Money value of time: luxury watches and the scarcity principle

May 6, 20223 min read
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Key takeaways

  • Luxury watch manufacturers produce a limited number of pieces, which tends to drive prices higher in secondary markets.

  • Major watch brands increase prices 5-10% a year compared to their original list price, with record mark-ups for well-known manufacturers such as Rolex and Patek Philippe on the secondary market.

  • While “passion” assets are often seen as a store of value, due to their scarcity they can potentially appreciate over time.

According to the scarcity principle – a cornerstone of modern economy theory – the price of a good with low supply and high demand tends to rise. While in an ideal, perfect competition market, other firms would increase production until profit decreases to zero – and prices decrease – this is unlikely to happen in the luxury goods market, where differentiation and uniqueness are key features. 

Luxury goods producers are quick to remind consumers that the craftsmanship required to make these special objects can be pricey, and that small production numbers make it all but impossible to satisfy demand. 

However, setting an expensive entry point through (what most consumers would consider) an elevated listing price is often not enough to discourage buyers. Specific brands have been historically able to fuel enough demand from potential customers, that prices on the secondary market tend to be multiples of the primary market ones.  
Statistically, iconic contemporary models from leading brands command the highest premia. For example, the stainless-steel Patek Philippe Nautilus1:

Similarly, the below chart shows the secondary market appreciation for another iconic watch – the stainless-steel Rolex Daytona Chronograph2:

The global market for luxury watches – primary and secondary combined – is currently estimated to be worth approximately $42 billion3, though that number is likely to be an undershoot given the amount of OTC transactions that happen between private individuals. Anecdotal evidence points to the real number being potentially higher, with iconic contemporary models from leading manufacturers regularly trading at premiums ranging from 50 to 300% of the original price. Some watches continue to appreciate over time, as they become rarer and their production stops, with additional potential premium courtesy of different types of restrictions such as – for instance – sanctions. 

Leading auction houses Christie’s, Sotheby’s and Phillips publish data on their total watch auction sales – worth approximately $530 million in 2021, a 77% year-over-year increase – which sheds a partial light over secondary market transactions. But crucially, this data does not include private sales from auction houses, which tend to be popular with select clients. While auction houses prefer public sales due to global reach and increased exposure, these are seasonal, whereas private sales – estimated to be worth at least 20% of the auction sales – can happen throughout the year. They also offer the additional benefit of further discretion for both the seller and the buyer. In addition, secondary market dealers and online second-hand retailers do not disclose their sales turnover. 70% of the secondary market is driven by Rolex and Patek Philippe both in value and number of pieces.

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To give potential investors a sense of the market size, Chrono24, the leading online watch marketplace, has over 500,000 pieces on offer, with a value of approximately $4.3 billion, and sales of approximately $2.2 billion in 20204.

“Passion” assets have been historically a preferred store of value for wealthy individuals, who have used them as a hedge against inflation – similarly to gold. But some of these assets also can appreciate over time, which may potentially lead to capital gains if they are sold at a premium in secondary markets – just as any other financial asset.

Learn more about the ways Yieldstreet can help diversify and grow your portfolio

Sources:

1 WatchCharts
2 WatchCharts 
3 Altagamma Luxury Market Survey, Fall 2021
4 Chrono24