Taking Control of Distribution

By Elliot Weiss

The modern economy of e-commerce provides small businesses and product developers with a host of distribution options to reach their customers. E-commerce behemoth, Amazon, derives a substantial portion of its sales from third-party sellers who sell and distribute their products via its platform. Such use provides a necessity of ease and preservation of capital for small businesses by not having to build a proprietary distribution platform (such as a back-end payments system or logistics for delivery). This form of distribution has been shunned and ignored by tech companies following the era of Steve Jobs, an industry pioneer who demonstrated obsessive dedication to consumer product branding and Apple’s proprietary distribution methods. Specifically, Jobs required that Apple own and control everything it made from the design of its products to its distribution system, including both its e-commerce and brick-and-mortar stores. “The tech company’s business model has been based increasingly on selling through its own stores and online.” ^1 

In a recent article from the Financial Times, dated May 31, 2018, titled “Swiss Sales Rebound Masks Online Challenges”, watchmakers acknowledge a weakness in their business model stemming from their “heavy reliance on a distribution model of selling via third-party retailers and brick-and-mortar stores.” As set forth in the article, “some 90 percent of Swiss watch sales by value are still made via third-party retailers.” This figure is “much higher than in other luxury sectors such as jewelry and leather goods where the equivalent figures are roughly 30 percent and 40 percent.”^2 

I find the timing of this article is noteworthy for the following reasons.

This Financial Times article follows a prolonged period of weakness over the past three years for the traditional watch industry, having been plagued by weak sales figures, de-stocking of inventory and/or discounted products. The foregoing issues have directly impacted the biggest companies in the global watch industry by upending the economics for many of these traditional watch businesses. For example, Fossil, Inc., realized a substantial reduction in operating income for the fiscal year 2017. The Company generated $325,000,000 of operating income in fiscal 2015 as compared to $31,000,000 for fiscal 2017. One may wonder why it has taken so long for these traditional businesses to expand distribution or pivot the business model when customer habits change or new behaviors are adopted?

Further, I find the comparison to technology companies interesting as well. The reduction of global sales for the traditional watch industry has occurred at the same time that digital or smart watches have emerged (such as the Apple Watch). Of course, much of the story surrounding the death of the traditional timepiece business appears to be related to the proliferation of smartwatches. 

However, the article appears to lay the foundation for an industry-wide adoption of distribution models focused on e-commerce, on the basis that (i) brick-and-mortar foot traffic continues to decline, and (ii) technology companies are demonstrating brand awareness by maintaining a laser focus on developing and owning their distribution systems. In the specific case of the traditional watch business, one may question whether adoption is based upon copying a clear product competitor because their business model is superior or whether it is because they are your competitor. If the underlying basis is competitor status triggering an analogy to the line from the Godfather “keep your friends close but your enemies closer”, one could question not only the quality of the business earning power but potentially the business judgment of management.

The article goes on to provide several criticisms of the adoption of e-commerce as the primary distribution model for the traditional watch business. The first argues that “the traditional view among watchmakers has been that their products are too expensive, and purchases too emotional, to be transacted online.”^3 

The counter-argument provides that “taking control of distribution, especially e-commerce, would allow watchmakers to capture retailers’ high markups, reduce supply chain inefficiencies and allow watchmakers to get to know their end customers better.”^4

Additional arguments provide that “it is wrong to assume all customers would want to buy online.”^5 Some people feel that seeing an array of branded products in brick-and-mortar shops, with the ability to touch and feel the products, is a hallmark of the luxury goods industry. However, such a position may continue to ignore the developments in social networking, such as through the Facebook subsidiary Instagram. In an article from the Financial Times, dated March 31, 2018, titled “Instagram brings visibility- and clients- to bespoke jewelers.”, the author states that “social media has changed the game for fine jewelry brands.”^6  Specifically, “clients are so well versed in a brand’s aesthetic that they are not only willing to spend thousands of dollars on a 15-carat diamond without trying it on but are confident enough in the brand and the jeweler.”^7  This statement seems to undercut the traditional argument that luxury goods need brick-and-mortar for distribution at expensive price points. Further, the foregoing statement speaks to the central concept behind a quality brand identity, that is built on the perceptions of the customer who feels they can taste, touch and feel the goods without requiring a physical interaction with the goods.

This leads us to believe that image and social interaction heavy brand channels such as those on Instagram can operate as extensions of brick and mortar stores, by emulating shop windows, or display cases, presenting their brand and their products within the context of the brand aesthetic presented via a post on Instagram, capturing new and old customers and funneling them through to (ideally) their own e-commerce stores, finally converting an interest into a sale with the use of creative brand.

References:

1 Ralph Atkins (2018) Swiss Sales Rebound Masks Online Challenges, The Financial Times, May 31, 2018

2 Ralph Atkins (2018) Swiss Sales Rebound Masks Online Challenges, The Financial Times, May 31, 2018

3 Ralph Atkins (2018) Swiss Sales Rebound Masks Online Challenges, The Financial Times, May 31, 2018

4 Ralph Atkins (2018) Swiss Sales Rebound Masks Online Challenges, The Financial Times, May 31, 2018

5 Grace Cook (2018) Instagram brings visibility- and clients- to bespoke jewelers. The Financial Times, May 31, 2018

6 Grace Cook (2018) Instagram brings visibility- and clients- to bespoke jewelers. The Financial Times, May 31, 2018

7 Grace Cook (2018) Instagram brings visibility- and clients- to bespoke jewelers. The Financial Times, May 31, 2018


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