Rolex: Timeless Excellence - [Business Breakdowns, Forever Episode]

21:38And if you know anything about the history of longitude, like that is effectively how Longitude was discovered. This is just kind of paramount to basically all exploration of the time period. But up until that point, no wristwatches had ever even been submitted to this thing called the QA, which is a British testing facility at that point. In 1908, he does that with an Aiklin powered watch. It's a 44 day test and it is given the QA certificate. And again, nobody had ever done it. Some years later, about 10 years later, he submitted 136 movements back to the QA. And I think 24 of them were cased in 34 millimeter gold cases.

22:15And then another 112 were in what we call boy's size, which is really very small. I mean, at this point, it would look like a nickel. But these are effectively the Formula One cars of watch movements. So there were other watch movements at the time that to you and me, and most people would look exactly the same, but these were high performance calibers. And they did it with a specialist statement. An escapement is basically how time telling is regulated. And these were effectively the Formula One cars of watchmaking. And they were done in a way that was very, even back then, very Rolex. There's really no indication that these were anything special on the dial, besides it would say QA.

22:48They're around. You can buy them today for really less than you might think. But once he had been given the QA certificates for the first wristwatch ever, he decided to really focus on three tenets of watchmaking, which really were not at all prevalent in that day at all, because it was really about utility. The watch can tell you the time pretty well, or it was about luxury. And at that point, we're talking, you know, the Cartiers, Patek-Blebes, complications really. So his three tenets of manufacturing, which remain true to this day, would be precision, accuracy, waterproofness, which didn't really exist at the time, and then self-winding.

23:19And what I mean by that is the ability to not have to wind the watch manually. So precision was done. We've kind of covered that. These watches were based on QA. They came up with a new statement to make them more precise. Waterproofness, I think, goes back to the question you asked about five minutes ago, which is how did you get something that more people know about than basically can afford or can find? And so he created something called the Oyster case. And now almost all Rolexes with the exception of the Cellini line use an Oyster case. And that basically just means a waterproof case. Nobody was doing it at the time.

23:48Omega had something that was pretty close and actually predates the Oyster case, but never really took off in the same way. Instead of using seals, it was almost like a locking system, didn't really take off. But effectively, there was this woman named Mercedes Glitz, who was a typist of all things, basically a secretary in the UK. And she had swum the English Channel successfully, the first woman to swim the English Channel successfully. And Hans Willstorf, the founder said, hey, wouldn't it be cool if this woman, A, she's a woman, B, she's doing this amazing feat that no one had ever done before.

24:17Wouldn't it be cool if she wore the watch around her neck? So she didn't wear it on her wrist, to be clear. She put it around her neck and she attempted to swim the English Channel. She actually didn't successfully do it. She failed, but nobody really cared because she had already done it before. And so he took out an ad celebrating the fact that this watch was around this woman's neck for 10 hours in the English Channel and the timekeeping was flawless. And so that kind of solidified Rolex as a household name because the Oyster case had been validated in the English Channel with this early brand ambassador, I guess you would call her.

24:47That was a huge deal. And I think one of the earliest examples of real marketing by any luxury brand or any brand really at all. And then the final tenet would be self-winding, which is, I would equate it to like the automatic transmission. When the automatic transmission came around, all of a sudden driving a car became a hell of a lot easier. It just became wider accepted, etc. So prior to, I guess it was around 1930, something that Rolex patented the first self-winding movement. To be clear, there was somebody called John Harwood that actually had a different self-winding movement first. I think that was in the 20s.

25:21And his idea was to make a hammer, something that would bounce back and forth like this to continue to power the watch. Rolex said, let's go a different array. Let's create a rotor. So a weight that would oscillate around in a circle to power the watch. That worked. and Rolex had, actually, I remember the date. It was 1933 because it had a 20-year patent on it. And Patek Philippe, which was another stalwart of traditional watchmaking, saw this and said, oh shit, we need to do that too. But they couldn't actually release anything until 20 years later because of the patent. The Patek 2526, which is their first self-finding watch came out in 1953.

25:55And that's a different thing altogether. But effectively, Hans Wollsdorf said, I want the watches to be precise, check with the QA. I want them to be waterproof, check with the Oyster case. And I want them to be self-winding, check with the Perpetual. So if you see Oyster Perpetual on any Rolex, which you'd see on all Rolexes now, Oyster is waterproof, Perpetual is a self-winding. From there, Rolex went out to make watches. And they were doing things very much in a similar style to everyone else at that time until the early 50s. So in the post-war era, post-war II era, they created their first sports watch.

26:28And by sports watch, it's actually the technical term, it's professional watch by Rolex, nomenclature. It's the Submariner, which is a diver's watch, which is 1953. It's the GMT, which is a pilot's watch, which was 1955. Explorer 1, which is an Explorer's watch or an all-day, everyday watch, which is 53 as well. Then you have the Daytona in 1963. Later, you have the Sea Dweller in 67, which is like a beefed up version of the Sub. And then the Explorer 2 in, I guess, 1970 or so. But those are the watches that I think most people now think of when they think of watch. You see rotating bezel. In most cases, you see a black dial.

27:03In most cases, you see an oyster bracelet, which is a very wonderfully produced bracelet with an oyster lock bracelet. And that is really when things change. And to be clear, Rolex was not alone. There were other brands doing it. Some would say earlier, some would say around the same time, but the Blancpain 50 Fathoms is credited to 1953. The Omega Seamaster 300 and 120 are around the same time as well. So they were not alone. And you have to remember that like even Rolex and the watch industry in that period, it was really a smattering of different suppliers. If you look at, for example, and I've wrote about this several times over the past few years, if you look at, say, the Rolex Daytona from 1963 and the Hoyer Carrera from 1963, it uses the exact same movement.

27:43And I'm saying the exact same movement, and that's a Belgium 72, same casemaker, same dial maker, same handmaker. So what is the actual difference? The assembly was done by Rolex and the assembly was done by Hoyer, but the product itself is really very similar. And if you look at early Seamasters and early Submariners, a lot of similarity there. The difference was, of course, the Oyster case, but that was how watchmaking was done. And if you look at, say, example of Patek Philippe, 2499, that's based on a Valjoux mood. You don't think of that. You think of Patek as Patek, you know, this is the Holy Grail.

28:13But up until really, I mean, the 2000s, they were using what you call an E-Vauch movement, which is just really movement blank. And then it would be finished by Patek or finished by AP or Vacheron or whoever. So Rolexes were really, I would say, finished to a higher quality than most, but I mean, any good Blancpain or any good Omega would do much of what Rolex was doing. It was really not until much, much later in the 70s first, when we had the quartz crisis, which is effectively the creation of quartz, which is analog time telling, but with a battery, which was dramatically more precise. I mean, like dramatically more precise than mechanical watchmaking.

28:48What is interesting to think about, and I give full credit to my old colleague, Joe Thompson, who's a legend in the watchwriting world is the Japanese came in with quartz, Seiko created it effectively, came in and there was a war between Swiss mechanical watchmaking and quartz analog timekeeping. And to be clear, the Swiss lost. The Swiss lost by a country mile. So all of a sudden, those guys that were buying a Rolex or an Omega or a Boyer, because they were the most precise thing in the world, just said, you know what, why would I do that? I can buy a quartz watch that is 10 times more accurate, 10 times.

29:19And by the way, you don't need to have the service. You just swap out the new battery or whatever all the time. And that decimated the Swiss watch industry to a point where very, very few brands were producing things at a profit of any kind. Jack Hoyer, whose family owned tech, well, before it was tech, it was just Hoyer at the time, in his biography, I mean, he talks almost going into bankruptcy. If you talk to Thierry Stern, whose father, Philippe Stern, and his grandfather have owned the tech for generations, in the late 70s, they had to borrow against, you know, what their banks have. It's existential.

29:47Yeah, this was real. And it wasn't just the smaller brands. The tech had issues. Hoyer had issues. Rolex was really smart in that through that period of real turmoil, when I would say their chief competitor, Omega, decided to make some quartz watches, decided to make some funky looking things, Rolex stayed the course. And yes, they did make quartz watches. The Beta 21, which was a Swiss conglomerate's answer to quartz, is the most expensive quartz watch ever made. I mean, like thousands and thousands of dollars. They said, you know, we're going to focus on what we do best. And the focus went away from precision and accuracy and time telling to luxury.

30:23And so that is when you start seeing the gold Rolex on, I hate to say it, but like the used car salesman and the gold Rolex became the thing. 70s and 80s, opulence, you understand what the 80s were, of course. It just changed what Rolex was. But by the way, it worked and it allowed them to continue to be relevant when everybody else being Omega and Patat to a degree, Vacheron, like these brands really struggle. And that is why so many of them ended up in conglomerates. In the 80s and 90s, when watches were, mechanical watches, were really not doing so hot, a lot of folks came in and bundled them all up.

30:55So Richemont owns a bunch of the great ones, including Bacheron. Swatch owns everything from Swatch to Blancpain, Brigade, Omega. It was a time of great challenge for sure. And Rolex, they struggled as well, never to the degree that the others did, but it was not great for them. And then the 90s started to come around and Rolex had a CEO by the name of Patrick Heineger. His father was actually also CEO to give you an idea of how things work at Rolex. And he said, I want to take Rolex in-house. And he was really the first to do, frankly, well before Patek or well before anybody else. And so Rolex was using 27 different suppliers to make, say, a Submariner.

31:29And after he was done with it, they're using four. And now those four are completely owned by Rolex. There are four different production facilities, two in Geneva, one in what I would call proper Geneva, one in Fonlewatt, which is a little bit outside. And then there's one in Schoenberg, which does dials. And there's one in VL, which makes the movements. But what's so amazing is Rolex, to me, the kind of secret sauce is equal parts case, equal parts movement. The cases, you can kind of reverse engineer if you're a competitor and say, okay, what's an Oyster case? It's got this, it's got that, it's polished there.

32:01Seals are done by X, Y, and Z. Movements are a different thing entirely. And what's amazing is Rolex Geneva, which is basically dials, cases, bracelets, all that stuff. And Rolex Bien, which is up in the mountains, the Valais de Joux, had a handshake deal for 70 years. And I mean, an actual handshake deal that the Calibers made by what was then called Eagler, who made the first movement for Hans Wollstorf. That company was making movements solely for Rolex Geneva based on nothing but a handshake. And I mean that literally, like there was nothing in writing for up until 2004, which is just insane to think about.

32:34I mean, Rolex was certainly a multi-billion dollar a year business before then. And up until 2004, there was no contract in place to say that Eagler couldn't make movements for Omega or Tag Heuer or whoever. And so in 2004, Rolex said, you know what, enough's enough. Let's get married here. And they purchased the company. And so now Rolex BN is basically what Eagler was up in the mountains until 2004. And so Rolex now has four different production facilities. As I wrote that story, I was among the first to be invited inside the movement manufacturing, which is really the source of the IP. Like that is where this also just made so to speak.

33:06Just remarkable. If you haven't read the story, it's on Houdinke. It's called Inside the Manufacturer Visiting All Four Rolex Locations. It was remarkable. As I started out in that story, I was a, you know, this was 10 years ago or seven years ago. I was a lover of watches. I was a lover of Rolex. And I had more Rolexes then than had anything else at that point. None of them were as old as I was. They were all considerably older than me. And it's funny, I reread the story to kind of prepare for this interview. And now since then, I've bought more modern Rolexes than I have vintage. And the world is just a different place.

33:36But once you see everything that Rolex does to a watch, and what I mean by that is the fact that they have their own foundry, even the steel, not just the gold and precious metals, even the steel on a Rolex is proprietary and it's made by Rolex. It's 904L. It's wild. They make their own gold. It's called Everose if it throws gold. It's just remarkable. And what I think is even more telling of what Rolex is about is that one of their facilities, they actually have, and I mean this literally, more than two Nobel Prize winning scientists on staff working on watches. Think about what that must mean from a material science perspective.

34:10The innovation done by Rolex is just above and beyond anything I've seen. I've been to every watchmaker in the world. I've been to several car manufacturers doing this. I've been all over. I've been inside Hermes. There's just nothing like this. They create machines to test their machines that make watches. They have their own oyster test, which of course provides artificial pressure on a watch to know it's waterproof. They have a machine that can open and close a Rolex clasp a thousand times a minute, which is kind of amazing because you actually have to open. It's wild. So you open this, it's actually kind of difficult to do.

34:38Imagine doing that a thousand times a minute. They invented a machine to do that. They have a machine in Shenbue, which is their dial and gem setting location to sort through all the stones that they're given. First of all, Rolex only works with IF, which is internally flawless stones, which is obviously the most expensive, highest then to ensure that the stones that they're given, whether it's diamonds or rubies or anything are real. They created a machine to sort them at scale and ensure that all of them are real. And I said, well, are bad stones or fake stones a real problem for you? They said, no, not really.

35:07But we just want to ensure that every watch we sell is what we want it to be. And I was like, how often do you get a fake diamond or fake anything? And the answer was one out of 10 million. To be clear, this machine was created either by them or they paid somebody to make it for them. This is their machine. It's not like it exists outside Rolex. And this gives you an idea of what they're about and kind of how they do things. And it is so wonderful and so different than traditional luxury, which frankly, I may say, even as a purveyor of luxury items, is full of shit half the time. I'm into sneakers, but not in the way that I'm into other things.

35:40Why would a pair of special edition sneakers sell for$5 ,000? Sneakers are made in China, by machines, they're hand-stitched here and there. It's just design, it's artificial scarcity, et cetera. When you see what goes into it, really any high-end mechanical watch, but in particular Rolex, you really start to understand the Submariner, we'll say is 8 ,000 bucks. That might be a deal after you see what goes into this thing. And I mentioned in the story, several competing brand presidents had told me before I went on this trip that, oh, not a human hand touches a Rolex before it's made. It's all done by machine, which effectively the most insulting thing a Swiss person can say, meaning that it's void of character.

36:17It's void of humanity. It's like luxury should be about people. It should be about craftsmanship. And they're saying Rolex doesn't have to do that. And I was like, oh, Okay, that's kind of a bummer. That may have informed why I didn't own any modern Rolex at the time. You walk into Rolex HQ in Geneva, and you see hundreds of people finishing watches. And they're not finishing in the same way Patek or Longer would, by hand with little pieces of wood. They're finishing maybe six or seven Rolexes at a time on a polishing wheel, but they're still polishing really the way that it should be done. They're assembling dials by hand.

36:46They're assembling the bracelet by hand. There's an incredible amount of handwork that goes into the most basic of Rolex being like a Submariner or a Datejust. beyond that what's so fun about them is like they know exactly how different they are than everyone else they also know that everyone wants to be like them so at at least two of their four facilities you might drive by and say oh there's rolex it's five stories high you know it's a few hundred thousand square feet when you go inside you realize that it's actually 10 or 11 stories high but five or six of those stories are below ground and i just remember thinking like why would they do that what's the point of that and it was in fact to suggest to anybody that drives by that Rolex is smaller than they actually are.

37:23And I think if we had any idea of how big the foundation was, they would blow all of us away. I think it's enormous. I think they're probably producing more than a million a year, but that's kind of the generally accepted number. It's who they are. And if they're going to do something, they want to do things at the highest level. I'm a golfer and have been lucky enough to meet some of their players. And Adam Scott became a good friend. And I asked, why don't you sponsor X, Y, and Z? Or like, why don't you go grassroots, whatever. And they said, this is Rolex like my golf. If we're going to do golf, we only want to be involved with the major.

37:50So the U.S. Open, the PGA Championship, the Masters, and of course, the British Open. And that's it. If they're going to do tennis, it's going to be Wimbledon and the U.S. Open. They don't even want to mess with some of the other majors in tennis. It's just remarkable how committed they are to working with the very best. It's wild. It really is. It's an unbelievable story. And also, it's amazing to me the commitment to quality over time. And I'm sure there's incredible pressure for all sorts of reasons. Maybe the non-for-profit thing is actually a benefit here, but there's always pressure to skimp a little bit on quality, right?

38:21Like give up the absolute perfect standard because it could mean a lot more sales or a lot more scale or whatever, and they just haven't done it. So you could think about buying one and looking at it and having it be a reminder of this like commitment to all the way down to the gold, the fact that they own all the way down to the bare metals in the ground is crazy. As you think about their genius on, I guess, quality and manufacturing, what is the equivalent on the marketing and distribution side? So you mentioned the great example of the woman swimming across the channel as like a marquee event that made a big splash and they're focused on like the upper echelon of whatever they're doing.

38:52What else do you think Rolex can teach the world's companies about unbelievable marketing or distribution? Referencing slightly what I was just mentioning, I commit me to only working with the absolute best and foregoing opportunity, foregoing working with the next generation of, we'll say golfers in this case, the guys that are coming up now until they've been validated as the very best, than they're just not interested in. You know, kind of good work if you can get it. Like not everyone has the benefit of being able to say, I want to work with Tiger Woods, therefore Tiger Woods will work with me.

39:21But I think they are just so unrelenting to their pursuit of excellence in the literal sense. The very best in the world, no matter what it is, you know, it's Yo-Yo Ma. It's not the person that has played Carnegie Hall twice, it's Yo-Yo Ma. It's Roger Federer in the tennis world. What's so amazing is they care about the people as much as they do the results. And Roger, I think, is the ultimate archetype for the Rolex. They call him Rolex testimony. I'm not calling them bastards. Roger is, I wouldn't be ashamed to say, like I think Roger is a hero to many of us. And I'm not really even a tennis player or a tennis fan.

39:51Just the way he - His character. Floats above the air. Yeah, he floats above the air no matter what room that he's in. He's just a gentleman and he married his high school sweetheart. Just a wonder, and I've met him through Rolex. And he's just a delightful person and completely authentic. They look at that. They want to be associated with people that are not only the best, but are genuinely good people as well. And again, good work if you can get it, or it would be nice to only work with the best people that are also the best performers, but they really maintain with that. And their partnerships are different.

40:18I'm trying to think of an example. I'll say Leonardo DiCaprio. He's been an ambassador for Tag Heuer. He's been an ambassador, I think, for IWC. He is a hyper famous, hyper talented person. He doesn't care. It's just money for him, et cetera. The contracts he's had, let's say, with Tag Heuer probably lasted five years. Rolex has worked with Jack Nicklaus since 1967. 1967. They work with him to this day. He's still very much alive and he's had a bunch of Rolexes. We did a video with him. But I mean, think about that deal, 1967 to 2022. It's just wild. Omega does that to a degree. They've had a partnership with Sidney Crawford since the early 90s.

40:52And now Kaia Gerber is with Omega. It's not an official ambassadorship. It's a much longer term thing. But Rolex really takes it to the next level. And they've been with Roger for his entire career. They really are committed to long-term meaningful relationships, much more so than any other brand. It's not like with some of these luxury brands or car companies where, okay, new CEO, I believe in tennis and equestrian. Then he gets let go and the new guy comes in and I believe in sailing and motorsport. It's not like that at all. There are core tenets of Rolex. Motorsport is in fact one of them.

41:22Then that's it. They're not playing in the NBA. They're not sponsoring baseball. They're not sponsoring the NFL. They're doing the things that they do, which is equestrian, sailing to a degree. It's motorsports, tennis, and golf. It's just amazing that these strategies continue to deliver decade after decade. What was golf in 1967? I actually don't know the answer, but I can tell you it was probably not a big deal, especially back then. And the fact that they were committed back then and they're even more committed now, it's just remarkable. What have you learned about maybe the way that they make decisions, obviously like being so long-term oriented is one of those things that again, you think is most portable to other either luxury brands or just businesses in general, based on how singular they seem to be and how they make their choices.

42:05It's kind of silly, but it's almost, it's almost too simple, I should say. And I think it's ultimately this adage of kind of like, do the right thing. They are creating products that deliver in a way that is so far beyond, I think, what people understand that people would be shocked. The way that I used to process, I used to write for the site. I don't anymore. But as a journalist, I went to journalism school. I would say two types of companies, one of which is the more you learn about the company, the less you like, the less you respect them. And frankly, that's a lot of luxury companies. You realize that, okay, the Swiss made wash is actually made in China.

42:35This bag is actually not hand-sewn. It's owned by a machine, you know, little things like that. And then there are other companies where the more you learn about them, the more you like them. Rolex is the architect of that. That article that I wrote in 2015 is, that was a foundational shift, in my opinion, of how watches should be made, mass luxury watches. And I think they continue to innovate in a way that we at Hodinkee continue to strive to be like. I mean, as an example, they have two in-house components that nobody knows about, or verity people know about. One of them is called Parachrome, which is a balance wheel, which is literally like the thing that rotates inside the watch.

43:09There was basically, I wouldn't call it Monopoly, but pretty damn close to Monopoly on getting those things. And everybody from Protect to Rolex were using something called a Nivorox balance wheel. And Rolex said, you know what? We're going to make our own at some astronomical cost, and it's going to be 10 times as accurate as the competitor. And they did that. And that's one of the few times they actually communicated on like a technical application. They also have their own shock observing system. I think it's called Paraflex, that again, 30 % more absorbent than your traditional shock absorbent system.

43:38Would that stop you or me or the guy on the street from buying a Rolex if they didn't? Not at all, not at all, but they do it because they should. And they are at the core of it. What's so charming about them at the core of it is they are master marketers, master everything, master distributors, but they are watchmakers at the core of it. This Samariner, this GMT, this anything, I would put against any watch in the world in terms of production ability. The other thing I should say is that they know what they're good at, they know what they're not. And Rolex does not sell watches, Rolex makes watches.

44:09They own exactly, and it may have even closed, I should check, I'll fact check this afterwards. Rolex owns one retail store, one. And Protect follows a similar model. They have, I think, four. They have London, Paris, Geneva, and I think Hong Kong. Rolex has one, and I actually think it may have closed, and it's in Switzerland. And that's simply because they had a, I was basically like a family friend type situation that owned it and they ended up acquiring it. So if you go to like the Rolex boutique in Manhattan, for example, which is in the Rolex building, that's not owned by Rolex, that's owned by Wempy, which is a great authorized dealer.

44:40It's actually right up the road. It's a German base company. If you go to the Rolex boutique in Singapore, it's either the Hourglass or another authorized dealer. So they're not selling watches. They're selling them at wholesale to retailers who then make between, you know, we'll say 20 and 50 % on every product they sell. And imagine your Rolex, right? You're thinking that you've got more demand than you could possibly ever supply. And you're thinking, man, I'm giving away 20 to 50 % of everything I sell. Like, why don't we just do that? And they don't change because they know that, first of all, everything's cyclical.

45:10The watch market is going through a boom unlike I've ever seen in 14 years of doing this, unlike the market's ever seen at all. And that may or may not last. We've reached a shift where like things will never go back to the way they were before, but things are softening up a little bit. And they realize like, hey, we make watches, we don't sell them. And to have the control, the self-control and the wherewithal to basically walk away from 20 to 50 % of retail sales at that scale globally, when the demand is just capacious, is just so admirable. And because they know that in 100 years, maybe things will change or maybe in 10 years, things will change.

45:46It wasn't really Rolex, but in 2014 or 15, around the same time that I went to go see them in Geneva, something called the Apple Watch came out. and Rolex is Rolex, like they're going to be fine. But a lot of the other brands are like, man, is this going to eat our lunch? And to be clear, it did. If you want to say apples to apples, the Apple watch is a bigger watch than Rolex by quantity and by revenue. But Rolex is obviously fine. It has changed. And this is not an Apple watch segment, but I'll just mention it briefly. It has changed how people buy luxury watches. A luxury watch, pre-Apple watch, I would consider $1 ,000 and above, maybe even$500 and above.

46:18It has decimated that market. So the market between 500 and sub 5 ,000 has just been destroyed. The brands like Shinola and Fossil. Fossil was a multi, multi-billion dollar company. I'm just enormous. I don't hear that name anymore. Exactly. Their share price in 2013, 14, pre-Apple Watch was$80 a share. But last time I checked, it was eight, probably even lower than that now. They've lost 90 % of their market cap. Apple Watch has in some ways helped the Rolexes and the Omegas of the world because Rolex and Omega and Tech Hoyer, they are luxury to most people. They're clearly expensive. They start around 5 ,000 bucks instead of around one, like some of the other folks do.

46:57That's the baseline now. Now you want a Rolex or Mega Tech Hoyer or above or nothing. You don't want the Shinola anymore. You don't want the Fossil anymore. And I think Apple Watch was a big, big player in that. Maybe say a bit, obviously we don't have the data on Rolex specifically, but just from what you know about the watch industry, about the income statement of a watch brand. Are they very high gross margin, like a lot of luxury products. How are they typically distributed? Anything interesting there that you think maps back onto Rolex? This is business breakdowns, not just product breakdowns, although here are the product is way more interesting.

47:28Anything worth mentioning there just in how the business itself works that's unique? Rolex is more vertically integrated than most. So one can imagine that their margin would be, once you absorb the cost of acquiring and bring everything in house, you would assume that the margin would be a little bit higher because they're making everything themselves. Historically, and generally speaking, there are very few brands that are as vertically integrated as Rolex. Weirdly, Seiko would be one, Grand Seiko would be one, Patek would be another. But most brands are buying effectively everything. The component, the movement might be an in-house design.

47:56I'm using air quotes here. In-house design, but they're buying e-bauches, base calibers, and modifying them significantly. There's margin there. They have to buy the products. To this day, or at least back in 2015, Rolex actually did not manufacture their own hands. I don't know why, but they were buying that from a company. I forget the name of it. I think it's Fiedler SA. So Rolex is buying crystals and hands, but nothing else. Most brands are buying pretty much everything. And then they're assembling it and putting it together. So then it just becomes like, okay, the production cost for watch is the raw materials, it's the man hours, the straps, it's all that stuff.

48:28And then they would ship it out to a US distributor at generally probably about, I would say, 40 % of what you'll see in the store. So 40 % of like US retail. And then the distributor would take 20%. And then the retailer would take about 40 % of that. So you can assume that your retailer is buying stuff at about 40 % below what you're paying. And then the distributor is taking 20 % of that. And then the actual producer of the watch is probably making 200 % on that. If you think about Rolex specifically, great watchmakers in general, what do you think are the most important overall business lessons where you've seen how, let's say Rolex specifically works at a base level?

49:09You've walked to the factory floors, you're intimately familiar with the products. And then when you start thinking about other product categories, whatever, it doesn't need to just be luxury goods. What do you wish more businesses did or a certain way that they conducted themselves most based on what you've learned about Rolex? I think continuity of design is paramount. That is probably really a simple thought. If you look at the Samaritan I have on my desk, I have a 1954 Samaritan. It looks pretty much like this. I have one from 1965 that looks just like this. And the idea that you can create a consumer good, and in fact, a completely superfluous, kind of unnecessary consumer good that becomes iconic is everything.

49:48And like, if you look at its competitors, look at Omega, the Speedmaster, the watch that went to the moon, that is by far its most iconic product. And because they're making the Speedmaster just like they did in the 1960s, that is why it continues to have the volume that it does. Look at cars, Porsche 911. 911s are trading well above retail right now for a variety of reasons. Wasn't always the case, but now they are. and you look at the Hermes Birkin bag, and it's just sticking with luxury. That bag has been around for 40 years and it will always be the iconic women's iron bag. So continuity design, and we just did a podcast on this on Toninke, I think really is what creates multi-generational demand.

50:22And I think with watches in particular, my origin story is I was given an Omega Speedmaster by my maternal grandfather, who was my hero. And that watch continues in some form or another to be made today. And so when my daughter, who's on the other side of this wall, who's six months old, again, is 25 or something, I can say, hey, Georgie, that's her name. Let's go out and get a watch that looks just like dads that look just like your great grandfathers who you never met. And there's something really wonderful about that because again, these are multi-generational items. Thinking long-term, which is what Rolex does.

50:53Rolex is planning, I can guarantee they have their product mix figured out for 2035, guaranteed. Being able to not have to answer to shareholders like so many of us do and play for the long ball, I think is intoxicating for somebody like me. For example, in 2013, it was the 50th anniversary of the Daytona. At that point, the watch was a steel watch with a steel bezel. All people wanted was a black bezel. That's it. That was all we were looking for. It wasn't too much to ask for. They didn't give it to us. They waited another two years. They gave us a platinum Daytona with a colored bezel. It was kind of brown ceramic bezel.

51:26And I just said, man, that's kind of shitty. 50th anniversary, they're not going to give us the thing that we want. And it's just a black bezel. It doesn't seem like much. And then when the watch came out in 2015, we all said, great, and we're celebrating it. And that kind of set off the pandemonium. But they do these iterative things where like that black bezel now exists on the gold version of the Daytona, but not on a bracelet. And so if you want to buy a black bezel on a gold Daytona, it comes on a rubber strap. And I guarantee you next year or the year after that, we're going to get it on the bracelet.

51:54This idea of iterating to a degree that is so frustrating almost for the consumer, but it makes you so excited. And by the way, I want the gold Daytona on the bracelet with a black bezel, but because it didn't come out on the bracelet, I bought it on the rubber strap, even though it's not even really what I want. You know, when it comes on the bracelet, I'm going to buy that too. And the idea that they've got, they've created demand for product that people will buy several iterations of basically, this is not basically really the same thing. It's just super admirable. As somebody that creates products, which is what we do sometimes that are thinking, I mean, to do things in that level of detail and continue to foster the demand that far outpaces supply is just remarkable.

52:34But again, doing things in a way that is not shouting from rooftops, but the quality is there. And for people like me who know a lot about this product in particular, I can look you or anybody in the eye and say, yeah, if you can afford this watch, it's a great fucking product. What other brands in your kind of world would you encourage people to study in this kind of detail to learn interesting lessons? The other brand that I've mentioned a lot in this episode here is Omega. And I think Omega now is doing, they've learned a lot from Rolex, if I can say. And nobody's told me that, but I can just see it.

53:08The Omega Speedmaster, which went to the moon organically, you know, it's not like they paid NASA for that. That is the greatest achievement of humankind. We sent men to the moon. It's insane. And there was a Rolex, to be clear, in contention for that. And NASA chose the Speedmaster over it. That's just the facts. And so the Speedmaster was not, believe it or not, the commercial stalwart that it is for Omega now. Up until probably five years ago, it was the Seamaster. It was DaiWash. And Omega is actually a larger brand in China than Rolex is, believe it or not. You know, they were driven by Chinese consumers.

53:37It was a lot of different colors and kind of interesting things. Then all of a sudden, the current president, a guy named Raynald Nishman, came in and said, you know what? The Speedmaster is iconic. The Speedmaster went to the goddamn moon. Like, this should be the thing that people go crazy for. And this should be the product that can compete with Rolex. And they started doing these special editions, these limited editions, one of which was to celebrate 15 years of Podinke. They did them with some other folks here and there. They did one with the Porsche Club of America. They did some special things with Snoopy, which is a title of NASA.

54:06And then they stopped. They stopped. So no more limited editions, really. They do different editions, but not limited. And now all of a sudden, the Speedmaster trades above retail. The Speedmaster is what everybody wants. And we're an authorized dealer for Omega, and we can't keep them in stock. And so you look at the Omega Speedmaster, which 10 years ago was really kind of a secondary product. And now it's a primary product for the second biggest brand in the world who sponsors the Olympics and James Bond and all these iconic things. And they're really paying attention to the enthusiasts, which I think he represents, which is who I represent, and the mass market folks, which is like just the guy that wants a nice thing.

54:39I think Rolex has frustrated a lot of people, and this is no news to them. I mean, I know they know because you can no longer go in and buy the watch you want at all. And historically, the Daytona was always kind of difficult to get. But as a 25-year-old guy that used to work in finance, which is when I started Hodinkee, you make your first$5 ,000 bonus or whatever, and you go into the store and you buy your Submariner and like, okay, like I'm an adult now. I have a Submariner. That doesn't exist anymore. And I think that's a real bummer for a lot of folks. And that certainly has made the aftermarket price of these things go in a significant way.

55:11But it really turns a lot of people off. and Omega, Tag Heuer, Hanarii, a lot of brands have really said, you know what, if you can't get that Samaritan, we'd be happy to sell you a watch. By the way, like here's some champagne and we're going to invite you to our next party and you might enjoy it. Look, Rolex is an exceptional brand. I would never say they're not. I mean, I spent the last hour telling you why they're exceptional, but these are just watches. And then we have to remember that. I'm the first person to say that like nobody needs a watch. There are no doctors prescribing us to buy watches.

55:37We're not carrying cancer here. And so if somebody has worked so hard that they can afford a$10 ,000 Rolex and Rolex says, sorry, you can't have one, that's a really frustrating experience. And X percent of you says, well, maybe I just want you more now. But Y percent of you kind of says, well, you know what? Screw you, man. I'm going to go buy an Omega. I'm going to go buy a Panerai and I'm going to love them and they're going to love me. It's just a matter of how much kind of ego there's involved. Some people don't care at all, but I can tell you without question that several people that I know personally have been turned off, not only from Rolex, Ketec, and Richard Mille and AP, because these are phenomenally expensive things.

56:12Like Rolex is on the low end side there. Let's talk about AP, which the watch you want is probably 30 ,000. The watch you might want is 150 ,000. But like to walk into a store and say, hey, my name is Ben, I've got 150 grand ready to go. I want to buy this thing and be told, sorry, no. Who are you? Can I see your Instagram fee? What do you do for a living? Who do you know? How insulting must that be? And the answer is, really fucking insulting to a lot of people. And a lot of people say, you know what, fuck you, I'm just going to go buy it for 500 on pre-owned site, or I'm just going to not buy it at all.

56:40I'm going to take a nice vacation or buy a Ferrari instead. And I think this industry has really struggled with that. The market has been so buoyed by easy access to capital, I'll say. And the prices have just continued to go up and go up in a way. It's not normal. And that's not just true for watches, true for cars, wine, art, et cetera. And all of a sudden, when things tightened up a little bit this year, which they have, people said, oh, wait a minute, that Rolexes will not always go up in value, then I'm out. I'm just going to sell it. That's a shame. And I think not just Rolex, but all luxury brands who have their chest puffed out really broadly now should just remember that everything is cyclical.

57:12And that if you have somebody that wants to buy a product from you that nobody needs, you should give them as much respect as possible because it doesn't last forever. We've talked a lot about the wonderful aspects of Rolex and some of these brands in general. What are maybe some negative lessons, things that you've seen them do through history, not just Rolex, but other brands like it, do you think are good, valuable lessons of what not to do? You've mentioned one there, which is what sparks my question. The weakest link of any chain is always retail. Finding people, good salespeople is remarkably hard because you're selling stuff.

57:41And a lot of the folks that are able to afford this stuff, frankly, are incredibly intelligent, incredibly well-versed in the world, know everything, know everyone. If they don't, they're going to go on Houdinki and read all about it. So they do know everything. And you get salespeople that aren't used to that. And I think you have people that are selling product in a way that is so counter to what these things represent. Just using what I have on my desk as an example, I bought this GMT with a good friend of mine. He had just signed a deal to play in a band, a very famous band. And I had just signed my seed round in fundraising for Hodinkee, which was a huge deal for me.

58:14And we went into the Rolex store on Fifth Avenue. We bought the exact same watch together. So this watch has nothing to do with how much it costs or anything. It has everything to do with that success in my life, that success in my friend's life. And to be told no in that moment, imagine we were there together trying to celebrate these achievements for both of us. And we were like, sorry, you can't have anything. And at that point, there were two of the exact same watch sitting in the case. So it was easy. But right now, if we were to do it again, we'd probably get told no. It's so, so demoralizing and insulting.

58:41I hesitate to use the word enemy, but like you could create an enemy for life as a consumer. That is crazy. Rolex knows it's a problem and they are doing everything they can to meet it. And I believe them when they tell me that they're creating more watches than ever before, since that demand outpaces it. But there needs to be a better way. And frankly, I don't know what that way is. Maybe it's e-commerce. I don't believe in that. I don't know. Maybe it's actual waiting lists where people can actually put their name down and say, okay, this person's at number 1 ,123. When you get to that thing, you'll get the watch.

59:12That doesn't exist. And the idea that the waiting lists are even referenced by Rolex today is nonsense. There's no such thing. If you know somebody at Rolex, you'll get the watch. If you bought a bunch of watches that they can't sell, then you'll get the one that they can sell. It's a gift, basically. And again, I want to be clear, Rolex is not alone. Several brands that are very hot right now are doing the same thing. But man, both my parents were teachers. The fact that I have more than one Rolex is still shocking. Like, I'm just happy to be here. And so I think of if I wasn't me in the watch world, but I had made a few thousand bucks, I wanted to buy one of these things.

59:45How disappointed you would be, how angry you would be that you just worked your fucking ass off for the last 40 years to get to a point where you can afford this thing. and you're told no, I think that is a major problem. And I think that is going to continue to be a problem for a long time unless somebody changes. It's a really interesting balance of like wanting it to be something aspirational, but once you achieve a certain bar to be able to do it, it's a fine line that you have to walk as a luxury brand, really, really interesting. Look, it's integrity and it's honesty. If somebody came to me and said, hey, they knocked on my door and said, hey, we want to buy your house.

1:00:13I'd probably say, well, like, I really appreciate that. Like, we're not looking to sell it. But in five years when my daughter's grown and we need a bigger house, I'll give you a call. Like, I would call that person. And I think that person would respect me for saying, not right now, but I'll give you a shout when we're ready. What goes on now is not at all that. It's basically say, hey, sir, please give me your name and we'll reach out if and when we have a product available, which doesn't mean a thing. It doesn't mean a thing. If you're a celebrity, if you're an entrepreneur, if you're somebody that has a million Instagram followers, they're going to call you soon.

1:00:38And if you're not, you're not going to get a call at all. And I think that is when things get really dicey, when people that don't have purchase history is kind of like the new street cred in the watch world. Here's another kind of interesting situation where a lot of brands are closing down authorized deals. So they're closing stores. So let's say you, Patrick, were the number one Audemars Piguet client at some dealer in Ohio or something. And you had bought a million dollars worth of APs from this authorized dealer in Ohio over the past 10 years. And then that dealer got closed. And then you walked into the AP boutique on 7th Street and said, hey, my name is Patrick.

1:01:12I've spent a million bucks with this dealer that no longer exists. Can I have the new ceramic like Turbillon or whatever. We're so pleased for you to come in, blah, blah. We'd love to chat. But you don't have a purchase history here, so we're going to have to put you at the bottom of the list. How would you feel about that? Imagine you've been buying that product in the correct meet from an authorized dealer for a decade, and you just got told you had to start all over again. And that is what's happening in the watch world right now. I'm not singling out AP or anybody, but it's the arrogance of some of these brands that are very hot to think that they can continue to treat people that way, even though everything is cyclical.

1:01:43And I've seen all these brands trade below retail, just like we're seeing them trade above retail right now. I'll certainly remember this conversation for this idea of companies that as you get to know them, you like them more, which is probably quite a rare feature of any company. Typically, the thing you see on the front of it is the best version of the thing. Almost by definition, like they're going to surface the most attractive, interesting stories, elements, whatever. But this idea that I'll think of those five floors below ground is a great lesson. Ben, this has been so much fun. Like what an interesting brand.

1:02:13I can't think of anything like it. that's a nonprofit, that's had this endurance, that has this global recognition and style. Thank you so much for taking the time today to break it down with us. It's my pleasure. It's been a lot of fun. 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.