What’s the Real Cause of the Parabolic Rise in Prices for Rolex Watches on the Secondary Market? November 30, 2019 – Posted in: News, Watches
What’s the Real Cause of the Parabolic Rise in Prices for Rolex Watches on the Secondary Market??
Over the last several years I have heard several theories on why the supply has seemingly dried up for Rolex Watches in the Primary Market (availability from Authorized Dealers). Most sound more like conspiracy theories than fact based on sound business principals.
Firstly, what got us to this point?
Beginning sometime in 2017 I heard a rumor from Authorized Dealers that Rolex would not be shipping any more sport watches past October through the end of the year. No explanation was given. Coincidentally, at that time, there really seemed to be no other outside pressures on the watch market, meaning the stock market was on an upward trajectory and we were still experiencing the Post-Trump rally in the economy but the economy was not without uncertainty. The rest of the world was still trying to recover from negative interest rates and an abundance of cheap money to kickstart their respective economies. And for you non-economists, cheap money fuels asset bubbles and leads to inflation. The first asset bubble I witnessed was an explosion in the pre-owned Vintage Rolex sport watch sector. When this inventory began to dry up the shift seemed to move to new Rolex inventory. In 2018 there was no additional, or shall I say, abundance, of Rolex watches shipping to Authorized Dealers and this led to more and more speculation about what was going on with the market and more and more people who had been sitting on the fence to buy a Rolex Watch finally jumping off the fence and buying whatever was available. This predicament has continued well into 2019 and will most likely continue for sometime more. Interestingly, the brands that are most affected are Rolex, Patek Philippe and Audemars Piguet.
So what really caused the shift from an abundance of supply, to an abundance of demand?
I have my theories and they are not quite as sinister as the theories being bandied about in the watch community.
First off, some of the rumors as I have heard them:
Rolex is canceling all authorized dealers and going to company owned boutiques.
Rolex is pulling back production to create an asset bubble to negatively impact gray market dealers.
Rolex is pulling back production to raise their prices in the primary market.
1). Rolex has set up strategic partnerships and has utilized outside jewelry companies to run what appear to be standalone Rolex boutiques. The strategy here seems fairly simplistic. All other watch brands do the same. Why shouldn’t Rolex. This also gives them complete control over exactly how they want their space and watches to be represented. However, this as a standalone means to distribute a million watches worldwide is simply not realistic. Rolex has built their brand in conjunction with Authorized Dealers who are typically well entrenched jewelry companies with many clients and distribution points.
2). Companies typically do not cut back production just to stick it to someone, not for any period of time, and the notion that creating a price increase in the secondary market is somehow going to hurt gray market or secondary dealers just makes no sense because it simply isn’t true. If a Submariner now costs me as a secondary dealer $6500 then I will buy it and sell it for $7500. Pretty simple. When it is $5500 again, I will buy it there and sell it for what the market will bare.
3). If a company pulls back production for any other reason than they are anticipating a global slowdown, then it is corporate suicide. If demand exceeds supply on an ever-increasing basis then this will lead to a rise in producer prices (prices to authorized dealers) and in turn higher retail prices. Interestingly, we have seen no marketable rise in Rolex retail prices on existing models. However, coincidentally, prices have gone up slightly to accommodate changes to certain models, such as the introduction of a new base caliber, Rolex Caliber 3255 and 3235.
Let me tell you what I think has led to much of the perceived shortage in the primary and secondary market of, particularly, Rolex Watches.
There’s no question that a mania of sorts has evolved concerning Rolex watches. As stated above, I first noticed this in the vintage sport watch market and it inevitably spread to secondary non-vintage sport watches and then as those prices rose, it put pressure on the primary market because if a used 116610 (New Style Date Submariner Stainless Steel) is $7500, why not just buy the new one for $8500? And then there were none. And then there were no Stainless Steel men’s size watches of virtually any sort and it has even spilled over to the more expensive Gold sport watches, albeit to a much lesser extent.
Remember, cheap money fuels asset bubbles and this is exactly what is happening. As more and more people are seeing their 401(k) go up every quarter they are feeling more confident (and rich) about their future so they will justify expensive purchases (and yes the same thing happens when the economy tanks. As they feel more and more poor, they puke their jewelry on the secondary market). Also, I have seen secondary vintage dealers with what I would describe as an inordinate amount of vintage and transitional Rolex Sport Watches for sale. This amount of merchandise, which they have seemingly hoarded, could easily be construed as market manipulation by some. The prices they are asking must be too high as they are sitting on a great deal of merchandise.
And now for the lesser known facts. Is Rolex S.A. Really selling way more watches at their Authorized Dealerships or has Rolex simply cut back on production for some reason, sinister or otherwise?
It is estimated that Rolex produces around 1 million watches each year. These numbers are not substantiated because Rolex does not officially release them but they have been guesstimated at this mark for many years. Why not more? Why not less? A company will produce a quantity that it feels it can sell at the price it wants to sell it at. If it produces fewer and the market will bare a higher price, then it will raise its prices. If it produces more and the market can’t absorb this supply, then the pricing will come down to accommodate the excess supply. This is pretty straightforward supply and demand economics. Again, nothing sinister here. But there are some interesting caveats.
Rolex has introduced some new styles into their line up over the last several years, more-so than at any other time in their past. These new offerings compete for design and production space. Although Rolex has expanded its real estate for business and manufacturing activities they are perfectionists when it comes to shipping watches. It has been said that it takes one entire year to complete one watch.
Watch components must be manufactured, inspected, measured and tested. Movements must be assembled, regulated, tested, sent off to COSC for additional testing and Certification as a Chronometer, then returned, cased and regulated and additionally tested by Rolex to reach their standards. The COSC (Contrôle Officiel Suisse des Chronomètres, the Official Swiss Chronometer Testing Institute) can only test so many watches at a time and it is a multi-week process. More and more companies are certifying certain models of their watches and this can only create a time backlog for other brands. Rolex also, for the last several years, has been “Ultra” tweaking their movements to perform within +2/-2 seconds per day, whereas the COSC standards are +6/-4 seconds per day. This additional tweaking and testing, of course, adds to the time it takes to complete a watch for shipment. Rolex has updated their movement calibers over the last several years, the latest being a movement that will replace its workhorse engine, the 3135 Caliber, which has been in production since the mid 1980’s and has been used in every sport watch as well as full size Datejust model ever since. The new caliber, 3235 is a marvel of engineering, requiring many additional patents in its design and production. Obviously, to have to re-tool for all of these upgraded and different movement components does not happen overnight and as more and more of these movements come online they will be introduced into more models, eventually phasing out the caliber 3135. Technicians also have to be trained in how to service this new movement. Add all of these new developments and it becomes obvious that a brand obsessed with quality may be taking longer to produce and ship watches.