In our Global Compounders Portfolio, we own Hermes, the French luxury handbag brand. This blog is about what is likely the only other brand that measures up as a true luxury brand – Rolex, which unfortunately is privately owned. The blog talks about Rolex’s history, what makes it a true luxury brand and takes a shot at valuing the business.
“Rolex is counterintuitively one of the best known brands in the world, and also one of the least known businesses. A lot has been written about luxury businesses, especially LVMH, but Rolex is extremely secretive and its business remains mostly a mystery. It’s not a public company, quite the opposite in fact: it’s owned by a foundation which operates as a non-profit”
The author begins by defining true luxury:
“A true luxury brand has the following characteristics:
- An obsession with high quality and craftmanship. It innovates and surprises, but always stays true to their core image.
- It’s exclusive and scarce. Products are hard to get. Consumers make a deliberate effort to get their hands on them, not the other way around.
- It evokes a certain status in the mind of consumers (both the buyer and the general public). This could be wealth, refined taste, appreciation of culture or history.”
He then takes us to Rolex’s history when the founder Hans Wilsdorf began by securing a stamp of quality for the brand:
“People did not associate wristwatches with good timekeeping nor were they fashionable, and the most accurate watches in the world were pocket watches. Wilsdorf addressed this by certifying his wristwatches with the the Kew Observatory in the UK (which certified marine chronometers for the British Navy), thus making the first wristwatch to be awarded with this certificate.”
So, how does Rolex meet the three characteristics of a true luxury brand:
First, the obsession over quality. The blog talks about how Rolex is particular about sourcing the best materials, being fully vertically integrated (much like Hermes) and employing some of the best experts in metallurgy, chemistry and engineering including Nobel prize winners. For example, it has demonstrated its engineering supremacy with water resistant watches:
“Rolex kept pushing the depth rating, quite literally to the limit. The Deepsea Challenge was introduced last year and has a maximum depth rating of 36,090 feet (11,000 meters), or equivalent to the deepest point in the ocean, the Mariana Trench. To put into perspective the pressure at these depths, it’s 16,000 pounds per square inch or 1000X the atmospheric pressure at sea-level. In fact, the watch accompanied James Cameron on his expedition there, hanging right outside the submarine. There’s literally nowhere deeper you could take the watch (at least on this planet).
The result of this obsession with quality is a simple yet powerful promise that consumers can trust: anyone buying a Rolex knows that the watch will be working perfectly fine decades from now, when they decide to pass it on to their child.”
Second, Scarcity: Much like Hermes, you cannot walk into a Rolex store and hope to walk out with a Rolex. To start with, most models are out of stock. Second, you have to prove to the salesperson that you are worthy of owning a Rolex (you have to sell yourself to a salesperson !) and join a ‘waitlist’.
“On the supply side, it’s mostly an outcome of the strategy employed by the Rolex CEO known as shrink to grow, where Rolex reduced and optimized its retail footprint while production has only increased somewhat. Rolex also periodically will discontinue certain models, making them even more desirable in the aftermarket.
More importantly, the demand has far outstripped the supply (which includes both new and used models). This is testament to the Rolex marketing strategy…
… The outcome of this strategy is also reflected in the value of secondary market prices for most Rolex watches, which typically trade above retail value — sometimes as high as 100%.
Making this even more impressive is the fact that Rolex sells over 1 million units per year, at an average $13,000 per watch. For context, the legendary Birkin and Kelly handbags from Hermès sell about 1/10 the number of units at similar price points. There’s really not anybody else selling those kind of volumes at those price points in Luxury, which is mind-blowing.”
Third, status: owning a Rolex is more than just about showing off your wealth:
“The Rolex design ethos is such that it always stays true to their original design code, while simultaneously making slight adjustments and improvements (sometimes without telling anyone). It’s this strategy that assures that it never goes out of style. You can be pretty sure that if you buy a watch today, it will still look quite fashionable decades from now.”
Finally, the author’s shot at valuing the business:
“According to Morgan Stanley, Rolex has a ~30% market share in the Swiss Luxury watch market, which is more than the next five competitors combined.
Rolex sells roughly 1.2 million units per year, at an average wholesale value of $8,050 plus some other revenue items (like servicing, repairs and parts) we arrive at somewhere between $10-11+ billion of revenue per year.
It’s fair to assume that Rolex has a 30-40% operating margin. This is higher than both LVMH’s Jewelry and Watches Group and Richemont’s Specialty Watchmaker’s Segment (both ~20%) since their watch portfolio skew to smaller, less exclusive brands (on average). The majority of the profit pool sits in the Top 5, which gives Rolex much higher margins (not to mention their immense scale). Also recall that Rolex is fully integrated, which saves on costs.
If we apply an Hermès /LVMH/Ferrari like historical multiple of 30-40X on earnings13, this means Rolex is conservatively worth more than $100 billion…”
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