Patek Philippe: Watch Perfection - [Business Breakdowns, EP.146]

27:01And that campaign is so brilliant because it just captures the heart of giving a watch to your son or daughter and imagining your grandkids having that peace in the family. And that transcends all other messages. And that's what people walk away and remember to this day. Absolutely. Yeah, I think it has a place if it's not the greatest of all time. It is certainly in a very small handful of other campaigns in that category. You referenced before that 1989 auction. And in the little research I did, it did seem like Patek embraced auctions differently than other heritage brands, watch brands. How involved were they?

27:41You mentioned they were both consignee and a buyer in these auctions. How important was that strategically for them? Obviously, there's a big secondary market. Talk a little bit about the auction space, which you have quite the history in yourself. Going back to 1989, the idea of a single brand auction was just quite foreign. There were Habsburg -Feldman slash Antichorum. They did it with a couple of other brands. Off the top of my head, I think Cartier, Omega had a sale. But Patek Philippe was the first that really the brand itself was fully behind it. And even their advertisements were both Patek Philippe and the auction house hand in hand.

28:23and the PR machinery of the auction houses and the brand itself worked together. So this was all just uncharted territory. Now, that was all great and it worked because there was such a small community of people that were even interested in auction at that time. But over time, people would be like, all right, well, the brands are gaming the auctions because then all of a sudden we saw every brand have an auction. They saw what Patek Flip did and they're like, oh, let's try the same. And it was in the early 2000s that Patek Flip significantly backed off from auctions. They just stopped. Their museum has everything they could ever imagine that they could want.

28:58So they weren't active in buying. And this was my era in the auction world. It was frustrating that Patek Flippi was not buying the top pieces at auction anymore. But the beauty of it was, it was a pure form of a marketplace. The momentum was already going and collectors and individuals, sometimes investors and buyers of all sorts, they were buying Patek Flippi at auction. So the prices just kept going up, up, and up. And as Pitek Philippe backed off completely, the prices just kept going up furthermore. And when they historically did buy in those auctions, you mentioned the museum. Is that where those pieces would go?

29:34Were they ever then coming back out and selling them or doing anything else with the watches? So when Pitek Philippe buys a watch at auction, and they were very active in the 1990s, in the early 2000s of buying. That was the golden era of all these great pieces were surfacing at auction. They were all going into the museum. They were being cleaned, overhauled, and put on view to this day. You can go see them in Geneva. It was an amazing period of time to acquire some of the rarest pieces that surfaced. It's like that intergenerational timing made sense. Pieces from the 1930s through 60s were showing up at auction during that period of time.

30:14Go through an auction catalog from 1999, your heart melts the opportunities that one had. Today, we just don't see the same types of pieces surface at auction. You get one or two great watches a season where back then you might get five to 10 amazing watches per auction. And probably at materially lower prices, I'm sure. I mean, the prices just make me want to cry. When thinking about auctions and the secondary Patek market, I heard some numbers that were quite outrageous. But can you put some ballpark around how big of a secondary market Patek actually has? In anticipation for that question, I was trying to get real numbers for you.

30:54So I'm going to give guesstimates two parts. First, the annual turnover of the company itself of modern production pieces of what Patek Flipp is selling. They don't share these numbers publicly or privately, but I'm guesstimating between 1 .2 and 1 .5 billion a year. And this is just modern of that 70, 75 ,000 watches they're selling per year. But where it gets interesting, and this is my world, is pre -owned and vintage. We estimate that approximately $8 billion annual turnover of vintage and pre -owned. So we're talking real numbers. It's unfathomable. But the point being is the pre -owned and vintage market is much larger than the primary market.

31:37And I think through the last three, four years, those numbers just keep getting greater. Really hard to pin down the exact numbers because just think every transaction that we see at auction is public, but imagine the amount of business that's being done out there that it's with dealers, it's with retailers, it's online. There's significant numbers and there are many of us trying to figure out how much it really is. But that's my best estimate. That's incredible. Those numbers. I mean, once you get into the billions, that's one thing. And then well into the billions, that is remarkable just to understand how much of an economy exists just around this single brand.

32:19How do they think about that secondary market, the vintage market? Because at least from my sense of things, it obviously has a massive impact on brand image. But from an economics perspective, they're not capturing any of the economics of those watches that are selling in the secondary market. Is there a way that the brand deals with that strategically just to have a sense of what's going on in that market? And it must impact what ultimately happens in their primary sales or the new modern sales. But what's going on inside the walls there in terms of how they're thinking about that? I think internally at Patek Philippe, they are very mindful of what happens at auction.

32:56They're very aware of what's happening on the secondary market, but it's not their business. Their business is selling modern production watches. They're watching very closely. I'll put it this way. I expect they're watching very closely what other brands are doing, especially Rolex that's going into pre -owned. We see what Vacheron Constantine is doing, what Audemars Piguet is doing on the brands itself with the secondary market, but Patek Philippe has taken a position of just not being part of it in any way, shape, or form. They're focused on what they're doing, which is making the best watches that have ever been made.

33:30Now, that said, when I was working for Patek Philippe, the first question I asked, naively, I asked the president of Patek Philippe USA at the time, what, in your opinion, is Patek Philippe's greatest competition? And I thought the answer was going to be Rolex. I was very wrong. I was quietly informed that Patek Philippe's greatest competition is Patek Philippe from the past. And that's a very interesting way of looking at things. So I wonder if that mindset is still in the minds of management of Patek Philippe that they've done such a great job in the past. That's what we should be looking out for.

34:05It's very interesting because I'm focused on vintage that I'm dealing with a lot of collectors that are trying to decide, do I buy a modern minute repeater or do I buy a vintage perpetual chrono. These are the questions that then consumers having. Sometimes they ask the dirty question, John, which one will go up more in value in the future? A question I just don't want to hear because I don't know. But I could tell you about major collectors in the world are really trying to decide whether vintage is the future or modern watches are the future. And the great thing is everything that's being made today by Patek Philippe, it'll eventually be vintage.

34:42So the answer is very circular at the end of the day. It's just a matter of where do you want to place your beds? Yeah, it's quite interesting. And you reference the collectors. And I'm curious when it comes to something like this, where it's wearable art, but there is this sense of, do you own your products or do your products own you and the fear of wearing something that's that expensive. So when you're dealing with collectors, do you think the majority of these are being put in cases, kind of sitting in safes or in closets or whatever it might be, or are most of the collectors that you're talking to wearing these on a, whether it's day -to -day or on a more regular basis, whatever it might be.

35:21What's your sense of that? And just dealing with a Patek and what you suggest, because obviously if you buy something like this, you want to wear it, but I think there's a fear that comes into play. Many Patek Philippe collectors take great pride in wearing their watches out there. And the beauty is not everyone's going to know what's on your wrist. I mean, there's simple Calatravas from the 1950s that are worth a half a million dollars, but for the uneducated eye, it looks like a $3 ,000 watch. And people are out there wearing these. And I absolutely love and respect when these things are seen out there in the wild.

35:56My eye is trained. It's what I'm looking for. I mean, I walk into a room, of course, I'm looking at everyone's wrists and trying to assess what do people have. Yes, if you're wearing a Rolex covered in diamonds, you're screaming to the world what you have. And that's the point of it. Yes, if you have a Richard Mille that you just bought $1 .4 million and it has a million different colors and bells and whistles, you're screaming to the world something very specific that's on your wrist. But when you wear a vintage, classic chronograph, no one's gonna know. It's gonna be hidden under your cuff. It's 33 millimeters of beauty that no one's going to know about.

36:32It's discreet, it's understated, and ultimately has more demand than those other watches over time. I love the understated luxuries that for the trained eye, obvious, but for everyone else, a lot less obvious. You referenced a few times you worked at Patek Philippe. I'd love to just hear a little bit about what the experience was like, both being hired there and also just inside the organization. How big is it? What is the culture like? I get some sense from the outside of what it's like, but how much did that match the inside? Anything you could share there would be fascinating. Sure. In my period of time, there was from 2000 to 2010.

37:11So it was a very different era, but it was also a very important era of transition of the company from being this unknown. I remember telling my parents, I might work for Patek Philippe. The first answer is, who? What? Where? They had no clue. It's like, why can't you get a job at Rolex? I think I heard. And ultimately, it was an adventure moving into the company of Patek Philippe. And just to share a quick story, I thought it was a joke at first when I received a phone call from a headhunter saying that we're interested in hiring for an important Swiss company to work for the distributor as a sales rep in New York.

37:47I was working at Sotheby's at the time, so I was quite happy with my job. But I remember telling this headhunter, unless you're Patek Philippe, the conversation's over. And she said, yes, it's Patek Philippe. So I said, let's talk. It was a dream come true, even though I still thought it was a joke because Patek Philippe doesn't call. But after a long series of interviews with the headhunter, I eventually was able to meet the principals of Patek Philippe in New York. And I remember, wow, countless interviews with the president and with the vice president, Tanya Edwards, who happens to be my colleague and co -founder of Collectability.

38:21We still work together to this stay. Tanya was vice president and head of marketing of Patek Flipe USA at the time. And going through that interview process with these individuals, I felt like I was trying to get into the CIA. And then it took another six months until I eventually had a job offer. And then finally, I made the jump. Once working inside the organization, again, any rough size of how many employees are there? How much is going on in the US versus in Switzerland and anything else that you can share there? Sure. In New York, it was small. I mean, it was also the service center. So it's distribution and it was all sales and education for ProtectFleep USA.

39:01It was based out of the Henry Stern Watch Agency as it is today. I think it was 48 people at the time. And today, I think it's a hundred. So it has doubled in size, but it was a small culture. You truly felt during my time there, you worked for a family company. You truly felt like, the Stern family had your back. And I remember being told every decision that you make, everything that you do when you speak to a client and consumer or retailer, imagine that Mr. Stern is standing there with you. This omniscient presence of Philippe Stern judging everything that you say and everything that you do, which was overwhelming, but also comforting.

39:42And you just knew what to say. You tried to always do the right thing. You tried to be there for the customer at all times was always put at the focus of every decision. And that was a lot of fun during that period of time. It felt like a small company. And what people perceived as the outside, as I looked at the outside and just respected this company so much, it turned out to be true when I was in the inside. And that was just a beautiful thing. I absolutely, to this day, I don't work for the company anymore, but I do feel as though I still represent the values of the company as best as I can.

40:18And it's going to be around a lot longer than any of us. But TechFleep is here to stay. Yeah, it speaks to the power of the brand that two people working inside the organization split out, but remain very much attached to the organization and everything they've done. I think that tells you a little bit about the culture. On the distribution point, you've mentioned how it can be a bit of a painful process for any new prospective buyer trying to purchase a Patek. Can you just share what is the distribution strategies of working with authorized dealers? Are they doing any of this direct? Anything that you can share there in terms of the sales process?

40:54A lot has changed during my time at Patek Flip, so I'll do my best. When I was there, we had 126 points of sale in the United States. Now they're under 40 points of sale in the United States. So it's a complete change and consolidation and strategy. Back when I was there, so going back 20 years ago, you could buy a Nautilus 5711, which retailed at the time for $18 ,000, $19 ,000. I remember retailers had a tough time even selling it for $15 ,000. It's a watch today. It's worth six figures plus. So it was a different era. It was truly sales driven during that period of time. The sales were driven through education.

41:38and no coincidence that my company now is just obsessed with education of all things Patek Philippe because that's what I grew up with is when you learn and study and compare, all roads do come back to Patek Philippe, vintage and modern. So in answer to your question of how does it work today, I think it's different. It's not as much about education as it is about allocation. It's about what have you bought from a particular retailer and are you entitled to buy the piece that you want to own next? It's a different storyline. It's not one that really captures my heart. It's more about money than knowledge.

42:15And that, I think, is one of the brand's biggest struggles today. Now, I'm speaking as an outsider because I know I can't go walk into a retailer and buy the watch that I want. But I also know that people that have a billion dollars in the bank can't go walk in and buy the watch that they want from a retailer. It's very democratic in that way. You just can't have the watch that you want. What you do need to do is build trust over time and almost build your reputation with the company in order to be allocated the pieces of your dreams. And I don't think they do it on purpose, but it's almost like a gamification.

42:50It's fascinating to see how end consumers bite into this or engage in this game that can go through decades in order to buy the watches that they want. And indeed, I speak to collectors all the time. They'll buy pieces they actually don't want in order to preserve relationships to get the watches that they do want. And they'll spend hundreds of thousands of dollars to preserve this relationship. And they'll never sell any of their pieces because they don't want to get in trouble in the meantime. So it is a really interesting thing. And it probably exists in the car collecting world. I've heard Ferrari collectors jump through hoops all day long.

43:26And that certainly does also happen with Bitek Philippe collectors. It's quite interesting, whether it's thrill of the chase or you want what you cannot have, but the ability to stroke on emotion and what that can do in terms of consumer behavior. With the points of sale, are these actual Patek branded dealers or are they individual existing watches of Switzerland authorized dealer types that are selling on behalf of Patek? They're authorized dealers. In the United States, there's no Patek Philippe owned boutiques, for example, like here in the New York, New Jersey area, Wempe, Tiffany, London Jewelers.

44:05These are powerhouses that go back generations. Those are the retailers that represent the area. But it's just so shocking for me to see less and less retailers out there. The good news is, in theory, they should have more watches at each point of sale. That hasn't proven to be true yet, but I think over time, we'll start to actually see watches and cases again. Yeah. I have to imagine that there is the person purchasing the watch who has to maintain this relationship with their dealer, but then those dealers also have to maintain the relationship with Patek Philippe. When you talk about that consolidation of dealers, is that happening out of bad acting on behalf of the dealers where they're doing things that Patek isn't liking?

44:48What was the mindset behind consolidating all of those dealers beyond making it, I guess, more exclusive as a result? My answer is based in speculation, but I could compare to my experience. One retailer I used to cover, I mean, it wasn't that long ago, so this is 20 years ago, I would go to Abilene, Texas twice a year in West Texas. And I'd meet with this amazing family, multi -generational store. And the goal, my goal, my job was to make sure they kept 15 Patek Flip watches in stock at all times. So I'd go twice a year and it's not easy to get to Abilene. There are no direct plates. And absolutely had a great time having some barbecue and you sit and spend time with the family and you talk watches.

45:34And my job was to explain to them why that 15 watch minimum was so important so you could properly show the breadth of production of Patek Philippe. Now, fast forward to today, there are no retailers out there that are required to have a 15 watch minimum, their buy -in is much, much bigger. I'm guessing it's 100 watches or more. And it's just ironic that they might even only have 15 watches in stock to this day because everything's sold out. So what Patek Fleeve has done is rather than focus on smaller markets globally, they were focusing on bigger markets and going in deeper with more prominent displays, more highly trained sales staff.

46:13And frankly, the goal is to have more watches available through less point of sales. This is just me as an observer seeing what they're trying to do. And when you have a situation like the Tiffany partnership, which seems to date back many years with Patek, but then Tiffany comes under the ownership of LVMH, did that change anything? It brought us the new Nautilus with the Tiffany dial, which was something new that came to the market. But was there any change just in terms of that partnership and shift in dynamics? I'm up more and more how that impacts an independent watchmaker like Patek? I don't know the exact numbers, but when I was with Patek Philippe, we had eight Tiffany locations that sold Patek Philippe watches.

47:00And now I think there's maybe one or two tops. There's obviously New York. I don't know how many other points of sale they have, but I know it's been cut significantly. The relationship between Tiffany and Patek Philippe goes back to the mid 19th century. And what people forget is From a historical point of view, it was a love -hate relationship from day one. Decade by decade, you see how the brands, sometimes Tiffany needed Patek Philippe, sometimes Patek Philippe needed Tiffany. And there are some great writings from the time that Mr. Patek was alive and how he just really did not like doing business with the Americans.

47:35He didn't always see eye to eye with his friends at Tiffany. And I say friends in quotes. There were cultural differences. There was misunderstandings. And at the end of the day, it was about money. I think throughout the 20th century, the relationship ebbed and flowed. And everyone thinks it's Tiffany as it is now. But you have to remember, Tiffany has this long storied past that people just so conveniently forget. Just for example, Tiffany was owned by Avon. Remember the Avon lady ringing the doorbell trying to sell cosmetics? From 1980 to 1985, Tiffany was fully owned by Avon before it was sold off.

48:11this was a different era where the brand was dying more or less and patek philippe stood by them the tiffany stamp dials you could see some of the most important watches that we see at auction were sold by tiffany new york in this era like tiffany signed 2499s and it's fun to think back from a historic perspective i guess an answer to your question is wow how's the relationship doing today from an outsider's perspective. I'm shocked by it, but it seems to be working. The Tiffany Salon in New York is absolutely extraordinary. The Tiffany Patek Philippe Salon is aesthetically beautiful. They have a wonderful, highly educated sales force.

48:50They could probably use a few more watches. There's not much availability. But I'm going to answer this question from a historian's perspective. I have no doubt there will always be a Patek Philippe, period. Drop the mic. I don't know what the future of LVMH is. 50 years from now, will LVMH be LVMH? Everyone could draw their own opinion. 50 years from now, will there be a Patek Philippe that's considered one of the finest watches in the world? Yes. On that point, I think the independence is a major thing here, being an independent brand. Has that ever been at risk or do you think that's of any risk moving into the future?

49:29Obviously, when you reference some of those sales numbers, I don't know what the costs are that go into producing these watches. It does seem like there's a lot of labor involved. But is there a scenario where independence is at risk? I'll answer that from a historic perspective. In the Great Depression, Patek Philippe was owned by the descendants of Patek and Philippe and actually became a publicly held company for a time period. Interestingly, one of the six shareholders in the early 20th century was an American who was a former employee of Tiffany. So it's such a full circle storyline. Fast forward to 1932, 1933 in the Stern era.

50:05Now we're on one, two, three, four, four generations of ownership of the Stern era. As long as there is someone with the last name of Stern that is obsessed and really believes in the cause, that the Stern family is going to continue ownership of Patek Philippe, in my opinion. I think it's in their DNA. Dynasties don't last forever. That's one thing we see time and time again. But I highly, highly doubt that in our lifetimes, we're going to see the company potentially be sold to one of the conglomerates. I just can't imagine that happening. It's just something that I don't think is in the works.

50:41A lot of gossip about it, but I just don't imagine that actually happening. And privately held, I think, makes that a lot easier to remain that way versus being a public business. When I think about other risks that have come up over the years, obviously, the quartz revolution was something that was big. Now, to some extent, you have electronic, whether it's Apple watches or performance -based watches. How has the business typically dealt with that? When you go back to that quartz period, was there anything that they did uniquely or in a way that they handled that? And then do you look at what's going on, anything related to the Apple watch or anything else that comes to mind when you think about evolving as a business?

51:23One of the things we could learn from Patek Philippe historically is how they dance between evolution and revolution. And it's very interesting to look at what happened with Quartz revolution where all of a sudden, all these mechanical timepieces were considered obsolete. And Patek Philippe really doubled down with explaining the history, the craftsmanship, and tradition as being assets of value. The result of that equation is luxury in its finest form. As quartz watches became, they were expensive in the 70s and spent hundreds of dollars, but soon they were a matter of cents where you could buy a quartz watch for under a dollar.

52:04But Patek Philippe went the other direction and just went to the height of the market and making some of the finest handmade pieces imaginable. Now, fast forward to the technological revolution, Patek Philippe doubled down in the same way. Everyone was saying, oh, everyone's going to wear an Apple Watch. So who's going to be wearing a half million dollar Patek Philippe minute repeater? It's completely obsolete. What's so surprising is now you see people have an Apple Watch on one wrist and Patek Philippe on the other wrist, and it shows that the two can coincide. What people forget is by collecting watches.

52:41It's part of a community. It's the ultimate connection to like -minded individuals that want to own the best. And people might want to join a country club or private jet ownership or you name whatever you connect to the world with. But when you own a Patek Philippe, you are connected to an international community of people that really are truly like -minded. I've just seen this so many times, men and women just connecting in business and in life based on the watch on their wrist. I mean, the connections that people make just based on what watch they wear is absolutely extraordinary. Why settle for the second best when you could buy the best?

53:22And I think I've heard you say before, once you go down the rabbit hole and buy one, usually that is not the last that you end up owning in terms of... It's a wonderful addiction. Yeah, it's true. Very few people only own one. This has been an absolutely fabulous conversation, history lesson. We try to close these out with just general business lessons that we can take away from whatever company we're examining in the episode. What do you think are the standout lessons from Patek that you might be able to apply elsewhere in life or just thinking about your own business? Wow. It's so cliche, but Patek Philippe has brilliantly navigated now, well, soon to be 200 years of history by never putting all their eggs in one basket.

54:06When a company focuses on one product or one style, and they're just so hyper -focused on being the best, but in a very limited scope, you're at risk in a wider marketplace. Patek Philippe has always navigated the 19th century ups and downs in the economy and certainly in the 20th and now early 21st century by being true to making the best but of a wide product line. Yes, they make sports watches. Yes, they make dress watches, but they've always made clocks, also jewelry. There's been a wide array of different types of product offerings that they've made throughout their history. So there's always something for everyone.

54:49So I think that's very important because if you look at other watch brands, they're focused on one particular aesthetic, one particular look, and that's highly risky. If the world changes really fast and all of a sudden, I'll be obnoxious, your 60 millimeter watch all of a sudden is out of style because it's too big, then your brand is done. Patek Flippe has always offered something for everyone. And it's also very, very focused on an important women's line as well as a men's line, simple watches and also complicated watches. So there is something for everyone in high -end horology within the world of Patekfleet.

55:24So that's the first lesson. Never put all your eggs in one basket. The other thing I think they've really navigated is how to run a family business, which is not easy. And it comes back to that idea of dynasty, where from one generation to the next, time's change. There's always an ebb and a flow. But Patekfleet, by always thinking in the past, present, and future at the same time, they're able to make decisions that are not short -sighted. And I think the business world can learn a lot about branding by looking at how Patek Philippe has navigated their history. And it's a master class in understanding how to protect your brand at all costs, take enough risk to build your brand, but never be too hyper -focused in one particular product or you could lose everything.

56:09And by being a family -run business, they've been able to navigate that absolutely brilliantly generation after generation. Absolutely rings true. And I think in my own research and a lot of the things that you've done on 1989 and the real strategic shift that happened there, there's so much interesting lessons to learn from that. And I've been stuck on that really for the past week and a half thinking about how thoughtful the approach was and how much they really just controlled the message that was going out there and aligning it with what they had done for years and years and years. So thank you very much, John.

56:43This was a masterclass in terms of this business. And we really appreciate you coming on. Thank you for your time, Matt. And absolute pleasure to be part of your show. It's been a lot of fun today. Thank you. To find more episodes of Breakdowns ranging from Costco to Visa to Moderna, or to sign up for our weekly summary, check out JoinColossus .com. That's J -O -I -N -C -O -L -O -S -S -U -S .com. Thank you.