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Patek Philippe: the Power of Prestige

Founded in 1839, Patek Philippe is 66 years older than Rolex. It’s known as the last independent, family owned Swiss watch manufacturer. It’s had a number of name changes through the centuries as different investors came into the business but has remained a private, family owned business the entire time.


In 1868 the company started producing the very first Swiss wristwatch ever produced, which was made for the Hungarian Countess Koscowicz, and was mostly an ornamental bracelet shaped like a baguette made of yellow gold plus some large diamonds, plus a watch with a key wound movement called Caliber 27368.


Watch technology continued to advance through the 19th and early 20th century, with companies recording patents for new movements (the mechanism for keeping time) and complications (basically anything in a watch that goes beyond telling the time). Patek Philippe introduced another first in 1925: the first wristwatch with a perpetual calendar complication. Until then these complications had only been seen on pendant watches.


Still family owned, the business obtained external investment from two brothers, Jean and Charles Henri Stern in 1932. The Stern brothers really drove innovation and this resulted in:

  • Regular production of perpetual calendar wristwatches (1941)

  • A record number of first prizes for precision in the Geneva observatory competition (1944).

  • Possibly the most complicated mechanical wristwatches ever made – the Henry Graves Supercomplication. Sounds fancy, and it was: an 18-carat gold masterpiece with 24 complications. 

 

The Henry Graves Supercomplication

Let’s zoom in on this watch for a bit because it’s very important to understanding why Patek Philippe is such a prestigious brand today.


The Henry Graves Supercomplication
Source: Forbes

Source: Forbes


The Supercomplication started out as a super-competition between millionaires – James Ward Packard (of Packard Automobile Company and Packard Electric Company) and Henry Graves Jr (a banker). The game was to commission Patek Philippe to build the most complex watch. Packard died before the competition was over but Graves would have won – here’s the full spec list:

Timekeeping

  • The hours, minutes and seconds of sidereal time (3)

  • The time of sunset and sunrise (2)

  • The equation of time

  • Calendar

Perpetual calendar

  • The days of the month

  • The days of the week

  • The months

  • The stars chart

  • The age and phases of the moon

Chronograph (stopwatch)

  • The Chronograph (can time two simultaneous events)

  • Split seconds

  • The 30-minute recorder

  • The 12-hour recorder

The Chime

  • The “Grande sonnerie” (Westminster chimes) with carillon

  • The “Petite sonnerie” with carillon

  • The minute-repeater

  • The alarm

Other functions

  • The going train up-down indication

  • The striking train up/down indication

  • The twin barrel differential winding

  • The three-way setting system

 

This watch held the title of most complicated mechanical watch in the world for 56 years, until Patek Philippe released the Calibre 89 (but the Calibre was produced with the help of computers, so for the purists this may not count).


Aside from the sheer craftsmanship involved in putting 920 pieces together to create such a complicated timepiece, the Supercomplication was important for an even bigger reason: its resale value. Here’s the sales history:

  • 1933 – sold for US$ 3k

  • 1999 – auctioned for US$ 11m

  • 2012 – sold for US$ 24m


Adjusted for inflation to 2012, the purchase price of this watch was US$ 343kmeaning it appreciated a ridiculous 6,897% in 79 years. That equates to a CAGR (Compound Annual Growth Rate) of 105.5% … ie that watch has effectively more than doubled in value every year for almost 4 decades.


What other assets appreciate in value that much? Well, you might find a startup to invest in that generates over 100% CAGR, but I doubt we’ve seen any businesses that generate that much profit over such a long time. This is exactly why luxury items are often treated as investments. The right item can last a very long time and appreciate in value almost endlessly, depending on the market.

 

The Luxury Watch market

While the Supercomplication is a unique item, luxury watches are traded all the time. While they may be complicated and require expert maintenance, they’re also extremely durable and so last for a very long time – I’m pretty sure a hundred-year-old Patek Phillipe will be around long after my Apple Watch is dead and recycled.


What drives second-hand vintage watch prices is free cashflow. When more people become millionaires/billionaires the watch index improves. You can see the impact of Covid and related general economic uncertainty here:


Timepeaks Luxury watch price index

Source: Timepeaks

 

Patek Philippe (78.9% growth over roughly 5 years) performs well above the combined Top 10 watch brands (8.4% over the same period), and has blown Rolex (39%) out of the water:


Watchcharts Top 10 luxury watch index

Source: Watchcharts

 

Buying (or more accurately being allowed to buy) a Patek Philippe

If you’re in the market though, you may need to get in line. There is no Patek Philippe retail store in Australia, only 6 authorised retailers in the whole country. Their website lists no prices, but an “entry-level” (obviously this is a relative term) watch will cost US$ 15k-20k.


Patek Philippe is employing a multi-pronged strategy to ensure their prices remain high (and consequently resale values):

  1. Restricting retail supply creates scarcity and drives up retail prices: Patek Philippe sales dropped dramatically during Covid much like many luxury retailers. As a result they have been steadily closing their own stores and reducing the number of authorised retailers.

  2. Restricting retail supply also diverts buyers to the vintage watch market. Patek Philippe has been known to buy its own watches at auction which is another tried and true method to ensure prices remain high.

  3. Gamification. If you don’t know the hoops that Hermes puts buyers through before they become “eligible” to purchase a Birkin bag, read this article. While stories about keen watch buyers being told to buy some jewellery first are only anecdotal, Patek Philippe do make sure that stores are not over-stocked with their watches. If anything they seem to be pushing buyers directly onto waiting lists.


And when waiting lists are long, buyers become tempted to buy from the vintage market which, as we know, also pushes up prices.

 

Patek Philippe is the master of balancing supply and demand

Swiss watch makers are long-term strategists. They had to become like this to deal with the influx of digital quartz watches in the 1970’s because they lost their long-standing competitive advantage – precision.


As a result the strongest Swiss brands have moved towards selling prestige. They are brands that exude quality, success and social influence. Buyers want them because that rubs off.

Patek Philippe sells their prestige through the strategy of restriction. Yes, they have a history of precision timepieces with many complications (oh so many), but the average smartwatch of today is better at both of those.


But if you want a fancy watch and you can’t have it, well for a lot of people that just makes it more desirable. And if you can control strongly influence the supply of that fancy watch in both the initial retail and resale markets, demand shoots up, and you win.


Patek Philippe have effectively mastered the Forbidden Fruit Effect.

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