ROLEX 2
Running Head: ROLEX 2
Professor Brandon Foor
Dunstan Davies
Monday, March 4, 2019
Managerial Economics 515, Assignment 3
Abstract
Rolex company’s watches are doing better than expected due to effort and hard work that are in place at the company. The stakeholders in the company will be meeting next month with a group of company’s Board of Directors and the investors with the aim of securing an infusion of $100 million in new capital which will see the company get a significant expansion of its operations in the watch market. The report is thoroughly and honestly evaluating Rolex and its watches market. In brief, the report is about research on the Rolex premium product brand on the market.
Further, the report will show several factors. For instance, it will explain the overall background and products of the Rolex company and its industry. Secondly, it will illustrate Porter’s Five Forces both weak and strong forces. Besides, the report highlights the pricing strategies of Rolex. Also, it shows the economic outlook of the company. Lastly, the findings are used to suggest solutions to some of the factors highlighted by the elements. Where Rolex has to continue making the transition of becoming an international luxury brand rather than a luxury brand.
Introduction
Luxury goods market is booming both locally and globally. Rolex watches are among the world best luxury goods. According to Bobs Watches (2019), Rolex SA is a leading luxury watch manufacturing industry in the world producing over 2000 watches in a day and generating over 7billion dollars in a year. Rolex has evolved over the years defending and building a strong position in the high end watch market (Liebskind,2004). The company has been involving itself in the strategy of ensuring brand purity, continuity and emphasized the performance of creating brand image thus its success. Conversely, in today’s world the global luxury goods market is massive. Therefore, Rolex has to deal with several factors in the watch industry. Although the Rolex company emphasizes its strategy, the company has to deal with several factors that discourage its business in the watch markets.
The report provides evaluation and analysis of the latest trends in the global watch industry and overall Rolex market sector. The report is structured in a few sections to effectively analyze the current global watch market and the company’s market sector. First and foremost, the report analyses Rolex background and its products using its watches, market sector, industry, and structure, factors that impact supply and demand of watches, non-economic forces impacting sales and profitability, and other economic characteristics. Following this part, the report illustrates Rolex Porter’s five forces which are divided into strong and weak forces and further showing a way of capitalizing on these forces.
Thirdly, the report illustrates the pricing strategies of Rolex that is explained by showing the existing practices at Rolex & industry and the potential practices that are not currently in use in the watch market. Lastly, the report gives the overall Economic Outlook of Rolex by indicating the short term and long-term outlook.
Background and Products
Market Sector, Industry, and Structure
While screening the watch industry, market sector and structure some general findings are evident. For instance, the watch market has changed a lot in the past years, and the internet retailing is the main market driver in the watch market. Besides, smart and sports watches have been increasing in demand is the latest trend in the market. Further, the whole market has a high prospect of growth as there is a high expectation in industrial growth.
During the period 2017-2021 the global watch market is expected to grow at a CAGR of 7.87% (Report Linker,2017). Besides, according to Report Linker (2015), Global Watches Market: Market Analysis 2015-2019 the global watch market is set to rise to more than 7.6% during the 2015-2019 period because of high demand for Swiss luxury watches which boosts the sales and the market of the watch. Further, the reports show watch manufacturers setting up e-boutiques as a way of entering the e-commerce segment. Therefore, the sales of watches online have witnessed considerable growth, and the trend is expected to continue in the period.
To date, Rolex is a well-known example that the Swiss industry produces. Besides, Rolex is the leading influential, known and collectible watch brand in the world. Forbes (2019) indicates Rolex as a valuable brand and leading name in the luxury wristwatches that focuses on watchmaking. According to Goulard (2017), Rolex immediately appears in the list if you ask an average man to name swiss brands or watch brands. Also, Rolex being among Swiss watchmaking industry the watches dominates the luxury watch sector. Jaberg & Nguyen (2017) indicates Switzerland as a producer of around 30 million watches in a year which is 2.5% of the global timepieces. Also, Swiss accounts to over half of the high-end watch sector in the world where it manufactures 95% of watches that cost over $1000.
Conversely, since 2015 the Swiss Watch industry has been facing some difficulties in the market. The Delloit Swiss Watch industry Study (2016) indicates that since 2011 the watch exports plummeted in the first half of 2016 to the lowest level. Banks (2017) indicates that the Swiss Watch industry faced tribulations in 2016 in many markets. For instance, the demand for watches in China was affected by the government crackdown on corruption. Besides, in Europe, the Swiss company had an 8% decline in watch sales after Europe cut into luxury retail and tourism causing financial fluctuation of Swiss Franc. Besides, Rolex being among the big watch group that dominates the Swiss industry faces competition from other three watch groups including Swatch Group, Richemont, LVMH that dominates the Swiss industry and other companies in the global watch industry. Therefore, Rolex is in a pure competition market structure. In brief, the Swiss watch industry faces difficulties despite dominating the luxury watch sector.
Figure 1: Swiss Watch exports
In conclusion, the market, industry, and structure are promising for Rolex as the trend indicates in Swiss watch market indicate. However, Wei Koh as cited by Banks (2017) acknowledges that Rolex is a strong brand that is not affected by the difficulties in the market. It is because the brand has made a transition from being a luxury watch brand to an international luxury brand.
Major Products and Services
Founded in 1905 by Alfred Davis and Hans Wilsdorf in London England, Rolex is among the dominant companies. The company is the leading luxury global watch manufacturer that produces over 2000 watches per day generating over 7 billion dollars each year (Bob’s Watches, 2019). The company is a Swiss-based company that services, distributes, manufactures Wristwatches under Tudor and Rolex brand through authorized dealers worldwide.
Factors Impacting Supply & Demand
Factors that influence Rolex watches supply and demand are interesting. Rolex watches are among the products that are famous and recognizable in the world making the watches vulnerable to several factors that can limit the supply and demand. First and foremost, Chase Hattan (2015) indicates that the Swiss company itself plays a role in impacting the supply of the Rolex watches. The company makes about 500,000 watches in a year which is less than the demand. By doing so, it limits the quantity of Rolex watches supplied resulting in ever-changing demand resulting in the price of Rolex to continue rising.
On the other hand, the demand of Rolex watches is affected by high value and prestige nature of Rolex with its price. As the prices of watches fall, the quantity demanded rises while the quantity demanded falls as the price rises. Therefore, with this factor, it makes Rolex second-hand watches to have a high resale price.
Other Economic Characteristics
A utility is an important economic characteristic of a good. It is the total satisfaction that is received from the consumption of a service or a good. According to Kenton(2018) by knowing the utility of a good, it becomes easier to understand the demand and further the price of that good or service.
Since its foundation, Rolex watches have been evolving by the utility of the watches. Fuortane (2019) acknowledges that everything that Rolex is doing is based on the utility of the watches. Initially, the wristwatches were made for women as small pocket watches, but in the 19th and 20th-century warfare pragmatism brought the watches to men where battlefield utility made it become marketed on men. Besides, watches like Rolex submariner and GMT were made for a professional utility. Where some Rolex watches for underwater purposes are larger for best visibility underwater. Moreover, Aschim(2016) argues that Rolex watches are well-crafted watches that grants the owners a look of sophistication and has a utility as an exquisite timepiece that works efficiently. Therefore, Rolex watches are made to satisfy different customers utilities according to their use.
Non-Economic Forces Impacting Sales & Profitability
The government can affect the sales and profitability of Rolex watches adversely. Neate(2017) indicates that the sales of Swiss watches experienced a huge drop in China market making it be the worst years for the Swiss industry watches. By the Chinese government cracking down on corruption, the Swiss watches sales fell by 10 percent. The sales dropped after Chinese president, Xi Jinping announced a campaign against rampant corruption in China which saw sales in Hongkong and China drop by 25% and 22% respectively. The role of the expensive watches in the Chinese economy was highlighted after a junior government official was charged with corruption owning more than 11 luxury watches worth $100,000. Besides, in 2013 the crackdown by the Chinese government also affected the sales Rolex in China (Beattie,2013). In brief, the corruption crackdown in China has made the Rolex watch sales and profitability drop.
Porter’s Five Forces
With the Porters Five Forces for Rolex, it will show why a company can sustain a different level of profitability. Kenton(2019) acknowledges that the model is used widely in the analysis of the industry structure of companies besides its corporate strategy. These forces include competition in the industry, the potential of new entrants into the industry, power of suppliers, the power of customer and threat of substitute products.
Strong forces
The bargaining power of buyers
The buyers are important in the success of Rolex. Every customer has different taste and preference which results in different criteria before buying the watches. For instance, they can consider factors like quality, style, price and even size. Besides, consumers can confront a multitude of brands in the industry and different segments like mass market watches, fashion brands, smartwatches, and others. Therefore, the industry being a perfect competition a buyer has to make choices. Rolex can capitalize on these forces by ensuring a strong brand quality and ensure brand loyalty. It is because bargaining power is lower when the customers are loyal to a company’s brand.
Threat of Substitutes
Over the years, the use of watches has changed drastically. The mobile phones are changing rules just like how Wristwatches brought a revolution from pocket watches. Therefore, the utilitarian aspect of watches has changed over the years as time can be found in many places. For instance, time can be available on computers, mobile phones and more. Therefore, if people do not consider Rolex as a style accessory that expresses personality rather a timepiece, then the watches will be substituted. Therefore, Rolex should make sure its watches are seen as a style accessory rather than normal timepieces.
Rivalry
In the watchmaking industry, Rolex faces stiff competition that exists in the industry especially portfolio brands. Rolex has many competitors like Tag, RADO, TISSOT, Titan, and others. The firms are covering several segments of the market where they own different brands in the Swatch group (Browning,2013). Therefore, the companies are involved in several efforts to develop a brand image, storytelling, and concept. Also, these companies involve themselves in competitive marketing campaigns where they cause an influential increase in power of potential customers and their customers. Rolex must set ways to gain a competitive advantage over its rivals.
Weak forces
The threat of new entrant
According to Arnold (2017), a super high-end mechanical watch (Haute- Horlogerie) has strong barriers making it hard to achieve the entry into the market as it requires many factors like brand heritage, manufacturing cost distribution selection, and other factors. Rolex has achieved Haute- Horlogerie, and it is a benchmark for quality and prestige in watchmaking (Rolex, 2018). Therefore, Rolex products are not simple to make, making a threat to new entrants difficult as many competitors may not achieve a super high-end mechanical watch like Rolex.
The bargaining power of suppliers
Rolex watches are from mass-market brands and premium brands where the two brands differ. The mass marketing brands watch components are made with a low to medium quality in low labor cost countries after which they are assembled in Switzerland thus allowing the watches to be Swiss made. Besides, premium brands are different as both assembling and manufacturing of the components are made in Switzerland by the company hence good quality of the watches. Swatch suppliers is a good example of mass-market brands supplier of Rolex (Browning,2013). With the supply from the mass market, it makes Rolex to experience diminishing bargaining power of its watch brands.
Pricing strategy
Existing Practices at Company & Industry
Before deciding how much is to be charged on a product the company needs to think more before it can add a markup or calculate the cost. According to Erick Dolansky as cited by BDC (2019) how much a customer is willing to pay has much to do with cost with how much the customer value the service or product they are buying while it has little to do with cost. Rolex uses a value-based pricing strategy in pricing its product. According to Dtcarguy (2013), Rolex sets prices higher with little regard to competitors by doing that it sets the price point for other companies to follow. Besides, Rolex uses a premium pricing strategy where it introduces its new watches in a new market using lower prices with the aim of positioning the product in the market(Woodruff, 2019)
Potential Practices Not Currently in Use
A potential pricing strategy that is not currently in use at Rolex is a temporary discount pricing strategy. The company does not offer any discounts to its customers as its consumers are willing to pay the prices the company is setting (Dtcarguy, 2013). The company can use the pricing strategy to its advantage to increase sells in certain markets. It can do so by introducing seasonal price sales and even volume sales discounts.
Economic Outlook
One indicator that poses the greatest concern for Rolex is inflation which reduces the purchasing power of Rolex watches (Steiger,2018). However, an indicator that possesses reassurance is GDP per Capita showing Switzerland is a healthy nation (Trading Economics, 2019). It was averaged to 54420.97 USD in 1980 to an all-time high of 76682.64 USD in 2016. Therefore, it shows the Swiss economy is a stable economy meaning that the company will run efficiently as it is a Swiss-based company.
Source: Trading Economics
Short-Term Outlook
Favorable Elements
The countries currency relies heavily on the economic climate of a country’s economy. Therefore, by Swiss Franc having a stable economy, the Rolex sales will be valuable to the company than when its economy is unstable.
Unfavorable Elements
Inflation in a short time it will affect the price of specific items that are used in the manufacturing of watches increasing the price of watches over a short-term outlook (Steiger, 2018).
Long-Term Outlook
Favorable Elements
When the Switzerland economy is stable at long-term, the Swiss company will benefit massively. Internations (2019) indicates that the manufacturing sector in Switzerland depends heavily on exports and imports hence Rolex based in Switzerland the economic environment is favorable.
Unfavorable Elements
Over a long-term outlook, the prices will rise higher than what the customer can afford causing a decline in the purchasing power of Rolex customers.
Conclusion
In conclusion, the market structure, industry, and structure of Rolex and its market indicate that the company has a competitive advantage over its competitors. However, it has a major problem with dealing with strong forces like the bargaining power of buyers, the threat of substitutes and rivalry. Besides, the company has to deal with weak forces like the bargaining power of suppliers and the threat of new entrants. Moreover, the company has to improve its pricing strategy by introducing a temporary discount pricing strategy adding on the pricing strategies it is using currently. Further, the company should beware of inflation as it has both long term and short-term effects on the company while maximizing on the economic advantage of the strong GDP of Switzerland. To end, Rolex should continue making a transition of making its watch brand become an international luxury brand rather than a luxury brand by building its brand.
References
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