SDC Weekly 148; Stern's McDonald's tell; Quality won, luxury lost; the 17th-century bundling tax on your Daytona
Amor fati for your watch regrets, lume meets Douglass, Resta on AP's chopping block, Hayek on Royal Pop, Pollock at $181m, Citizen passes CHF 1bn, SpaceX files at $1.75tn and more!
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👠 Quality won, luxury lost
Last week, BoF covered the FT Business of Luxury Summit in Puglia, and their headline was pretty bombastic; given how many people forwarded me their Instagram post, I figured I’d add this extra section here. What underpins a lot of the article is a claim that between 2022 and 2024, the global luxury industry lost about 50 million customers (i.e. the total addressable base dropped from 400 million to 350 million). Note: all pulled quotes in this section are from the BoF article linked above.
“According to Bain’s Claudia D’Arpizio, the global luxury industry peaked at around $1.5 trillion in size in 2023, reflecting overall growth of 40–45 percent since 2015, before contracting by almost four percent by 2025.
When asked what is the greatest risk facing the luxury industry, D’Arpizio didn’t cite tariffs, the war in the Middle East or slow growth in China, but rising inequality: the risk that luxury goods are becoming markers of exclusion rather than totems of aspiration.”
If you follow the watch market, and more so if you read SDC regularly, nothing in this article should be surprising at all. The watch industry has been arguing about this for about three years now but of course, the Federation of the Swiss Watch Industry would never put out a press release saying “the aspirational class has left the building.” Other industry reports seem to dance around the situation with phrases like “K-shaped” and “uneven recovery.”
The BoF article was somewhat clarifying, in that it offers a decent summary of what has gone wrong across all luxury, and a number of people who shared it with me seem to agree that nearly everything in there has some sort of ‘watch parallel’. In fact, we’ve explored many of those parallels in the SDC already.
Aspirational class disappearing
To start, Bain’s data shows the top 2% of luxury spenders now account for 45% of all luxury purchases, up from 35% in 2021. So about half of an entire global industry is now powered by 1 buyer in 50.
I wrote about how the K-shaped economy was about to do this exact thing to watches, and here’s a follow-up explaining why the aspirational watch buyer was being squeezed from every angle. The story across luxury in general sounds eerily similar to what we see with watches. Someone buying their first £7,000 watch is checking their credit card balance, but the person buying their 5th Patek is not. When wages stagnate, when discretionary income narrows, when GLP-1 drugs and longevity clinics start competing for the same wallets… the watch market will lose the bottom of its pyramid first.
The numbers we have seen in the watch industry confirm this too; Morgan Stanley’s Ninth Swiss Watcher report shows Swiss watch volumes have more than halved since 2011, from 29.8 million units down to 14.6 million. Total industry value is up modestly over the same period, but only because the mix has drifted upmarket. I suppose you can read that in two ways. The optimistic view is that the industry is “premiumising” and that’s what industry people will tell you. The more realistic view is that fewer people are buying more expensive things, and a lot of the people who used to buy entry-level Swiss watches are simply not buying any (and one could argue, they’re buying Japanese instead, but that’s a story for another day).
Bain’s Claudia D’Arpizio (via BoF) suggests that the big price increases of recent years have been ‘hardly accepted’ by buyers unless they came with corresponding creativity and quality. Watch collectors have a more pungent term for what happens when neither of those things shows up, which I explored at length when looking at the broader luxury asset correction. Ultimately, the verdict is roughly the same.
When a brand becomes the product
“India Mahdavi, the French-Iranian architect and designer, drew a distinction between what she called “industrial luxury” and “authentic luxury.” In the industrial model, “the brand becomes the product,” she said. The experience is standardised, disconnected from place and replicated across cities and continents.”
This, for me, was the best paragraph in the BoF article. In other words, with “industrial luxury” the customer is paying for the image of the brand, and not the thing the brand is making and selling. To be honest, this describes the watch industry over the past decade quite accurately.
Morgan Stanley estimates that marketing accounts for about 8% of luxury sector revenue. For an LVMH-owned watch business chasing F1 sponsorships, celebrity ambassadors and red-carpet placements, I’d guess the figure is comparable. I called this luxoplasmosis a few months back; the argument was that brands have become so obsessed with measurable marketing metrics (like engagement rates and reach) that they have stopped asking whether their campaigns build any brand equity at all. They confuse “moves metrics on the dashboard” with “being important” and then wonder why the watches don’t sell well.
In the watch industry, “the brand becomes the product” is essentially a watch that is made as a thing to carry the logo. You may know the name, the case is nothing special, the movement may be developed by an external supplier (but the brand will never say it outright), the dial design is super forgettable… but there is a Hollywood actor who’s invested in the brand and present in every campaign, and everyone is saying this is a serious horological player. The brand budget is doing all the work which the products themselves, cannot - and eventually, the maths catches up.
Handmade fairy tale
Speaking of “the brand becomes the product” - this phrase reminded me of a discussion which went on across many Substack pages at the time it was trending. The general principle was the issue of quality, or the pretence of it. The BoF article notes that Chanel and Dior pushed handbag prices up 59% and 51% respectively from 2020 to 2023; customers wanted to know what they got for that. In many cases, the answer was nothing. It was just the same bag, but at a much higher price. Delphine Arnault herself, on stage in Puglia, conceded: “we can’t really increase the price of a product without increasing the perception of the quality.”
No sh1t!
Watches did the same thing, with the added twist that “hand finishing” was a perfect example of a substitute story for legit quality improvement. The hand finishing fairy tale essay showed that for many “artisanal” brands, the math simply does not add up. When you divide annual production by total staff and allow for the fact that humans need to eat and sleep and answer emails, the claim of “fully hand finished” becomes mathematically impossible. All these sharp inner angles people fetishise can now be cut by CNC anyway, and the bevels can be polished by machine. The “hand” in hand finishing has, for many brands, become a marketing word instead of a factual description of what actually happened in a workshop.
Saint Laurent’s CEO said “quality has won over luxury” and the general consensus is that customers are more educated about quality than they were a decade ago. They know the gap between what it costs to make a bag and what it costs to buy one. So when it comes to watches, if the watch lacks quality, the price tag will not save it. As we’ve covered repeatedly in SDC, the watch market has confirmed this in the secondary numbers. Excluding Rolex, Patek and AP, the average watch now trades at -31% or worse relative to retail. Some Patek perpetual calendars sell at auction for as much as 70% below retail. Roger Dubuis released a reissue last year, and nobody could quite explain who that watch was for. The market spoke, and what it said was that the price did not match the offer.
Dead middle
If we zoom out on what the BoF article is getting at, the luxury industry has lost the aspirational buyers, retained the wealthy buyers, and now has this giant ‘middle layer’ of brands trying to be two things at once. They are too expensive to be considered ‘value’ buys, but also too generic to be ‘prestige’ buys; so they end up losing share on both ends.