Carlo Ceppi: Its purpose is to set out a two-year scenario for distribution, which is undergoing major changes as markets become more global. Ten years of uninterrupted growth, combined with the belief in all-powerful marketing, convinced retailers they could go on increasing their profits year after year. This has left us with the current situation of disproportionate stock. In today’s economy, consumers prefer the safety of iconic models from established and acknowledged brands, while retailers are responding with promotions in the form of heavily discounted prices, and by a recrudescence of the grey market in an attempt to reduce stock.
In Europe, distribution is well-established. In southern Europe in particular we’re looking at a multitude of small and ultimately not very professional family firms. This contrasts with northern Europe, where distribution is mostly in the hands of retail chains which need high revenues to cover their costs and overheads. The model is somewhat different in new markets, where distribution tends to focus on shopping malls.
In this context, and from a marketing point of view, brands would do well to take local specificities into account in their collections, particularly in mature markets, through closer consultation with retailers. We’re looking at an inevitable reduction in the number of points of sale in these markets with an eye to improving quality through staff training, presentation of the watches, and after-sales service. Similarly, retailers will have to focus on a smaller number of brands as the key to greater professionalism. As for the brands themselves, no doubt they will become more selective in their choice of distributor, thereby ensuring they are up to speed with customers who are looking for the kind of specialist advice found in single-brand stores, whose numbers incidentally we can expect to grow. In a word, there are some major changes on the horizon for the next two to three years.
Sales structures in Italy revolve almost entirely around family firms. Today’s crisis is also happening at a time when many of these firms are handing over to the next generation. This has led to heightened tension between these small retailers and the multinational distribution chains. While more brands open their own stores, recent examples being Patek Philippe and Rolex Milan, smaller retailers in suburbs and small towns are disappearing. In a market that is currently dogged by a decline in quality and excess stocks, we’re in for a rough ride! The challenge will be to sell less at better margins, and to propose a standard of service on a par with customers’ expectations. Today’s customers want products of impeccable quality that justifies price… the experience of recent years suggests this is something brands have perhaps forgotten.
A glimmer of light at the end of the tunnel
In its Eleventh Watch Retailer Survey, published in June, Goldman Sachs reports – hardly surprisingly – the most negative sentiment ever observed at points of sale since the first survey eleven years ago. Customer traffic and sales projections have never been so low. Retailers are also counting on a reduction in suppliers’ prices to maintain their margins. Efforts to shed stock are also likely to continue into the coming months.
Inventory levels observed by the bank do however suggest the situation is becoming more stable. While stock reduction is still likely to put pressure on manufacturers, this phase in the cycle appears to have reached a relatively advanced stage. If sales to the end customer were to level off over the second half-year, retailers could replenish their stocks faster than expected. For Goldman Sachs, it is still too soon to forecast an imminent upturn in the sector. However, further downside potential is now relatively limited with sector stocks showing a more attractive risk/reward profile.
Still according to the survey, at a time when end customers are seeking value for money, five firms stand out as those most expected to win market share during this downturn. They are Breitling, Cartier, Omega, Rolex and Tag Heuer. The bank has issued buy recommendations for Bulgari (a unique strategic asset in the luxury segment), Richemont and Swatch.