could afford one of those watches, you will have to endure a years’ long waitlist. If you’re lucky, you could find a rare model on auction or on the secondhand market — but usually priced at a massive premium.

Moreover, there’s the risk that you end up buying the wrong watch. Although some luxury models have delivered outstanding returns, on average, watches have yielded single-digit returns.

Between 1983 and 2020, Art Market Research’s Wrist Watch Index — the industry standard price gauge for collectible watches — delivered average annual returns of 5.5%. Those returns pale compared to the S&P 500’s 10.7% annual return over the last 30 years.

And as we pointed out earlier, most of a luxury watch’s selling price is tied to its “perceived value.” Most enthusiasts can point out Rolex and Patek Philippe’s most popular watches, but will these particular models still be highly sought-after in five years’ time?

From an outsider’s point of view, investing in watches appears more of an art, not a science. This could explain why most HNWI investors bet just a tiny fraction (a low single-digit percent) of their assets on new luxury watches.

This, of course, may change in the future as secondhand and alternative asset marketplaces grow. But for now, buying individual luxury watches — with the hope of massive future price gains — looks like a rich man’s game.

The sales pitch for watch retailers

Thankfully, there’s another way to get in on some of the action. A handful of pure-play luxury watch retailers have gone public, giving investors indirect access to Rolex, Patek Philippe and Audemars Piguet.

Take Watches of Switzerland (LON:WOSG), which Morgan Stanley says is the world’s second-biggest Rolex retailer by sales. The company debuted on the London Stock Exchange in May 2019, IPO-ing at £0.27 pounds a share. It now trades at £1.022 a share, up 278%.

Many of the world’s most successful luxury watch retailers have been around for decades. For instance, Watches of Switzerland first began selling Rolex watches in 1919. Privately held Bucherer, said to be the world’s top Rolex retailer, was founded in 1888.

In an industry that constantly preaches about the value of lasting products and relationships, watch makers appear to prefer partnering with retailers with a long operating record. These relationships grow over time, forming an “invisible moat” around the business.

What’s also very interesting to us is that these retailers have cultivated valuable HNWI customer bases, often across different countries. This makes them a key partner for watchmakers.

Watchmakers can safely rely on retailers for detailed, specific insights into what customers in each market want. In fact, prominent watchmakers like Rolex often work hand-in-hand with retailers to create marketing and distribution campaigns for their products.

Moreover, with their existing HNWI customer base, watch retailers can expand to markets for other ‘Veblen’ goods.

VEBLEN AND THE SNOB EFFECT: TURNING ECONOMICS UPSIDE DOWN

Most investors are familiar with the law of price and demand. This law
suggests that as demand for a product increases, the price of the product
will drop. But there's an exception.

For products mainly priced based on "perceived value," things can go the
other way round. Increasing prices result in higher demand, while lowering prices can actually reduce demand.

This unique phenomenon is called the Veblen Effect.

A "Veblen good" -- such as a luxury watch -- "helps you separate yourself
from others, especially if you're interested in signaling your wealth," says
Pinar Yildirim, assistant professor of marketing at the University of
Pennsylvania's Wharton School.

Because what you own is very expensive, it's "very difficult for others to
pay the same price (to buy your Veblen good)," says Yildirim. "It's very
costly for others to imitate you."

On the other hand, if you lower the price of a Veblen good, less people
may want to buy it -- as it no longer helps them signal their wealth as well
as it did. That's why you'll find that Veblen goods are rarely discounted.

Moreover, the more exclusive the Veblen good is -- meaning there's less of
that product available -- the more people want to own it.

This is because as more people own the Veblen good, the less desirable it is. This phenomenon is called the Snob effect.

All these explains why luxury watchmakers like Rolex and Patek Philippe
produce only a limited number of watches every year.

Jean-Claude Biver, known for developing major watch brands like Hublot
and Omega, put it this way: "You only desire what you cannot get. People want exclusivity, so you must always keep the customer hungry and frustrated."

This results in years-long waiting lists for popular models. As they
have limited units to sell, dealers prioritize customers who spend
the most, according to Robb Report, an American luxury magazine.

Those who can't wait may be able to find pre-owned or secondhand watches elsewhere -- but often have to pay twice or thrice the retail price.

Tapping the wider market for luxury goods can dramatically widen the addressable market for a retailer. More importantly, it reduces the risk of being overly reliant on a single popular brand or product.

Many of the world’s biggest watch retailers — including Torneau, Watches of Switzerland, and China’s Chow Tai Fook Jewellery Group (HK:1929) — have long sold jewellery, rings and gold alongside watches. While not all watch retailers also sell other luxury items, what’s more important is that they have the option to do so — if the need arises.

After all, the Swiss luxury watch industry — as we know it today — only began in the 1970s. But even if Rolex were to go out of style, retailers have front-row seats to the next hot luxury item.

[ 1 ] For the record, Omega is owned by public-listed Swatch Group, but the brand is mixed with 17 other watch brands, including non-luxury ones.

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