Looking for a high-end watch? How newcomer Filippo Loreti is playing digital disruption to its advantage

Matas and Danielius Jakutis, two brothers from Lithuania and founders of Filippo Loreti (FL), are set to disrupt the watch industry. Their secret? Cut the middlemen and sell high-quality, Italian designed watches directly to the consumer at affordable prices, leveraging digital tools [1].

According to the brothers, a luxury watch is sold at over 10 times its production cost due to the overinflated margins charged by wholesalers, distributors and retailers to pay for expensive advertising campaigns and luxurious stores [2]. The public seems to support the brothers’ premise given that Filippo Loreti’s first collection was the most funded timepiece project in crowdfunding’s history, raising close to $1M.

Digitalization: challenge or enabler?

The road to growth hasn´t been easy for the Jakutis brothers. One of the first challenges they faced was how to setup and finance a high-quality supply chain centered on watch manufacturers, in light of the limited funds at their disposal. Furthermore, customers’ rising demand for faster delivery times, integrated solutions and more options (e.g., of drop-off locations) fueled by the rise of e-commerce and associated digital developments made this endeavor even more complex [3]. In fact, leading players in this space, such as Amazon (now experimenting with drone delivery), keep raising the bar for tech-enabled startups.

Secondly, the brothers had to find ways to provide a high-end online buying experience consistent with a high quality product. This was particularly challenging since the Internet as a distribution channel for high-end watches was still incipient – e.g., in the UK only 3% of watches with price tags above £1 500 were sold online in 2015 [4] – while consumers increasingly demand more customization and transparency, enabled by new technologies [5]. Moreover, watch lovers typically like to try on the time piece before making a final decision [6], a hurdle that needed to be overcome by improving other aspects of the shopping experience.

In short, digitalization has become of utmost importance for FL since it raised customers’ service level and transparency expectations. Interestingly enough, digitalization was not only a source of challenges for FL’s supply chain but also its main enabler.

Filippo Loreti’s action plan

To maintain low costs while ensuring the customers’ high-quality expectations were met, FL adopted a made-to-order model – a watch is only produced once the customer places an order online. Additionally, consumers receive regular status updates: when the watch is sent to production; when production is finalized and when the watch is shipped. This mechanism relies on high integration with FL’s production partners. In fact, when looking at a watch in FL’s website, consumers can observe the number of people currently looking at that same watch, the last time it was ordered and its expected shipping time. Clients also have the option to choose among different logistics operators with distinct price points and delivery times. All of it seemingly integrated in a single interface to match the audience needs for transparency and choice.

 

Filippo Loreti limited-edition watches start at $249 (disclaimer: I personally own the model in the picture and can attest to its quality)

When purchasing a watch, customers also embark on a journey of digital story-telling: they immediately receive an email explaining the mystery behind the fact that each collection is limited to 1,641 units, as well as links to articles explaining the potential return of investing in a high-quality watch. The use of these digital tools aims to recreate the interaction one would have with a watch master at a physical boutique.

Furthermore, besides the short-term oriented measures previously highlighted, given customers’ increasing focus on integrated smart devices, FL has recently launched a crowdfunding campaign to develop a smartwatch, following the lead of both tech players (e.g., Apple) and traditional watch makers (e.g., Tag Heuer).

What’s next?

Given the increasing need to reduce the time-to-market of new products and to provide options to consumers, FL should focus on using 3D Printing to develop prototypes. The technology doesn´t require manufacturers to order parts or tools to build new models and is in fact already in use by 64% of Swiss watchmakers [6].

Moreover, given the rising focus on transparency highlighted above, FL should be crystal clear about the origin of the components inside its watches, as well as the production / quality standards it follows. Only recently did the company disclose that its watches were manufactured in China [7].

In the medium-term, FL could also leverage Virtual /Augmented Reality technology so that consumers can see how a given watch will fit in their wrists using the camera on their smartphones (particularly relevant to see how different watch sizes match one’s wrist size).

Nonetheless, the question emerges: can a startup like FL scale by itself and continue to play digital disruption to its advantage in a world of “sharks” both in the watch and in the tech industry? Only time will tell…

(Word count: 799 words)

 

References

[1] Tomas Laurinavicius, “How Elon Musk Inspired Brothers Are Disrupting Watch Industry,” Forbes, May 3, 2017, https://www.forbes.com/sites/tomaslaurinavicius/2017/05/03/brothers-disrupting-watch-industry/#251b79b38140, accessed November 2017

[2] Filippo Loreti, “Our Story,” https://www.filippoloreti.com/shop/our-story, accessed November 2017

[3] Martin Joerss, Florian Neuhaus and Jurgen Schroder, “How customer demands are reshaping last-mile delivery,” McKinsey & Company, October, 2016, https://www.mckinsey.com/industries/travel-transport-and-logistics/our-insights/how-customer-demands-are-reshaping-last-mile-delivery, accessed November 2017

[4] Robin Swithinbank, “High-end watch brands finally embrace the digital market,” Financial Times, November 13, 2015, https://www.ft.com/content/7ffa86f6-6c2d-11e5-8171-ba1968cf791a, accessed November 2017

[5] Knut Alicke, Daniel Rexhausen, and Andreas Seyfert, “Supply Chain 4.0 in consumer goods,” McKinsey & Company, April, 2017, https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/supply-chain-4-0-in-consumer-goods, accessed November 2017

[6] “The Deloitte Swiss Watch Industry Study 2016”, Deloitte, https://www2.deloitte.com/content/dam/Deloitte/de/Documents/consumer-business/CB-The%20Deloitte%20Swiss%20Watch%20Industry%20Study%202016_English.pdf, accessed November 2017

[7] Filippo Loreti, “How China Became the Home of Watcmaking,” Watchmaker’s journal (blog), October 20, 2017           https://www.filippoloreti.com/shop/journal/article/watch-production-in-china, accessed on November 2017

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6 thoughts on “Looking for a high-end watch? How newcomer Filippo Loreti is playing digital disruption to its advantage

  1. Wow, Miguel! Awesome article! I have to be honest, I am in the market for a nice watch, but have always been turned off by the high price point. What if I don’t like the watch a couple of years down the road? Or what if I want to switch things up and buy another watch to accompany a different style? The extremely low price points (and the supply chain story behind them) is very intriguing and makes this company a very attractive option. I just went to the site and I am loving the Venice and Automatic series. I especially like how I can be “involved” in the watch-making process and watch my product being built!

    One issue that you mention in the article is trialability. After perusing the website, it looks like FL offers a refund/shipping policy, which reduces my anxiety of being stuck with watch that looked good on the site, but not great on my wrist. Unfortunately, they do charge a 15 euro shipping, handling, and restocking fee. I know it’s only 15 euros, but perhaps this could be a barrier for people to try the product? Additionally, if people do return merchandise, then it will surely increase their inventory costs which they are working hard to reduce. Where is the balance with all of this? If you reduce the 15 euro shipping/restocking fee, then more people will try and return, increasing your inventories. If you increase the shipping/restocking fee then it further builds the barrier preventing people from trying the product…..I think if FL can figure out a good balance, this company could catch on fire very quickly….

    Great article…and thanks for introducing me to my new watch!

    1. Miguel, to be honest I was extremely excited when I saw that you wrote about wrist watches, in particular the effects of the digital market on this highly traditional industry. I am a wrist watch aficionado and I spend a good amount of my free time reading about differences in movements, designs, horological complications, etc. What this company is doing isn´t unique, there are other major players taking a very similar approach and I´m curious to see who´ll be the most successful one down the road. As you mentioned, the manufacturers realized that a good portion of the final price is due to the high margins charged by dealers and distributors, who at the end set the final prices in levels that are not affordable for most people.

      There is a company called “Christopher Ward” (https://www.christopherward.com) that has lately received a lot of attention from watch fans and a significant amount of media coverage because they have been successfully designing and manufacturing their own time pieces for the past 15 years and their only sales platform is their website. They don´t use any distributor or dealer to sell their watches and they don´t spend money on marketing campaigns. The best part is that they were even capable of developing their own in-house mechanical movement, which is quite an achievement for a company competing on a market dominated by “sharks”, as you mentioned. There is a very small number of companies capable of fully manufacturing their own mechanical in-house movements, since it requires a lot of engineering and craftsmanship from the companies. For you to have a comparison basis, today most mechanical movements installed in several different brands (Junghans, Longines, Seiko, RW, etc) all come from the Swatch group (ETA movements) and if you want a true unique in-house manufactured piece you must pay the premium charged by brands like Omega, Rolex, AP, Glashütte, Patek, Nomos, etc…

      Christopher ward also tries to be very transparent in their pricing structure, charging always 3 times more than the cost to produce the watch (this is already a lot, imagine the margins charged by dealers and distributors!!!). Therefore, a good CW with an in-house movement costs around USD 1500,00. Don´t take me wrong, this isn´t cheap, but at least it is a lot more affordable than other companies are charging for their watches. It is amazing to see how effective digitalization was able to reduce and disrupt the industry so far.

      I love the idea of having a software/VR platform where you can see how the watch looks on your wrist. It´s usually hard to assess how the case and the bezel will fit. That would be an amazing tool to add into these online platforms.

      Thanks for sharing! I would love to discuss other interesting details about this industry in person.

      Thiago C.

  2. What a cool product- I’m struck by the contrast of this model with other e-commerce models that prioritize fast delivery. Due to the supply chain, the watches often take weeks to deliver, yet the manufacture has succeeded in making this part of the experience- something that actually differentiates it from other D2C watch companies. At the same time, this inventory-less model likely allows the startup to scale with little inventory and no danger of over ordering unpopular styles. Plus they look pretty cool.

  3. Great find, Miguel. A family member got me a Daniel Wellington watch a while back, which has a similar model. A few things I’d note relevant to your article:
    I wonder how much they are investing in speeding up delivery capabilities and whether this is really the best use of money. For a more expensive product, such as a $250 watch as shown in the image above, I’d be willing to wait a bit longer for the product. Additionally, I love the fact that they share the details of the watch’s production; not only does it provide transparency, it also makes me more connected to my new watch and the company.
    I also question in a world where it’s easy to setup a website on a ecommerce platform (Shopify, Wix, etc) and relatively easy to source product (Alibaba opens up manafacturing), how do direct-to-consumer brands not only get the attention of consumers, but also survive in the long-run? I would think that they have to invest more than the next player when it comes to building their brand while at the same time investing significant amounts in product innovation. But I wonder if that’s enough…

    Thanks for sharing!

  4. Great article, Miguel. As brands become more digital, I think transparency will become even more important. Consumers that buy this watch for the Italian inspired design could be put off when they discover that the product is manufactured in China. Also, I am looking forward to seeing how this company will use Virtual/Augmented reality technology in the future! If they are able to use this technology to give the consumer insight on how the watch will look on his/her wrist, then they can definitely lower the consumer’s reticence to purchase a luxury watch online. Thanks for sharing!

  5. Miguel, excellent article! Reading your article I got so excited that I actually went to Filippo Loreti website to check out if I can find a Christmas present for my father in law who actually lives in Lithuania!
    My major concern with Filippo Loreti’s business model is that at $200-300 prices these watches won’t be considered luxury high-end watches by many customers. I agree that many customers value transparency and fast delivery, but if Filippo Loreti wants to be viewed as luxury watches they need to build that luxury ambiance around the brand. One way of doing that is to have a high price model that customers can try in a physical shop. Otherwise, these are just one of those above average watches that you can buy on Amazon or Ebay.
    Also, Filippo Loreti needs to be careful who much data they share with customers. Some customers like dreaming that their luxury watches were produced by a group of talented Italian watch makers who spend months of time delivering this piece of art. When they find that a watch was produced in 5 days on a factory somewhere in SE Asia, this might be the end of a customer dream.

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