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Second Hand Luxury; An Oxymoron or Window into Value

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Second Hand Luxury; An Oxymoron or Window into Value

Outside of financial assets and property, very few items retain their value as they are passed from owner to owner. In fact most consumer items have a single owner and are used until failure or obsolescence. One segment of the market that is ironically bucking this historical axiom is luxury goods. 

In fact the market for second-hand luxury goods is growing fast particularly for items such as Swiss watches and high-end handbags. Websites like “Watchfinder & Co,” “The RealReal” and “Vestiaire Collective,” connect potential watch sellers with a deep pool of buyers globally, and are gaining consumer confidence by hiring expert authenticators and restoration services to get items looking like new.

For the major luxury watch makers like Omega (owned by Swatch), Cartier, Jaeger LeCoultre and Vacheron Constantin (all three owned by Richemont), the resale market poses a significant challenge. Second-hand watch sales have now grown to ~US$3.3 billion per year (according to Credit Suisse), which is the equivalent of 10 per cent of the entire market. As with any market where there is a legitimate option between new-and-used (e.g. cars, bikes, boats, planes, etc), what happens in one effects the other, as buyers may substitute between new-and-used if value presents itself.

This may be what’s happening in luxury watches, with deeply discounted, second-hand items readily available online. For example, one of Cartier’s Panthère watches sells for US$25,000 direct from the manufacturer, while at the same time (no pun intended), a mint, virtually identical, authenticated model from 15 years ago, can be purchased on “The RealReal” at a 75 per cent discount.

How does this affect the companies that own the major watch brands?

Well, the immediate challenge from a more transparent market is that consumers know which watches don’t hold their value and which do. The knock-on effect of this could undermine a brands’ ability to raise prices for new products and/or reduce watch sales as more people buy used products. This may explain Richemont’s recent acquisition of “Watchfinder & Co”; it may be looking to exert greater influence over second-hand trading of its products as a defensive move in order to preserve margin and profits.

However, controlling a market is a difficult proposition, with price discovery usually beyond the control of any single player (at least over the long-term). In fact Richemont’s second-hand timepieces, like Jaeger-LeCoultre, continue to sell at >40 per cent discount to their new equivalents. This is in stark contrast to privately held, family run players like Rolex and Patek Philippe, whose second-hand products can fetch >30 per cent premium to new prices (according to “Watchfinder & Co”), as supply and model differentiation sufficiently keeps them out of the jaws of commodification.

Price of Watches: Premium / Discount of Second-Hand Watches on “Watchfinder & Co”

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Source: Credit Suisse 

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Amit joined MGIM in April 2018 as a Senior Research Analyst after spending seven years as a credit analyst at Credit Agricole and Citigroup, based in New York. Prior to this, Amit was an investment banker with Citigroup for five years in New York and Sydney, focusing on Media and Telecoms; Metals and Mining; and Consumer Products.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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