Word is beginning to spread that buyers of certain luxury steel sports watches have unwittingly entered into a sacred pact with certain brands. The pact is this: if you are eventually selected off an unimaginably long wait list you may buy a watch that isn't supplied in great enough numbers. But you may not sell it. If you do, you will be prohibited from buying that brand again. The brand will drop the ban hammer.
In an article published Nov 24, 2019 in GQ an anonymous author states that after having quickly sold his Patek Philippe Aquanaut 5167 for a tidy profit, "Patek Philippe knows that it is not [his] anymore. They found out and [he is] not sure how. [His] name could be potentially circulated among other Patek ADs, [he is] told. The AD (who [he] had a great relationship with) will no longer offer [him] 'hard to buy watches'."
And from Watchpro we have: "people that do manage to buy an investment-grade watch and flip it for a profit are being hunted down and blacklisted by brands, retailers and sometimes both. Serial numbers can be traced back to an authorized dealer that sold a watch that was then flipped. The customer can be identified and, `They will never get a watch from us again,' Mr Seddiqi revealed." Mr. Seddiqi operates one of the most significant watch retail stores in Dubai.
A few thoughts. First, this seems like a remarkably un-Swiss thing to do. Over centuries the Swiss worked tirelessly to build a reputation for zealously protecting the privacy of clients, particularly in the field of finance. Now, when a watch returns for service, certain Swiss watchmakers query their database containing serial numbers and names of buyers and look to see if the name on the service order matches? If it doesn't match they then add the name to a "do not sell" list? Swiss bankers must be apoplectic with the potential reputational impact of this practice.
The GDPR also contains a clause called Article 17, also known as "the right to be forgotten." It gives a person the right to ask companies like Google to erase any records which are tied to an individual. The exact text is: "The data subject shall have the right to obtain from the controller the erasure of personal data concerning him or her without undue delay and the controller shall have the obligation to erase personal data without undue delay where one of the following grounds applies: .. (b) the data subject withdraws consent on which the processing is based according to point (a) of Article 6(1), or point (a) of Article 9(2), and where there is no other legal ground for the processing" I'm not a lawyer but it sure seems like this creepy, big brother, tracking of buyers runs afoul of the spirit, if not the letter, of the GDPR. And luxury watch buyers have the kind of resources to force the issue.
The most important question, though, is whether it is good that brands are implementing this strategy. To answer this question I will draw from my prior analysis explaining why secondary market (aka gray market) prices are so high compared to MSRP. The TLDR on this is that the existence of high secondary market prices and "flipping" by buyers is directly attributable to three things completely under the control of brands:
1. Low production levels
2. Artificially low prices at authorized dealers
3. Mismanagement of wait lists.
There are long wait lists for highly desirable steel sport watches. Mr. Saddiqi, quoted above, claims a 12 year wait list for certain references. This is a consequence of the restricted, or rationed, quantity on offer by brands. The rationed quantity is marked QR in the graph. This is not enough production. A shortage occurs because the MSRP price set by the brands, PAD in the graph, is too low. At that price the demand for steel sports models, marked QD, exceeds the number of timepieces brought to market, QR. The magnitude of the shortage is given by QD - QR.
In order to understand why rapid resale of watches, aka "flipping," takes place we need to spend some time discussing demand. When does a person buy something? Economists imagine that people have what we call a "willingness to pay" or WTP. This is the personal "price tag" an individual puts on an object or service, consciously or subconsciously. It is the monetary value of having the product. People will only buy things if their WTP is above the price. If I buy a $5 cup of coffee at Starbucks and I'm asked "what is the monetary value to you of drinking that coffee" then my answer must be greater than $5. Otherwise I would not have bought the coffee. Let's say my answer is $12. Then the great thing about buying the coffee is that I actually get a "discount" on the product which is worth $7 to me. We call this discount consumer surplus.
Let's return to the graph of the rationed market for steel sports watches. Individuals with a high WTP are on the northwest portion of the demand curve, shaded green. Those individuals will buy timepieces at the absolute highest prices because they place a very, very high monetary value on ownership. In fact, the green shaded portion of the demand curve represents the group of buyers who, as a whole, would buy all of the available steel sports stock at the high gray market price of PGray in the graph. It is very very important to remember this observation: there is a group of buyers who have the highest WTP and who could buy all of the available steel sports models. Let's refer to this group of buyers as HWTP.
But there are others who will seek to buy watches as long as the price is below the gray market price. This group of consumers is on the blue portion of the demand curve. While they do not have the very highest WTP, the monetary value they place on the steel timepieces is high enough that they will buy a watch provided they can pay the MSRP located at PAD. Let's refer to this group as the low willingness to pay group, or LWTP. For the brands, the totality of those seeking to buy a watch is both the HWTP individuals and LWTP individuals. This group lands on the wait lists at authorized dealers because the potential buyers outnumber the rationed quantity of watches.
So this exposes the third reason that flipping happens: poor management of wait lists. Let's suppose that buyers are evenly distributed on the wait list. As long as the gray market price is high enough then some LWTP consumers are going to get a watch before HWTP consumers. For an example, suppose that there are 5 HWTP buyers and 15 LWTP buyers. So an evenly distributed wait list could be the pattern H, L, L repeated five times:
1. H
2. L
3. L
4. H
5. L
6. L ....
In this example there are only 5 watches available (remember that QR is always equal to the number of HWTP buyers).
Under these circumstances two of the HWTP consumers will get watches (#1 and #4 on the waitlist) while three LWTP buyers (#2, #3 and #5) get the rest. And 3 HWTP consumers (and 12 LWTP consumers) are left out in the cold! This is NOT a sustainable situation because the HWTP consumers without watches are willing to give the LWTP a sum of money equivalent to their personal, low, monetary value of the watch and include a "bonus" which makes the LWTP willing to sell. The "bonus" just needs to be capped according to HWTP > LWTP + bonus. This is flipping. And it is going to happen whether the brands like it or not because three of the rationed timepieces have been misallocated to the wrong consumers: those with a low willingness to pay. Those with a high willingness to pay buy them out.
The emergent solution of brands blacklisting flippers could possibly eliminate flipping provided the cost imposed on the flippers is greater than the bonus paid by the HWTP. But why are LWTP consumers being punished in this way? It is not their fault that they aren't willing to pay extreme prices for watches. It is not their fault that there are people out in the market who ARE willing to pay those prices and who are locked out from buying because of poor wait list management. The individuals who value watches the most turn to the secondary market and encourage the LWTP to sell. It is almost as if the brands are frustrated that the "wrong" people are buying the timepieces. And to some extent that is understandable: the people who will get the highest surplus from paying PAD are the HWTP people. Economists would recommend that they receive the timepieces first.
A wait list ranking determined by a down payment is only one of many possible "carrot" strategies. There are others. These include: 1) reduce or eliminate rationing (increase production), 2) raise AD prices or 3) change the pricing model! An auction of watches would also avoid flipping since the watches go to the highest bidder (those with a HWTP). But we can see that LWTP are not uniquely responsible for the practice of flipping. Consequently, they should not be punished.
In summary, with creative and alternative strategies for managing the shortage in steel sports models a far more positive and healthy outcome can emerge for both brands and watch buyers.
In an article published Nov 24, 2019 in GQ an anonymous author states that after having quickly sold his Patek Philippe Aquanaut 5167 for a tidy profit, "Patek Philippe knows that it is not [his] anymore. They found out and [he is] not sure how. [His] name could be potentially circulated among other Patek ADs, [he is] told. The AD (who [he] had a great relationship with) will no longer offer [him] 'hard to buy watches'."And from Watchpro we have: "people that do manage to buy an investment-grade watch and flip it for a profit are being hunted down and blacklisted by brands, retailers and sometimes both. Serial numbers can be traced back to an authorized dealer that sold a watch that was then flipped. The customer can be identified and, `They will never get a watch from us again,' Mr Seddiqi revealed." Mr. Seddiqi operates one of the most significant watch retail stores in Dubai.
A few thoughts. First, this seems like a remarkably un-Swiss thing to do. Over centuries the Swiss worked tirelessly to build a reputation for zealously protecting the privacy of clients, particularly in the field of finance. Now, when a watch returns for service, certain Swiss watchmakers query their database containing serial numbers and names of buyers and look to see if the name on the service order matches? If it doesn't match they then add the name to a "do not sell" list? Swiss bankers must be apoplectic with the potential reputational impact of this practice.
Press the Unlearn Button
Further, how exactly does this jibe with the European Union General Data Protection Regulation (GDPR)? Have you noticed that, beginning just recently, as your browse the web you are bombarded with warnings about how web pages use cookies? You can thank the GDPR for that. I don't even live in an EU country and yet somehow this regulation has impacted me. It has global reachThe GDPR also contains a clause called Article 17, also known as "the right to be forgotten." It gives a person the right to ask companies like Google to erase any records which are tied to an individual. The exact text is: "The data subject shall have the right to obtain from the controller the erasure of personal data concerning him or her without undue delay and the controller shall have the obligation to erase personal data without undue delay where one of the following grounds applies: .. (b) the data subject withdraws consent on which the processing is based according to point (a) of Article 6(1), or point (a) of Article 9(2), and where there is no other legal ground for the processing" I'm not a lawyer but it sure seems like this creepy, big brother, tracking of buyers runs afoul of the spirit, if not the letter, of the GDPR. And luxury watch buyers have the kind of resources to force the issue.
The most important question, though, is whether it is good that brands are implementing this strategy. To answer this question I will draw from my prior analysis explaining why secondary market (aka gray market) prices are so high compared to MSRP. The TLDR on this is that the existence of high secondary market prices and "flipping" by buyers is directly attributable to three things completely under the control of brands:
1. Low production levels
2. Artificially low prices at authorized dealers
3. Mismanagement of wait lists.
No Steel for You
Luxury steel sports watch references are currently rationed. There is not enough production compared to what we economists call the "market clearing" volume. In Figure 1 below (which is a standard graph of a market following the laws of demand and supply) the market clearing quantity is Q*. If producers bring this amount of product to market it clears: sellers sell out and all the buyers who want a product at the prevailing price get it. The first is happening in steel sports watches, the second is not.
There are long wait lists for highly desirable steel sport watches. Mr. Saddiqi, quoted above, claims a 12 year wait list for certain references. This is a consequence of the restricted, or rationed, quantity on offer by brands. The rationed quantity is marked QR in the graph. This is not enough production. A shortage occurs because the MSRP price set by the brands, PAD in the graph, is too low. At that price the demand for steel sports models, marked QD, exceeds the number of timepieces brought to market, QR. The magnitude of the shortage is given by QD - QR.
In order to understand why rapid resale of watches, aka "flipping," takes place we need to spend some time discussing demand. When does a person buy something? Economists imagine that people have what we call a "willingness to pay" or WTP. This is the personal "price tag" an individual puts on an object or service, consciously or subconsciously. It is the monetary value of having the product. People will only buy things if their WTP is above the price. If I buy a $5 cup of coffee at Starbucks and I'm asked "what is the monetary value to you of drinking that coffee" then my answer must be greater than $5. Otherwise I would not have bought the coffee. Let's say my answer is $12. Then the great thing about buying the coffee is that I actually get a "discount" on the product which is worth $7 to me. We call this discount consumer surplus.
Let's return to the graph of the rationed market for steel sports watches. Individuals with a high WTP are on the northwest portion of the demand curve, shaded green. Those individuals will buy timepieces at the absolute highest prices because they place a very, very high monetary value on ownership. In fact, the green shaded portion of the demand curve represents the group of buyers who, as a whole, would buy all of the available steel sports stock at the high gray market price of PGray in the graph. It is very very important to remember this observation: there is a group of buyers who have the highest WTP and who could buy all of the available steel sports models. Let's refer to this group of buyers as HWTP.
But there are others who will seek to buy watches as long as the price is below the gray market price. This group of consumers is on the blue portion of the demand curve. While they do not have the very highest WTP, the monetary value they place on the steel timepieces is high enough that they will buy a watch provided they can pay the MSRP located at PAD. Let's refer to this group as the low willingness to pay group, or LWTP. For the brands, the totality of those seeking to buy a watch is both the HWTP individuals and LWTP individuals. This group lands on the wait lists at authorized dealers because the potential buyers outnumber the rationed quantity of watches.
The Queue is the Clue
And now we can understand why flipping takes place. There are many sources. If rationing weren't happening and brands brought enough stock to market there would be no shortage and waitlists. If brands raised the MSRP to the gray market price then the HWTP individuals would all buy the outstanding stock, there would be no waitlist, and there would be no flipping because nobody values the watches higher than the HWTP group. But that is not current industry practice: rationing is happening and brands are sticking to their low prices at authorized dealers.So this exposes the third reason that flipping happens: poor management of wait lists. Let's suppose that buyers are evenly distributed on the wait list. As long as the gray market price is high enough then some LWTP consumers are going to get a watch before HWTP consumers. For an example, suppose that there are 5 HWTP buyers and 15 LWTP buyers. So an evenly distributed wait list could be the pattern H, L, L repeated five times:
1. H
2. L
3. L
4. H
5. L
6. L ....
In this example there are only 5 watches available (remember that QR is always equal to the number of HWTP buyers).
Under these circumstances two of the HWTP consumers will get watches (#1 and #4 on the waitlist) while three LWTP buyers (#2, #3 and #5) get the rest. And 3 HWTP consumers (and 12 LWTP consumers) are left out in the cold! This is NOT a sustainable situation because the HWTP consumers without watches are willing to give the LWTP a sum of money equivalent to their personal, low, monetary value of the watch and include a "bonus" which makes the LWTP willing to sell. The "bonus" just needs to be capped according to HWTP > LWTP + bonus. This is flipping. And it is going to happen whether the brands like it or not because three of the rationed timepieces have been misallocated to the wrong consumers: those with a low willingness to pay. Those with a high willingness to pay buy them out.
The emergent solution of brands blacklisting flippers could possibly eliminate flipping provided the cost imposed on the flippers is greater than the bonus paid by the HWTP. But why are LWTP consumers being punished in this way? It is not their fault that they aren't willing to pay extreme prices for watches. It is not their fault that there are people out in the market who ARE willing to pay those prices and who are locked out from buying because of poor wait list management. The individuals who value watches the most turn to the secondary market and encourage the LWTP to sell. It is almost as if the brands are frustrated that the "wrong" people are buying the timepieces. And to some extent that is understandable: the people who will get the highest surplus from paying PAD are the HWTP people. Economists would recommend that they receive the timepieces first.
You Can Accomplish By Kindness What You Can't By Force -Pubilius Syrius
The brands have alternatives to using the "stick" of a blacklist. The crux of their problem comes from a poor sort of the wait list. Those with the highest willingness to pay should be placed at the top and then there will be no more flipping. There is a "carrot" solution which does not involve blacklisting. Tell buyers: you need to give us a down payment which we will hold in escrow, those with the highest down payment are ranked first on the wait list. This will provide an incentive for those with the highest WTP to reveal their position on the demand curve by placing a large down payment. They will go to the top of the wait list and flipping will be reduced. This may not be a perfect mechanism but it certainly represents an improvement on current practice.A wait list ranking determined by a down payment is only one of many possible "carrot" strategies. There are others. These include: 1) reduce or eliminate rationing (increase production), 2) raise AD prices or 3) change the pricing model! An auction of watches would also avoid flipping since the watches go to the highest bidder (those with a HWTP). But we can see that LWTP are not uniquely responsible for the practice of flipping. Consequently, they should not be punished.
In summary, with creative and alternative strategies for managing the shortage in steel sports models a far more positive and healthy outcome can emerge for both brands and watch buyers.
This comment has been removed by the author.
ReplyDeleteThe problem is, there are no real waiting list. The Siddiqui owner candidly admitted it last year: we give the hard-to-buy watches to those who spend the most at our shops. Simple as that. And it happens everywhere.
ReplyDeleteExcellent blog btw, just found it and subscribed.