Investing in a circular economy with Watches of Switzerland

Abby Glennie, Co-Manager, abrdn UK Smaller Companies Growth Trust plc

The market for luxury brands is largely immune from the vagaries of economic cycles, and so offers investors a potential source of steady and reliable returns. One UK company operating within this sphere is specialist watch retailer Watches of Switzerland. In this article, we’ll take a look at what attracted us to invest in the business at abrdn UK Smaller Companies Growth Trust, and examine its sustainability credentials.

Supply and demand

We believe close relationships with its high-quality brand suppliers, an ambitious management team and clear environmental, social and governance (ESG) commitments combine to ensure UK-based Watches of Switzerland (WOS) ticks along impressively.

The company operates in a relatively stable market where demand far outstrips supply. The average waiting list for the Rolex, Patek Philippe, Cartier and Breitling masterpieces it sells is often measured in years. Luxury watches never go out of fashion and, despite their hefty price tags, demand is largely immune from dips in economic prosperity.

Watches of Switzerland nurtures close relationships with leading watch brands.

The success of WOS has been built by chief executive officer (CEO) Brian Duffy and his management team as painstakingly as Swiss watchmakers craft the timepieces that the company sells. WOS nurtures close relationships with leading watch brands and demonstrates its commitment to these relationships through the customer service it offers to watch owners. In fact, WOS is an authorised dealer for more Swiss brands than any other retailer in the UK. Its 2,000-strong workforce is based at stores, warehouses and offices in the UK and US. The company is now expanding further into Europe and into selling branded jewellery.

Trusted partner

The prestige reputation of luxury-watch brands is maintained by ensuring only high-quality retail outlets are authorised to stock the company's products. It’s a retail world where ‘discount war’ is not part of the vocabulary. Such is the level of trust in WOS, major brand owners are confident in allowing the company to brand stores in their names. Also, WOS invests extensively in employee training and marketing so quality of service is maintained at the high levels expected by brand manufacturers.

As a trusted partner, WOS secures better stock allocations than its competitors, which helps its long-term planning and avoids the supply and demand uncertainties that some retailers face. The luxury-watch companies are happy to favour WOS because they know their products will receive high visibility in stores that attract the ‘right’ types of client. Additionally, WOS markets their products favourably and doesn’t discount them.

Being a successful retailer of high-end products also puts WOS in a good position when negotiating with property landlords in its store-rollout programme. This enables the company to locate in high-footfall retail areas.

Leadership quality

We first invested in the company in 2021, impressed by the quality of the management team and clear evidence of its leadership succession planning. They have displayed both operational talent and strong investor communications. That means we can regularly discuss with the team the challenges they face, such as the evolution of smartwatches and how they plan to continue building the business.

A clear sign of the company’s strong succession planning came in April 2022, when Mr Duffy promoted David Hurley from vice president of its US division to president of that division and also deputy CEO of the group.

ESG commitment

The company scrutinises its supply chain to ensure there is sustainability and transparency. Luxury goods like expensive watches fit the circular economy model well, and the pre-owned market is buoyant. As a result, coveted and long-lasting timepieces avoid the ‘make, use, dispose’ pattern familiar across much of the retail sector. Instead, each watch’s extended lifespan reduces the need to constantly replenish product ranges. This eases the depletion of the planet’s raw-material sources and cuts down the ‘carbon miles’ required for their production and distribution.

We are also impressed by the company’s environmental action plan, which aims for year-on-year reductions in energy, fuel and water consumption, as well as minimising waste, especially in packaging, and recycling more materials. As a store-oriented retailer (although it is also expanding its e-commerce business), WOS has achieved significant energy savings with in-store lighting by switching to LED spotlights.

Final thoughts…

We feel that WOS's commitment to address its environmental impact is an important position not always found in the retail sector, where the dash for short-term profit often dominates. Participation in the circular economy, thanks to the high-value nature of the products it sells, is a clear ESG message for the company’s employees, watch-brand owners and stakeholders.

We believe the market for luxury watches will continue as demand from consumers with high disposable income is maintained, regardless of economic uncertainties or rising costs of living. The expansion of WOS into Europe and branded jewellery products should create a positive outlook for the company.

 

Companies are selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance. Past performance is not a guide to future results.

 

Important information

Risk factors you should consider prior to investing:

  • The value of investments and the income from them can go down as well as up and you may get back less than the amount invested.
  • Past performance is not a guide to future results.
  • Investment trusts are specialised investments and may not be appropriate for all investors.
  • There is no guarantee that the market price of a Trust’s shares will fully reflect its underlying Net Asset Value.
  • As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
  • The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
  • The Alternative Investment Market (AIM) is a flexible, international market that offers small and growing companies the benefits of trading on a world-class public market within a regulatory environment designed specifically for them. AIM is owned and operated by the London Stock Exchange. Companies that trade on AIM may be harder to buy and sell than larger companies and their share prices may move up and down very sharply because they have lower trading volumes and also because of the nature of the companies themselves. In times of economic difficulty, companies listed on AIM could fail altogether and you could lose all your money.
  • Certain Companies treat the generation of income as a higher priority than capital growth; such Companies may deduct part or all of their management charge from capital. This will increase the amount of income available but at the expense of capital growth.
  • Shares of smaller companies may be more difficult to buy and sell than those of larger companies. This means that the Investment Manager may not be able to buy and sell at the best time or may suffer losses. This could reduce your returns.
  • Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.


Other important information:

Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Registered Office: 10 Queen’s Terrace, Aberdeen AB10 1XL. Registered in Scotland No. 108419. An investment trust should be considered only as part of a balanced portfolio. Under no circumstances should this information be considered as an offer or solicitation to deal in investments. You should obtain specific professional advice before making any investment decision.

Find out more by at abrdnuksmallercompaniesgrowthtrust.co.uk or by registering for updates. You can also follow us on Twitter and LinkedIn.