LONDON, United Kingdom — When John Idol, chief executive of Michael Kors, announced in May that the brand aimed to turn its menswear business into a “major force” with sales of over a billion dollars, he identified three key categories that would help the company hit its target: apparel, leather goods and men’s watches, which Idol dubbed “a huge opportunity.”
Michael Kors does not actually make watches itself, however. Instead, the company licenses its brand to Fossil Group, a watchmaking behemoth that designs, manufactures, distributes and markets Michael Kors watches. Fossil — which sells 26 million watches a year, generates roughly $3.3 billion in annual revenues and owns 80 percent of the market for watches in the $100 to $500 price range in the United States — it also handles watches for Adidas, Burberry, Diesel, DKNY, Karl Lagerfeld, Marc By Marc Jacobs, Tory Burch and others.
By entering into such agreements, fashion brands have been able to enter and exploit a new category, worth $62 billion at retail last year, according to Euromonitor, without taking on the burden of operating costs, ensuring licensing revenues go straight to the bottom line.
“There is a macro trend of consumer discretionary dollars that are switching from apparel to accessories,” said Greg McKelvey, the chief strategy and marketing officer at Fossil Group. “There is a lot of price competition and competitiveness in apparel, which is driving prices down in that market and creating consumer discretionary spend going into accessories, of which watches are a significant beneficiary.”
“Watches can take some of the share of these accessories products for sure,” agreed Mario Ortelli, senior vice president of European luxury at Sanford C. Bernstein, an asset management firm. However, the primary driver of the category’s dramatic expansion has been the increasing desire of consumers to wear their brand on their wrist, he continued: “Why fashion watches are getting so much success is because they are targeting the consumers that are looking for something that is an immediately recognisable brand, especially in emerging markets, and many of them use watches.”
“Within [the watch market], there is a macro trend of lifestyle brands displacing traditional watch brands, based on consumer desire and emotional connection with fashion and lifestyle brands,” said McKelvey.
It’s all a far cry from Swiss-made luxury watches.
“Our model thrives off the over-10,000 SKUs that we produce a year, which allow us to respond to seasonal trends and allow us to have a full branded offering for different customers’ needs,” said McKelvey. “The most significant [license agreement] beyond Armani [in the 1990s] was in 2004 when we did Michael Kors. In ten years, it became one of the world’s greatest merchandising and design explosions and really proved our business model.”
The largest department at Fossil is design, with over 300 employees. “We want to partner with brands that have global growth objectives and bring unique style design and lifestyle elements to consumers; something unique that we can design around.” McKelvey also believes speed is critical to success. “The speed at which we can get the first collection right, the faster we can then begin designing and taking the brand into new collections, distribution points, price points, etcetera. Those are the things that allow us to grow the business,” he added.
“With Michael Kors it took us a couple of years to make sure it was special and just as the brand got a lot of heat we were able to create whole collections, male and female, and respond to the global style trends of all the collections to the point that we are bringing 3 to 5 collections a year.”
Brandon Little, Fossil’s chief creative officer, who joined the company from Richemont, insists that the manufacturing steps required to make a Fossil watch versus a luxury watch are “largely the same, it is the materials that alter pricing.” Fossil primarily manufactures its products with 316 stainless steel, chosen for its scratch resistance and non-allergenic properties; precious metal surfaces are added via electro-plating. “A $500 watch is not going to be made of solid gold,” said Little.
The products Fossil creates for fashion brands are sold at a wide range of price points, from $100-$240 (Armani Exchange) to $395-$3,995 (Burberry). “Servicing the level of variety and fragmentation of consumer desire and bringing that breadth of scale, brand and product into global distribution is just something nobody else has got in their business. Not even close,” said McKelvey. Fossil’s licensed and self-branded products are sold in 30,000 doors, across department stores, branded boutiques and specialty retail stores in 90 countries.
Ortelli said Fossil’s distribution network was fundamental to its attractiveness to fashion brands. “I think that in the low end it is very important to have an external partner, because distribution is mainly wholesale. Luxottica is successful with sunglasses because there is a technological, industrial part, which they scale — and they are very good in distribution. Luxottica’s distribution platform serves thousands of multibrand opticians all around the world. It is the same with fashion watches; you will sell some of these watches in the [licensor’s] stores, but also a lot in the accessible multibrand shops for watches.”
Despite its impressive market share in the United States, Fossil product still accounts for only one in every five watches sold on a volume basis. “There is significant opportunity within the watch category in the United States,” said McKelvey. “And when I look outside of the US, I see the same global growth trends and fundamentals from a consumer perspective which will play out globally. We are seeing that in our growth in Europe and in Asia-Pacific,” he continued.
But according to Euromonitor, the growth of watch sales in the US — 6.3 percent in 2013 — is expected to decelerate over the next three years to 1.7 percent in 2014, 1.3 percent in 2015 and 0.5 percent in 2016, crossing into shrinking sales in 2017.
Fossil is also eyeing share in the market for wearable tech and plans a major push into the space next year with multiple brands and form factors. “This isn’t just about smartwatches, this is about how to integrate technology into all of the products and brands that we have, in ways that are desired by our fashion customers. So this can take the form of watches and jewellery,” said McKelvey.
“There is a tremendous amount of hype in the space at the moment and I don’t see anybody yet bringing a product to market that really meets the criteria of the fashion customer — by a lot. That is what we are solving,” he added. “Our fashion customers care about three things in particular. They will not compromise on style; they want real valuable function and utility; and they want a branded experience, both in design and in the application layer of the functionality that it brings. We are in development of how to make it a branded experience.”