Business Breakdowns are a series of podcasts which dive deep into very interesting businesses such as McKinsey, LVMH, Atlas Copco, Union Pacific, etc. We find these podcasts very useful because they help us understand & appreciate competitive advantages that we had never thought of. The featured expert in the podcast tends to be someone who has known the relevant company for many decades either as an employee or as a consultant or as a fund manager. In this podcast, Business Breakdown interviews Ben Clymer, founder of HODINKEE, about Rolex: “Founded in the UK in 1905 under the name Wilsdorf & Davis, Rolex has become the leading name in luxury watches. But, while the company’s products are iconic, the business itself is highly secretive. Owned by a Foundation and run as a non-profit entity, little is known about Rolex.”
We recommend that you listen to this podcast in full to understand this remarkable business properly and to get deep insights into drivers of massive long term value creation. Some of the points Ben Clymer makes are:
- The word “Rolex” was chosen as a brand name because it is pronounced “Rolex” in every language.
- One of Rolex’s first iconic watches was the Daytona. Rolex very deliberately built the brand of this watch around motorsport and around film stars like Paul Newman. In fact, Newman’s Daytona watch went on to be sold for a $18mn, a record sum for a watch (see https://www.forbes.com/sites/hylabauer/2017/10/26/paul-newmans-paul-newman-daytona-sells-for-15-5-million-a-record-for-a-wristwatch-at-auction/?sh=7e9adc745313). Newman had been gifted that watch by his wife, Joanne Woodward, a film actress. In the world of watches, Newman’s Daytona is seen as the ‘holy grail’: “”Many people are saying this is the greatest watch on the planet,” said Geoff Hess, a vintage Rolex collector and CEO of Analog Shift. “This watch transcends watch collecting, it transcends the watch community,” he continued.”
- These types of super-exclusive watches are not for normal consumers. Similarly, many of Rolex’s other watches are very high-performance watches suitable for, say, only deep-sea divers or astronauts or mountaineers. But what these sorts of iconic watches do is associate with Rolex a glamourous lifestyle which even the ordinary office worker aspires to. As a result, when he buys a Rolex, he buys that lifestyle (which is actually beyond him for a variety of reasons). This explains why although by sales Rolex is the world’s largest selling watch brand (Omega is number 2), the brand evokes exclusivity, adventure and glamour.
- Wrist watches became mainstream after World War I as during the war soldiers found it convenient for tie their old-style watches to their wrist. Because Rolex had focused on wrist watches since 1905 (thanks to a Elon Musk type move by the founders) and in 1908 Rolex was the first wristwatch ever to pass testing. As a result, the firm was ready for the post WW I surge in demand for wrist watches.
- Digital watches came in 1969. Until then you needed mechanical watches to tell the time. Through the 1970s, brands like Rolex repositioned themselves to tell the public how they handmade watches (so that people realise that cheaper brands, like a Casio, are machine made). Then over the past decade, Rolex has emphasised the “timeless” nature of Rolex as an investment. That has brought in a whole new class of buyer to Rolex’s especially bankers looking for ROI.
- In the context of showcasing a Rolex watch as an investment, Rolex now emphasises the durability and longevity of its watches which can now go for decades without servicing even if you wear your Rolex into the shower or to bed. In a world where everything is changing, Rolex has positioned itself as an unchanging purveyor of mechanical excellence. Rolex has emphasised how your kids can wear your mechanical Rolex through their entire lifetime without needing batteries or servicing.
- You wear a luxury watch to signal to the world your success. This aspect of watchmaking and watch selling has become ever more important in recent decades. Vintage and collectible Rolexes are now a big part of the business that Sothebys and Christies do with billionaires, sport stars and filmstars being part of the buyers & sellers in this market for ultra-luxury watches. To keep this market revved up, Rolex was the first firm to do marketing of watches and has kept “the pedal down on marketing spend” through the last 20 years especially after the 2008 crisis (when other luxury watchmakers like Omega and Tag-Hauer pulled back marketing spend). 2009 was thus a turning point for Rolex.
- When marketing a luxury product, you want the ratio of a number of people who are aware of a product to the people who can afford it to be as high as possible (i.e. you want the product to be affordable for very few people).
- Rolex is likely to be making around 1 million watches per year with a wholesale unit price of $7000/watch implying annual revenues of $7 billion. Swatch (which includes Omega) does more in terms of revenues but Swatch – which is a listed company – is unlikely to be as profitable as Rolex.
- Rolex is now owned by the Hans Wilsdorf Foundation and the foundation is not-for-profit and is very secretive. Nobody knows what the family behind this foundation looks like or where they live. The firm has a CEO and a Board but the owners – the most powerful people in the watch industry – are completely out of sight. Rolex is likely to be the largest not-for-profit in the world.
- Rolex continuously makes improvements in the movements to their watches BUT they do NOT communicate the same to the world at large. Even more interestingly, Rolex does NOT hike the price of its watches even after the movements have been improved. Other brands will be continuously trying to tell the world how their products are newer, better. Rolex does not do any of that. Rolex will NOT talk about itself or its products.
- As early as 1908, Rolex’s founder decided to focus on three tenets of wrist watchmaking (remember, at that time no one else was making wristwatches): 1) Precision i.e. the best movements in the world which Rolex itself made; 2) Waterproofness thanks to using a signature oyster case which Rolex uses to this day; and 3) Self-winding i.e. the owner of the watch did NOT have to wind the watch every day (a remarkable breakthrough in that era). Rolex still focuses on these 3 tenets of watchmaking.
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