Rolex’s Success Secret Revealed

How do we account for Rolex’s success in the luxury watch market? David Foster Wallace tells a parable about two young fish swimming along. An older fish comes by and asks, “Hey there, how’s the water?” The two younger fish look at each other, confused, and ask, “What’s water?” And there you have it: the secret to Rolex’ success. Allow me to explain . . .

To the younger fish, the water is a truth so innate it’s not even perceived. Similarly, there are economic truths we don’t challenge: humans are rational actors, GDP is the best measure of economic state, economic growth is always good. These are like water to a fish. Except they’re not true.

I won’t go into all of them, but I will challenge one of them: the notion that growth is always good, even necessary, for economic success.

The endless pursuit of growth has negative consequences. It leads to perverse incentive structures, increases materialism, shallows our culture, rewards manipulation of people to achieve corporate objectives.

I say this as a professional marketer that traffics in the art of getting people to want things. There are now social, political, and economic movements that seek to undermine the notion that eternal growth should be the goal (see: Raworth’s doughnut economics).

So, what does this have to do with Rolex’s success? Many things. But let’s keep it to a single topic. The pervasive growth fallacy within the luxury watch industry largely explains why Rolex sits perpetually atop the watch totem pole.

To be clear, I’m not saying Rolex’s success is due to making the best or most expensive or most advanced or most desirable watches. I’m not making any claims that Rolex makes the most superlative anything. I’m making the point that Rolex occupies a market position that other watchmakers – even the most distinguished of them – can’t replicate.

Let’s unpack this a little.

How did growth become the de facto central objective of economies, markets and therefore companies? It’s mostly down to the advent of the publicly traded company, which dates back hundreds of years but really took off in the early 1800s.

In a publicly traded company – one whose shares trade on an exchange –  shareholders own the company. Even the most senior executives in the company report to, and exist to serve the interests of, the shareholder (that’s you, me, and anyone who owns stocks in 401Ks, brokerage accounts, pension funds, etc.).

Publicly traded companies must, by definition, have short-term interests. They need to think quarters ahead, not years or decades or generations ahead. That’s because their stocks trade hands constantly, and their share prices reflect all known information about the company (barring insider trading).

If publicly traded Citizen Holdings Co., Ltd  is expected to sell, say, $1b worth of watches next quarter, it needs to find a way to sell more than that to advance its shareholders’ interests.

Paradoxically, selling $1 billion of watches does very little for the shareholders – the expectation of $1b in sales is already priced into the company’s share value. (For simplicity I’m excluding dividends from this discussion).

Publicly traded luxury goods companies like Richemont or LVMH own scores of luxury watch brands – Cartier, Lange, Montblanc, Piaget, Vacheron, Panerai, JLC, TAG, Hublot. They look and smell like maisons that put heritage at the center of their existence. But it’s an illusion.

They’re just portfolio brands of larger publicly traded companies. They owe it to their true owners to drum up more sales or lower costs every quarter to  increase shareholders’ portfolio values. No company wants to end up on the “sell” list.

This is important: to such a company, you are not the customer – you are the product.

A watch-buying public is a financial resource from which revenues must be drawn in order to meet analyst expectations. That resource exists to serve the real customer – the shareholder – whose shares represent an interest in the future revenues of that company. A controlling executive of these companies who fails to focus single-mindedly on growth will find themself out of a job.

Enter Rolex.

Rolex is privately owned by the Hans Wilsdorf Foundation, a private family trust. It need not serve the interests of nameless, faceless shareholders. It need not concern itself with pricing studies that measure, algorithmically, the delta between product price and perceived product value to “narrow the price/value gap,”

In fact, it’s well-understood that the perceived value of steel Rolexes is higher than their nominal prices – you can tell because secondary market (grey market) prices for such Rolexes exceeds their prices at retail.

Rolex’s success – as a privately held company – means they can produce less than market demand, in perpetuity, knowing full well that it is doing so as part of a long-term strategy that prioritizes longevity over quarterly returns. This can only be done with companies that are not beholden to outside shareholders. Companies like this can think in terms of generations rather than quarters.

Rolex is of course not the only prominent publicly traded company that inoculates itself from the shareholder pressures and plays the long game. There are many.

Hermes makes the Birkin, the “it” handbag for women. It has yet to be dethroned, after many years. Hermes is a fashion icon in the truest sense. Would it surprise you to learn that Hermes is majority-owned by a family trust?

This is why Rolex was, is, and will continue to be, the king of the watch hill for years to come. It’s not because the product is so amazing  – though it’s a solid product, sure, if not expensive for the actual quality on offer. It’s because of the company’s ownership structure.

There are other reasons, of course – I won’t suggest that being independent is the only relevant fact, as there are plenty of independent watchmakers that will never become Rolex.

So what does this mean for you, or me, if we want to buy a luxury watch? This gets at the difference between price and value.

Price is what you pay, value is what you get for what you pay.  Price is objective, value is subjective. A watch buyer who sees watch companies primarily as a business interests serving a consumer need on behalf of a distributed shareholder population will see watches differently. Or at least we have language to describe market principles we already intuitively understand.

Rolex is hardly the most unique, artistic watch. But you’re not buying uniqueness or artistry with a Rolex, if we’re being totally honest. They’re beyond ubiquitous, and the most popular series – the professional pieces – are tool watches, not objets d’art.

Buying a Rolex is not decision to buy “the best thing” or “the best thing for the money.” It’s “a sure thing.” Sure that it will mean in 10 years what it means today. Sure that you can sell it or trade it if you need to. Sure that it will continue to be produced in quantities fewer than market demands. Sure that it will not subordinate the brand’s interests to shareholder pressures and dilute long-term brand value.

This is the key to Rolex’s success – why it sits atop the watch brand pyramid.