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Academic in-depth look at the Rolex recipe for success

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Introduction to Rolex Recipe for Success

The success story of Rolex is one that, in its magnitude, is hard to understate, and many wonder what the Rolex recipe for success is.

Despite selling an antiquated product whose initial use case has long lost its merit, they are more successful than ever as an enterprise.

The brand is ranked among the most valuable ones in the world, last achieving the top spot in 2022 (RepTrak, 2023), and synonymous with the idea of luxury.

When asked about their own explanation for their success, the brand claims to owe it to “our values of perfection and to our culture of continuous improvement, we strive to always go further. “ (Corder, 2022, II).

Rolex Market Share 2021

Striving for perfection, however, is not an element exclusive to Rolex in the luxury watch market and hence fails to explain their growth.

In this article, we will explore how Rolex used vertical integration in its business practices to set itself apart from the competition and gain a competitive edge in the luxury watch market.

To that end, we will start by briefly exploring the history of the brand and explain their pivot to the luxury market and some of its complexities.

Following that, we will look at what vertical integration is and how it can affect a business.

We will refer back to Rolex to gauge the extent to which they have undergone this type of business expansion.

Finally, we will conclude by seeing if vertical integration truly is a recipe for success in the luxury watch market.

Historical background and the luxury market pivot

While the word Rolex is synonymous with luxury watches today that has not always been the case.

While always a premium product they had originally a much more utilitarian appeal. They were in the so-called tool watch market.

1957 Rolex Submariner Magazine Ad
1957-Rolex-Submariner-Magazine-Ad – Source

These were timepieces that satisfied specific customer use cases rather than just telling the time (Yianopoulos, 2016). Examples include watches specific for divers, car racers, or mountaineers.

Their unique selling proposition, what differentiates them from their competition and attracts customers (Stone & Desmond, 2007, p.203), was their high levels of quality and reliability (Donze, 2017).

This was highly relevant for the niche markets they targeted. A feather in their cap was that they were favoured among military personnel (Altieri, 2022). Here, mechanical watches were tested to the extremes.

However, with the introduction of quartz technology in the 1970s, they lost that edge.

Quartz watches were orders of magnitude cheaper, more reliable, and more accurate (Lombard, 2011).

The Casio G-Shock, a cheap $100 Plastic watch, had replaced the premium Swiss handcrafted timepiece as the military watch of choice (Yiannopoulous, 2016).

marines g shock2 1536x864 1
Source: GunMagWarehouse

The following statement captures the new ethos the brand followed:

“As the price of quartz movements declined by a factor of 100, beautifully crafted, exquisite mechanical movements came back in favour – and they had to be made in Switzerland. They were something rare and very special: high-tech machinery, almost artistic skills and tremendous experience were required to make, assemble, and service them. Damn, the wonderfully accurate but mass-produced timepieces: intricate micromechanics are something exclusive and deeply emotional, and only very limited quantities of such timepieces can be produced.” (Trueb, 2005: 11).

This required a transition towards luxury, which was important for the company’s pricing strategy.

Premium products always justify their high price through higher, though diminishing, levels of quality.

With luxury products, there is no clear correlation between production costs and the final price (Kapferer & Bastien, 2012, p.485). This allows for significantly higher margins.

Further, luxury goods play by a different rule book than normal products and disobey all forms of conventional wisdom.

They are much more price-inelastic, for example. That is because rather than being bought for their objective purpose, they have a signalling function. Customers use them to display their perceived status (Morhart et al., 2020, p.76).

A high price is relevant, therefore, as in order for it to function as an indicator of social hierarchy, it should be aspirational in its nature (Han et al., 2010, p.27).

Luxury goods can be so extremely price inelastic that counter to any rational thinking, a reduction in price can negatively affect the demand for a good (Kuksov & Ying, 2012, p. 621).

This is because too-high accessibility negatively impacts the signalling value of the good (Yeoman & McMahon-Beattie, 2018, p.12).

Rolex has achieved this by ensuring that its products increase in price both beyond the average salary increase and inflation, making them proportionally more expensive every year for the average citizen (Appendix A & B).

image 28
Rolex price increase compared to Inflation: Source: Bredan, 2014
image 29
Amount of Rolex watches a yearly income can buy: Source: Source: Bredan, 2014

Two factors make their strategy in terms of supply and demand in the luxury field a success.

Their Production of 1.2 million units is large by luxury watch standards.

image 30
Rolex Market Share 2022 in Morgan Stanley Report: Source: Müller & Morgan Stanley, 2022

Nevertheless, they consistently sell out all but their least desirable products, leading to news headlines about empty shop windows (Hagen, 2019).

Vertical integration as a growth strategy

Before we consider some of the advantages and disadvantages of vertical integration, we will first briefly establish what exactly it is.

To understand what vertical integration is, we first have to consider what a supply chain is.

A supply chain is described as the system and the facilities that convert raw materials into finished goods (Ganeshan & Harrison, 2002).

These different facilities are usually occupied by different companies producing products and services along the chain, each capturing their respective segment of the value creation (Perry, 1989).

This chain has two dimensions, one moving along the vertical and one moving along the horizontal space.

The vertical dimension can be best understood by numerically visualising the distance that each member of the supply chain has from the final customer. In this model, a firm that sells directly to a consumer would have a vertical position of 0, with each step removed, adding one more number (Gofman et al., 2022). 

Vertical integration is a concept often used in conjunction with horizontal integration, as its peers describe it. Extrapolating the previous numerical example, we find that horizontal integration describes when companies are integrated into one another and hold the same numerical vertical position.

Rolex Recipe for Success, Vertical Integration Illustration.

An example would be one tyre manufacturer buying another. Vertical integration, however, would only occur when the individuals hold different vertical positions.

In this case, a tyre manufacturer would integrate the rubber producer from which they source their raw material into their business.

They can then be further differentiated between forward and backward integration, each with their own benefits. Forward increases the company’s reach towards the customer, allowing them to access retail and control more of the demand (Lin et al., 2013).  

Backwards, on the other hand, increases the control of their supply, allowing, for example, for higher quality (ibid).

From a theoretical standpoint, there is no clear answer to the question of whether vertical integration would be a beneficial endeavour for a company.

diagram 2 forward integration 1
Supply Chain Example

The fact is that too many individual factors are at play, and determining whether such a strategy would be successful requires an analysis specific to the business.

For example, there seems to be an interesting “V-shaped” relationship in terms of a company’s vertical integration and profitability.

That is to say that both very high and low levels of integration can positively impact profitability (Buzzell 1983).

Other studies also found that in terms of strategy for levels of vertical integration, both extremes are okay, but the middle ground is questionable (Bowman, 1978, p. 70).

Vertical integration as a strategy also works best for those with a large market share. Here the return on investment is higher when the subject holds a market share between 25% and 60% (Buzzell 1983).

Vertical integration is also an innovation driver. Highly integrated businesses may sacrifice short-term profitability in their activities, but overall, they can boast more innovation (ibid).

WORKSHOP © RolexRemy Lidereau
WORKSHOP © Rolex/Rémy Lidereau

This is achieved mainly through backward integration, which fosters better communication and coordination between the different facilities (Mansfield & Wagner, 1975, p. 180).

There are certainly downsides. Vertical integration as a strategy is a costly endeavour. In order to buy a part of the production chain, there is a large capital cost. That high level of investment usually reduces the profitability of the business (Gale, 1980, p. 78).

Another issue is the loss of specialisation. Particularly for manufacturing companies moving into the retail segment this can be problematic.

That is for example why U.S. oil companies moved towards franchising as their inflexibility and manufacturing mind-set could not be effectively transitioned towards retail (ibid).

Vertical integration, as demonstrated by Rolex

Having established some of the theoretical aspects of vertical integration as a growth strategy we will now look at whether Rolex has implemented these in their business operations.

Rolex prides itself on being manufactured in Switzerland, which has become the mecca for watch-making in the modern world.

Rolex now rests on the fruits of a decision in the 1990s to radically buy up all the suppliers and move as much as possible of their production process under their own roof (Baxter- Priest, 2018). The current four production sites employ 9000. These sites are the following:

  1. Acacias (Rolex, 2024):
    Here, we can find the headquarters of Rolex. All levels of administrative work are done here, ranging from Rolex’s extensive philanthropic activities to its commercial ones. It seats the board but also their research and development centre and training facility.
Acasais Rolex Geneva

Further, it houses two production units. These are used both for the final assembly of the watches as well as their rigorous testing for their internal quality control.

  • Plan-les-Ouates (ibid):
    Here, we can find Rolex’s own foundry, another unique distinguishing factor from their competition. They use these to create their own patented alloys. Rolex is a market mover for its use of high-end metals. It was the first company to move to 904L steel in 1985, which they call Oystersteel. This is the new industry standard for high-end sports watches. They also have their own titanium, which they call RLX titanium.
Plan les Ouates Rolex
ROLEX PLAN-LES-OUATES SITE – © Rolex/Jean-Daniel Meyer


Their gold, platinum, steel, and titanium alloys also all get tested at this site for any imperfections. Next to material science laboratories they also have designated labs for chemistry and tribology where they, for example, create their own lubricants. Further they stamp their cases here and polish them. They also hand assemble their bracelets and claps at this site.

  • Chêne-Bourg (ibid):
    Here, they manufacture their own dials, a highly complex process often outsourced by competitors. Specific electroplating techniques are used for the background colours. Pad-printing applies the text before finally the appliques with their unique night-glow substance, called chromalight, are placed on it. It also houses their gemmology department.
Chene Bourg Rolex
ROLEX CHÊNE-BOURG SITE © Rolex/Jean-Daniel Meyer


Finally, they also have their ceramic department here. This is industry-leading, as they have been able to create seamless double-colour ceramics in one solid piece since 2013.

They also use a physical vapour deposition coating using molecularly thin layers of gold and platinum for numerals on their bezels. All of these processes are the result of intense research and development and are patented processes.

  • Bienne (ibid):
    In Bienne, their movements get produced for all their watches. A historical distinguishing factor for Rolex is that they produce their own movements, save for some exceptions. This is something that many other brands, even in the luxury segment, did not do until recently.
ROLEX BIENNE SITE
ROLEX BIENNE SITE © Rolex/Roger Frei


This involves patented technologies and extensively high levels of detail down to orders of fractions of a micron. Following the assembly of the movements the final timepiece then gets tested by an independent institution so that they can be certified as superlative chronometer.

Rolex is keen to continue on their path of expansion as there are already plans for another major production site to complement the already existing ones. This 100,000 square meter plot is planned to employ further 2,000 employees. The purpose of the building however is yet to be determined (Corder, 2022, I).

This shows that what we consider one company is, in reality, a huge array of small business units, which in any industry would be different companies. This begs the question of why Rolex goes to these lengths.

We have established previously some of the advantages of vertical integration, but as we have seen, there are certainly also drawbacks.

One factor specific to the watch industry is the concept and importance of “in-house”.

While there are many watchmakers only few actually produce their own movements. While being an “in-house” producer, a company that makes their own movement, doesn’t necessarily equate to quality there is a certain connotation to it in the consumer’s mind.

An example from a different industry to explain is that a Ferrari car needs a Ferrari engine in order for it to be considered a real Maranello thoroughbred.

In their production chain there was one aspect that Rolex had never touched, that being the sales and after-care in direct contact with the consumers.

Rolex uses a network of authorised dealers to distribute their products to their customers.

This aspect is subject to change marking the final transition to what can arguably be considered the most vertically integrated company in the world.

Subject to approval by the relevant competition authorities Rolex has made a bid to buy the historic jewellery and watch vendor Bucherer (Rolex Press Release, 2023).

This allows them to gather all the value created in their products, with this final step being one of the most profitable and difficult yet.

They will be aided by the pre-established locations and expertise of Bucherer.

This will make them a manufacturer that owns the complete product chain, starting with creating their own alloys in their foundries to the final swipe of the credit card when they deliver the product to the consumer.

When relating the levels of integration from Rolex back to our theoretical basis we can see that they are in a great position to reap the benefits from their integration.

Their market share of 29.2% fits perfectly in the previously determined scale where vertical integration is beneficial.

Further, they follow the V shaped relationship between integration and profitability going for extreme integration as we have seen.

The downside of having reduced profitability from the high cost is offset by them being in the luxury market.

Since they are not bound by regular rules of having to compete for price they can transfer excess costs to the customers which might even help solidify their products as a status good.

Finally, the potential downsides of going into the retail business with a “manufacturing mindset” are alleviated by them clearly stating that they do not want to intervene with the operational business of Bucherer, but instead act as a silent owner.

Conclusion

In conclusion we have seen that Rolex has gone through a significant transformation. Following the loss of their competitive advantage with technological advances due to the quartz technology they shifted from the premium to the luxury market.

We have seen what advantages vertical integration can have for a company.

It can increase the profitability of a brand allowing them to capture value from all parts of their product chain.

Further how it can allow for more control over a product both in its quality when integrated downward and presentation when integration upwards. We have also seen though some of the potential downsides such as higher cost and complexity.

Following the technical background we have looked in depth at how Rolex has implemented vertical integration in their business model.

We have looked at their different production sites and analysed how they have, over the years, positioned themselves to be the most vertically integrated luxury watch brand in the world.

We have seen that they lend themselves perfectly to vertical integration and that data supports that this is a highly successful endeavour for them.

Even though Rolex does not release any numbers we have enough evidence to determine that they are a largely successful company and, in their field, the clear market leader holding the top position for multiple years.

image 31
Rolex Ranking Morgan Stanley Report 2017 to 2022: Source: Müller & Morgan Stanley, 2017, 2018, 2019, 2020, 2021 & 2022

This allows us to come to the conclusion that vertical integration in the luxury watch market can truly be a recipe for success.

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2018, 2019, 2020, 2021 & 2022

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