The Basel 2000 Internet Forum

By: Michael Disher

On March 27, 2000, The Basel Fair presented a panel discussion dubbed “How will the internet challenge the traditional promotion and sales channels of watches and jewelry within the luxury market?” Nearly 400 people attended. Joe Thompson, Editor in Chief of American Time magazine, served as moderator.

The panelists represented several areas of expertise, including law, advertising, business consulting, market research, on-line retailing, and brick and mortar retailing. The presentation consisted of two keynote speakers, followed by six shorter presentations, then a question and answer session between the audience and the panelists.

The Basel Forum panel. Left to right: Philippe Azzola, Felix Thomann, David Gow, Gerard Nijenbrinks, Jerry Fielder, Guido Streit, Joe Thompson, Jean-Louis Mouillet, and Pascal Schermesser.

Above, part of the Basel Forum audience.

Moderator Joe Thompson, Editor in Chief of American Time Magazine.

The first keynote speaker was Guido Streit, head of e-business for PricewaterhouseCoopers in Switzerland. He focused on the advantages of e-commerce and the reasons for transforming old-economy businesses into an e-commerce businesses. Mr. Streit presented a 4 step chronological model for this transformation. In Step 1, the internet enhances the company’s “customer interface”, bizspeak for improving customer communications and service. In Step 2, the internet “streamlines the value chain”, for example allowing companies to adopt mass customization rather than simple mass production. In Step 3, the internet transforms industries by deconstructing the traditional value chain, the best example being, which renders traditional book retailers obsolete. Step 4 is convergence, where previously unrelated industries join together, like Electrolux and Toshiba, who have joined forces to build smart refrigerators that monitor their own contents and order groceries automatically via the internet. Mr. Streit noted that of the most businesses are still in Steps 1 or 2.

Mr. Streit concluded by stressing the many benefits of e-commerce, including reduced costs, increased efficiency in the supply chain, customer retention through improved communication and service, added services made possible by the internet, and improved image through well conceived and executed websites.

The second keynote speaker was the animated and entertaining Jerry Fielder, Chairman and Group Media Director for Legas Delaney, an international advertising agency based in London. Mr. Fielder’s company designed the Patek Philippe website, among others. Mr. Fielder spoke passionately about the internet as the vehicle for a “consumer-lead revolution”, in which consumers, not manufacturers, control the market. Luxury manufacturers want complete control over how and where their products are experienced – in posh stores with attractive sales people, or inside fine magazines with wealthy subscribers. The internet, on the other hand, is open to anyone with computer access, and it allows consumers to control when and where they experience products.

Given this internet reality, Mr. Fielder stressed that manufacturers must do their best to ensure that when consumers experience luxury products on the internet, the experience is consistent with the consumers’ non-internet product interactions. Mr. Fielder cited the Gray & Sons watch website as an example of how not to present products – isolated images that do not match up with consumer expectations based on manufacturers’ marketing efforts. Then, claiming he was not aware an executive was on the Panel, Mr. Fielder cited Ashford’s site as an example of how a luxury goods website should look, with images and information that compliment manufacturers’ marketing efforts.

Mr. Fielder then presented a series of lessons manufacturers need to learn about the internet. These included:

  • The consumer’s internet experience should compliment their other experiences with the product;
  • The internet does reach high net worth people;
  • The internet makes “place” less important (e.g. stores in posh locations), and increases the importance of the manufacturer’s identity/image;
  • The net empowers consumers by giving them more information;
  • People do buy luxury goods on the internet;
  • The internet consumer/market is important to luxury goods manufacturers;
  • Things happen very quickly on-line, and manufacturers must be able to respond;
  • Customer service is key in e-commerce; and
  • Selling on-line is a two-way information flow. Mr. Fielder noted that the average Blue Nile customer makes six telephone calls to Blue Nile before making a purchase. Blue Nile is an on-line diamond retailer.

On the whole, Mr. Fiedler was strongly enthusiastic about the possibilities for luxury goods manufacturers selling on the internet.

The next speaker, Lisa Allen, appeared via video. Ms. Allen is a Senior Analyst, New Media Research, with Forrester Research Inc. in Cambridge, Massachusetts. Ms. Allen presented a host of facts and statistics to dispel the several myths about on-line selling to the affluent. She cited these examples:

  • Myth: the affluent are not on-line. Not true – studies show the affluent are among the leading users of the internet.
  • Myth: the affluent do not shop on line. Not true – in a recent survey, 87% of those in the “affluent” category reported making an on-line purchase in the past 90 days. This percentage was higher than any other income group.
  • Myth: the affluent are different than the average person. Not true – surveys show the affluent use the internet like everyone else, to do research and gather information on products before buying.
  • Myth: putting a luxury product on the net sullies the brand. Not true. Consumers expect to find brands on the net that they see in magazines and other media. Manufacturers can take steps to control how their images and products are presented on-line. Technology like digital wrapping is making it easier to prevent copying of images by unauthorized sources.

Ms. Allen established that affluent people shop on line as much or more than people of lesser means, and luxury goods manufacturers cannot ignore this growing market.

The next speaker was David Gow, Chief Financial Officer of Mr. Gow began by describing the typical Ashford customer as being on average affluent, with a majority earning over $100,000 per year. They work hard and appreciate the convenience of shopping at home, on their own schedule. They come back to Ashford, with 22% of Ashford’s sales during the past quarter being to repeat customers.

Mr. Gow then explained how Ashford works with manufacturers to create on-line catalogs with a strong brand message. Ashford uses professional photographers, or images supplied by the manufacturers, and the manufacturers are involved in every step of creating the on-line environment in which their products will be shown. Ashford’s site provides important information for consumers, and Ashford honors manufacturer’s pricing and geographic shipping restrictions.

Mr. Gow’s presentation was aimed directly at manufacturers. He focused on allaying their fears about selling on-line, and he demonstrated how they can work with Ashford to achieve their on-line sales goals. CFO David Gow.

The next speaker was Gerard Nijenbrinks, a brick and mortar retailer in The Hague who is authorized for several luxury brands, and who has a website. Mr. Nijenbrinks noted that his website generates 50% of his business. As a retailer, he sees the net as a friend, not a threat. He feels his website expands his shop window around the world. He noted that he does not actually sell on line, but rather uses his website like a catalog to provide the consumer with product information. To buy, customers must actually contact the store. Mr. Nijenbrinks also pointed out that the Netherlands is a small country, and it isn’t hard for most people to visit his store in person.

Watch retailer Gerard Nijenbrinks.

Addressing the legal issues related to protecting existing distribution channels was Philippe Azzola, a Swiss lawyer based in Geneva, specializing in commercial and intellectual property law. Mr. Azzola opened by noting that the very nature of luxury goods is that they are available only in certain places, and only at certain prices. He observed that luxury manufacturers spend large sums on distribution and shops to create the right environment for customers to see their products. Manufacturers view the internet as the means by which they will lose control over the product environment.

Mr. Azzola then acknowledged that e-commerce is a reality, and manufacturers have only two alternatives. One is to fight, for example by contractually prohibiting agents from selling on-line. Mr. Azzola cited Vendome as an example of a company currently using contract clauses to keep their products off line. Option 2 is cooperation. Here, Mr. Azola favors the strategy of trademark holders creating and operating their own web sites.

Mr. Azzola cited two ways in which the manufacturers might sell on-line without disrupting current distribution channels. One is to create official websites that takes orders, then forward the orders to the official retailer nearest the customer and have that retailer ship the product and receive credit for the sale. The second approach is for manufacturers to create special product lines sold only on-line, while reserving the bulk of their line for brick and mortar stores exclusively.

Mr. Azzola concluded by saying he believes that in the future, “e-commerce will be the commerce.”

The next speaker was also a lawyer – Felix Thomann, an intellectual property specialist and former President of the Basel Bar Association. Mr. Thomann open his remarks by noting that a major Swiss newspaper recently reported that the entire luxury watch industry appears to be asleep when it comes to e-commerce. As an example of this, he noted that the head of a major Swiss watch company said in an interview that his company prides itself on modern management, but they were only just beginning to explore the internet.

Mr. Thomann sees the big e-commerce issues as the spread of counterfeiting, sales by retailers outside their assigned geographic territories, and the erosion of antitrust protections some distributors enjoy. Mr. Thomann feels that a radical overhaul of current distribution systems is likely, and he closed by telling the manufacturers “you can’t beat e-commerce, so you might as well master it.”

The most provocative presentation was made by Pascal Schermesser, Director of the Viginet project for DRP, a provider of internet price surveys pertaining to luxury goods. Mr. Schermesser addressed what happens to prices when luxury goods become available on-line.

Mr. Schermesser presented a chart showing the wide variation in suggested retail prices on luxury watches around the world. The USA and Switzerland were near the center or median prices, while other countries ranged from approximately 35% less to 35% more than Swiss and U.S. prices. Mr. Schermesser next showed web pages captured from internet sites selling luxury watches at discounted prices. One page showed offering a steel Patek Philippe Nautilus with a suggested price of $19,995 at a 50% discount of $9995. There was an audible gasp from the audience when this image went up. Several other deeply discounted luxury brand watches offered by other internet sellers were also shown. Mr. Schermesser then presented a chart summarizing the average discounts available on the internet for about 15 luxury watch brands. According to Mr. Schermesser’s chart, Blancpain is the most heavily discounted brand worldwide, selling at and average of 50% of suggested retail. Most brands were selling on line at 32 – 38% off suggested retail.

Mr. Schermesser stated that the rise of internet sales of luxury watch brands has created three inescapable facts the luxury watch manufacturers must face:

  • People think luxury goods will always be available at a discount;
  • No one knows the “real price” of these goods; and
  • The internet effectively allows everyone on the planet buy goods in the country where prices are the lowest.

He urged manufacturers to take these steps to address these problems:

  • Make their prices the same worldwide; and
  • Make their products available on the internet through official websites.

Mr. Schermesser then told the manufacturers they are responsible for the grey market, and it is up to them to either live with the situation they have created, or more closely control their distribution channels.

All in all, this was a most interesting and informative presentation.

The fireworks were not over however, as the floor was opened for questions from the audience. Many of the questions were directed to Mr. Gow of Ashford, by audience members who appeared skeptical about e-commerce. In response to some of the questions, Mr. Gow established that Ashford is 83% authorized for watches on a unit sales basis, 80% authorized on a brand basis, and 90% authorized site wide. In many product categories, Ashford is 100% authorized. Mr. Gow also noted that the Patek Nautilus example cited by Pascal Schermesser was not representative of Ashford’s current pricing. Finally, Mr. Gow stated that Ashford had no present plans to sell products under the Ashford name.

When questioned about the legal steps manufacturers can take to stop unauthorized sales, the lawyers agreed there is little if anything that can be done, unless the unauthorized seller is also using the manufacturer’s trademarks, which can be stopped through legal action. But merely advertising “I sell Patek Philippe” is not a violation of any laws, even for an unauthorized seller. The lawyers also discussed the fact that in most of the world today, “price fixing” laws prevent manufacturers from dictating retail prices. The lawyers noted that worldwide, so-called “parallel selling” is not illegal.

Responding to the lawyers’ comments, a gentleman from Patek Philippe, reportedly a high company officer, stated that Patek had won two lawsuits against websites selling their watches, though he did not identify the sites or provide specifics. He then presented Patek’s position that customers need to see and touch the product before they buy, and that Patek will not sell on the internet. When another audience member questioned the validity of that claim and pointed out that Pateks sell on the internet every day, the Patek official responded, “Yes, and some men find their wives on the internet too.” That remark created some nervous laughter, as the tension in the room rose just a bit. Fortunately, the Forum adjourned for lunch at that point, and I am pleased to report that there were no instances of fisticuffs following the show.

Overall, the Forum was a great success. The audience gained a better understanding of e-commerce and the issues luxury manufacturers face in the age of the internet. The panelists delivered the message that e-commerce is here to stay, and the industry must adapt to the new paradigm. Only time will tell if the industry accepts the panel’s advice.