Sep 4, 2023
You can’t buy shares in Rolex SA because it’s a privately held company. The closest investors can get is probably Britain’s Watches of Switzerland Group Plc, which generates about half of its sales from Rolex timepieces.
So, in effect, Watches of Switzerland is a listed proxy for Rolex. But that status is under threat after Rolex said it would acquire Bucherer, a Swiss retailer of watches and jewelry.
Watches of Switzerland now faces a more powerful rival, whose owner also happens to be its biggest supplier. Despite the slowdown in US luxury demand, there is no shortage of eager buyers of Rolex watches in the retail market. The tricky thing is getting enough stock of the most in-demand models. If that is jeopardized, then Watches of Switzerland could see sales come under pressure.
To recap: On August 24, Rolex, which is owned by a Geneva-based foundation, said it had decided to acquire Bucherer, which operates 100 stores worldwide, of which 53 distribute Rolex watches and 48 sister brand Tudor.
The move looks opportunistic — and defensive. It comes after Jörg Bucherer, the 87-year-old Swiss billionaire behind the boutique, decided, having no direct descendants, to put the business up for sale. Rolex said in a statement that the acquisition reflected a desire to “preserve the close partnership ties that have linked both companies since 1924.” It added that Jörg Bucherer was the last person still active in the industry to have known and worked with Rolex founder Hans Wilsdorf.
Reading between the lines, the purchase probably delivers a better outcome for Rolex than seeing Bucherer fall into the hands of a private equity group or Bernard Arnault’s LVMH Moet Hennessy Louis Vuitton SE. Competition concerns look unlikely. The watch retail market is fragmented, and although collectors would disagree, luxury timepieces are hardly essential items.
Rolex said the deal was the “best solution not only for its own brands but also for all the watch and jewelry partner brands.”
But the significance of this transaction — for which no financial details were disclosed — can’t be overstated. Rolex in effect selling direct to consumers for the first time is a seismic shift.
Jean-Philippe Bertschy, an analyst at Vontobel Wealth Management, estimates that Rolex will generate annual sales of over 10 billion Swiss Francs ($11.3 billion) this year. Bucherer will contribute annual sales approaching 2 billion Swiss Francs, he estimates. Based on Bloomberg data, Rolex’s sales would be close those of Hermes International. They would also be ahead of Kering SA’s Gucci and LVMH’s Dior.
Yet Rolex has largely eschewed the dominant strategy in the luxury industry — pushing out the middleman and selling direct to consumers — choosing instead to distribute through partners, such as Bucherer and Watches of Switzerland. Up until now, the only store it has owned and operated is its Geneva boutique.
Rolex said Bucherer would be run as an independent business, and there would be no change to its relationships with its retailer partners. Watches of Switzerland added that it had confirmed at the highest level of Rolex management that there would be no alterations to the way products were allocated.
In the short term, that is likely correct. You can’t buy very many new Rolexes in stores right now anyway — most are on wait lists. But there is a danger that in the longer term, Rolex will favor its new subsidiary over other retailers when determining who gets the estimated 1.2 million watches it produces every year.
If Bucherer becomes known as the go-to destination for Rolex, this could limit foot traffic to Watches of Switzerland stores. If fewer customers come through its doors looking for a Rolex — which mostly aren’t available to buy — there is less opportunity to sell them another brand, such as Omega or Cartier instead.
Watches of Switzerland’s home market of the UK, where it generates about 50% of its sales, looks the most insulated. Rolex watches are sold in just four Bucherer stores in Britain, according to analysts at Peel Hunt, compared with a presence in 45 Watches of Switzerland stores. But Watches of Switzerland wants to expand in the US and Europe. In America, the two are pretty close, but Bucherer is much more dominant in Europe. As the UK retailer seeks to grow, it faces a rival with the backing of a muscular parent, potentially making it more difficult to secure the best locations.
Given these risks, the 15% fall in Watches of Switzerland shares since the deal was announced looks justified.
Of course, there are some mitigating factors. For example, if Rolex were to follow rivals Audemars Piguet and Patek Philippe and restrict supply to third-party retailers, it’s the independent dealers, rather than long-standing partners such as Watches of Switzerland, that look most vulnerable.
An acquisition of Watches of Switzerland by Rolex or another brand, in order to tighten its grip on distribution and control its image, can’t be ruled out in the long-term. But this looks far-fetched. Both Swatch Group AG and Cie Financiere Richemont SA already own and operate their own stores, while Rolex said it had no plans to acquire other retailers. Watches of Switzerland may also be able to acquire any parts of Bucherer that Rolex decided to sell.
Either way, the Bucherer deal has cleaved apart the proxy relationship between Watches of Switzerland and Rolex that was a crucial element of the investment case in the former. That has serious implications for the valuation of what has been a British retail champion.