Fining the Crown

News recently broke that watch brand Rolex was on the receiving end of a €91 million fine levied by French authorities.

A view of Rolex's offices in France. Source: Google Maps.

Generally, the headlines ascribed this fine to Rolex's alleged practice of prohibiting online sales of its watches. However, I've looked closely at the situation and I don't think those headlines are completely accurate (although they're probably what French authorities would want you to believe).

I came to this conclusion after reading a Google translation of a 134 page report issued by the French Competition Authority on December 19, 2023. Generally speaking, such documents do not make for engaging reading. However, for those who know how successful Rolex has been at maintaining a comparatively high level of corporate secrecy, the French report provides a compelling and rare insight into some specific aspects of the brand's business. It is these insights which lead me to conclude that Rolex's policies on sales channels are not the entire story when it comes to the multi-million euro fine.

More specifically, French authorities raided Rolex's office in Paris on January 17, 2019.

An AI generated image of French police entering a Rolex building.

Materials seized in that raid are discussed, in some detail, in the competition authority report. Further, French authorities interviewed many, many French authorized dealers in order to gather evidence about Rolex's business practices. Results from these interviews are also discussed in the competition authority's report.

In what follows, I will provide some historical context for the investigation and fine. I will also share details about Rolex's busines practices, as documented in the competition authority's report. Finally, I will wrap up this post with a discussion of how events might unfold in the wake of this fine. So let's get into it.

History Repeating

In many ways, the most recent investigation and findings are not actually all that novel. For example, more than 25 years ago, the French competition authority issued a report on Rolex relating to "practices observed in the distribution of Rolex watches." Apparently, French regulators have a longstanding interest in Rolex. Further, if we consider the long arch of history, the very existence of the Swiss watch industry is associated with French animosity, of a sort. As detailed by famed watch collector account @horology_ancienne, French persecution in the 16th century resulted in an exodus of Huguenots to Switzerland and other countries. Among these Huguenots were skilled clock and watchmakers; progenitors of the modern fine watch industry. I couldn't help but wonder if this week's penalty by French regulators triggered thoughts of historical hostilities in Rolex's Genevan headquarters.

Details uncovered by the investigation, itself, connected to history in interesting ways.

An international org chart for Rolex created by the French competition authority.

Although the main business practice at hand, online sales, is relatively modern, my own writing on the history of Rolex marketing shows that certain tactics from the past are still at play in the brand. For example, in my book on Rolex I provide evidence from primary sources showing that the brand adhered to the priniciple of uniformity in messaging and advertising around the world. During the 2019 raid of Rolex France, authorities seized a document entitled "Rolex Official Retailer Digital Program" which revealed that the brand offered three options for authorized dealer web pages. These were: 1) an "e-corner" in which a retailer simply placed code on their web page that "imported" content from Rolex HQ, 2) a "bespoke" mini-site which was similar to the "e-corner" but sligtly customized (Rolex France held final approval over updates to the Rolex pages on these mini-sites and they were more expensive for the AD) and 3) a "hybrid" solution. For all three of these options, Rolex would be able to achieve a certain uniformity of presentation, an outcome that is quite similar to the brand's desire for trans-national marketing uniformity in the 1960s.

Historical practice also provides an explanation for why Rolex may be averse to online sales. In my book, I provide evidence that in the 1960s, Rolex expressed concern over a pattern of "trade diversion" in which watches allocated to a market with weak demand were channeled to other markets with stronger demand (in this case, demand for Rolex in Singapore was weak so retailers were selling watches to others in Japan and Hong Kong). Even six decades ago, Rolex preferred that when they allocated timepieces to a certain geographic location, buyers living in that location acquired the watches. I am not aware of an explanation for this business strategy but I have hypothesized that those who wear a Rolex also offer "earned media" for the brand. In other words, they advertise it to others. Trade diversion could deprive Rolex of organic promotional activity in certain markets, thereby further weakening demand in those markets.

Regardless of the true reason behind Rolex's aversion to trade diversion, it is clear that e-commerce in new Rolex watches would make trade diversion worse. If online sales were allowed in France, there would be little to prohibit a buyer in Germany, say, from finding a French-allocated Submariner and buying it online. And, Rolex expressed concern over this outcome to French regulators as a basis for not allowing online sales (the report describes this concern as "parallel trade," see the definition here).

Beyond these longstanding international strategies involving uniform marketing and anti-trade diversion, there are some France-specific issues at play which we'll turn to next.

Trust But Mystery Shop

It is clear from the competition authority report that authorized dealers in France and Rolex have a somewhat strained relationship (in fact, this may be true globally but I will only concentrate on what French authorities documented).

A French retailing holding a Rolex authorized dealership many years ago. Source: Foursquare.

I wouldn't go so far to say that Rolex distrusts French authorized dealers, but it is clear that Rolex is committed to a "trust but verify" strategy. More specifically, at the time of the investigation, Rolex ADs in France were regularly visted by "mystery shoppers" as part of a program coordinated from Rolex HQ in Geneva. According to an employee of Rolex France, "The mystery shopper verifies the handling of the point of sale, the quality of the welcome, the quality of the technical discourse and the historical knowledge of the brand and models and the ability to sell the product, to have a convincing speech and the exit ceremony." These visits would take place multiple times per year. Prior to 2007, an AD would receive a mystery shopper 3 or 4 times per year. But in more recent years, ADs could expect 10, 6 or 4 visits per year (depending upon the volume of Rolex sales at a particular AD). Authorized dealers told the competition authority that mystery shoppers would often end their visit with a query about discounts for a watch. The results of this conversation, and other observations from the mystery shopper's visit, would be written in a report submitted to Rolex France and Rolex HQ.

In addition to the mystery shopper program, the competition authority report presents evidence that Rolex's pricing policies have squeezed authorized dealers. More specifically, for some of the most popular models, Rolex has increased the wholesale price (the price charged to authorized dealers) at a faster rate than it has increased retail prices. This means authorized dealers are earning less for each sale of the popular models. With lower margins, the temptation to deviate from the distribution agreement is stronger. For example, an AD will be more inclined to sell to the grey market and receive a higher price. Or, they may skimp on the retail experience in order to reduce costs. This is likely one explanation for the faster cadence of mystery shopper visits. These types of monitoring programs are expensive and, with the increase in volume of mystery shopper visits, each AD in the Rolex network costs the brand more.

The same retail location shown above after losing its Rolex distribution agreement. Source: Google Maps.

In light of this development, and perhaps other factors, Rolex decreased the number of ADs in France. The competition authority report notes that in 1999, France had 155 authorized Rolex dealers. As of late 2021, that number had decreased by a whopping 43% to 66 locations.

In my assessment, this trend is an important cause of the fine by the French competition authority. The competition authority acknowledges that its investigation was spurred by complaints from: 1) a trade association of watch retailers (Union de la Bijouterie Horlogerie) and 2) one specific authorized dealer who lost their distribution arrangement and took Rolex to court. While it may be true that the competition authority actually believes online sales of new Rolex watches would increase competition, it is quite plausible that the fine was a bit of unfortunate economic nationalism masquerading as antitrust. Is the French government striking back because French enterprises were "hurt" by a Swiss business? We need to at least ask this question.

Next let's turn to the question of online sales themselves. Did Rolex prohibit them? What is the brand's rationale for doing so (beyond the trade diversion argument above)? What is the impact of an online sales ban?

The Heart of the Matter

In my opinion, the French Competition Authority provided adequate evidence to establish that Rolex's distribution agreement with its French ADs prohibits them from selling new Rolex watches online. This evidence includes text from seized documents as well as interviews with Rolex France representatives and authorized dealers. However, it is important to note that retailers themselves may not want to sell Rolex online. One stated, "I don't believe in high-end internet."

Rolex's most plausible explanation for prohibiting online sales of new watches has to do with counterfeit timepieces. The brand rightly points out that Rolexes are more heavily counterfeited than any other watch design. If authorized dealers sell online, there is a real risk that buyers will have a harder time differentiating between legitimate sources of new watches and other online sellers who are moving fake watches. This will end up harming Rolex's reputation. Another, relatively unexplored, reason for prohibiting online sales has to do with the fact that through a company called Roldeco, Rolex sells decorative materials (displays, signs, seating, etc) to authorized dealers. This "retail design" business would be less succcessful if sales start to move online.

In response to Rolex's defenses, the competition authority argues that the rationale for banning online sales is not adequately convincing. To begin, the authority mentions alternatives for preventing counterfeit, such as blockchain. It seems a little disingenous to recommend this fairly novel and untested methodology for anticounterfeit, but the French regulator does just that. The competition authority also mentions that other brands have allowed online sales of watches, suggesting that the counterfeit downside from online sales is not sizeable, at least for certain brands. In addition, the competition authority noted that Rolex permitted online sales in its new certified preowned program. Indeed, the brand's differential treatment of online sales across the preowned and new market segments has the potential to undermine its defenses when it comes to banning online sales of new watches.

Wrapping Up

I don't think this is the last we will hear of the Rolex fine imposed by French regulators. The brand has the right to contest the fine in front of the Paris Court of Appeals. Companies have been successful at overturning French regulatory findings on appeal. While the French competition authority did conduct a very thorough investigation, the report also contained errors that may gain attention in the appeal. For example, the competition authority separately mentions the brands "Audemars" and "Piguet" in the report (paragraph 14). As far as I know, these brands do not exist separately, although Audemars Piguet does. More significantly, in three places the competition authority describes Ulysses Nardin as a brand owned by Kering. That is no longer the case. Ulysess Nardin became independent almost two years ago.

If I'm honest, I'm also not sure this fine is a good idea. Part of me bristled at the idea that a regulator would attempt to replace business practices grounded in history (ie Rolex's policies of anti-trade diversion, marketing uniformity, and structured distribution agreements) with a different business practice (online sales) when historical practice has served Rolex quite well. Pointing to other brands that allow online sales is not a convincing argument because it is extraordinarily unlikely that those brands are as successful as Rolex. I buy the argument that some authorized dealers would prefer to sell new Rolexes online. But I truly don't know why any government would spend resources punishing a foreign business because domestic businesses voluntarily agreed not to sell a product online. If an authorized dealer doesn't like the terms of their Rolex distribution agreement, they're free to stop selling Rolex. If enough ADs walk away from distribution agreements, Rolex will have to change how they do business. This would be a sort of market discipline that could bring Rolex around towards online sales. Indeed, it's likely that other watch brands have permitted online sales in order to attract retailers.

Finally, I do believe that Rolex will pull out all the stops in order to prevent online sales of new watches in France. Unless the brand is ready to rethink certain principles that are seemingly core to its success, there is too much risk that online sales will spread to other markets once they begin in France. I can easily see authorized dealers in the United States, say, complaining to Rolex that French retailers are taking some of their business via online sales. We also can't forget the fact that Rolex has another option when it comes to watch sales in France. Now that Rolex owns Bucherer, they can close all independent French authorized dealerships and sell exclusively through Bucherer stores. Then, there would be no online sales in France and no additional pressure for online sales around the globe. It would be hard to think of a better example of a situation in which a regulator wins a battle only to lose the war.

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My book on the history of Rolex marketing is now available on Amazon! It debuted as the #1 New Release in its category. You can find it here.

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