Random thinks in no particular order...
When oil prices go up, people switch to natural gas, which makes the price of gas go up. I've been reading and hearing similar things about people switching from sea freight (which I don't use) to air freight (which I do).
Air freight is and always has been more expensive, but obviously a lot faster and easier to arrange for a small business like mine. For smaller shipments like mine, the cost isn't (or at least, it wasn't) so high that it made sense to consider switching to sea freight.
But now, a lot of companies are switching to air freight, despite the insanely higher costs recently, simply because they absolutely must have their goods received in a timely way, more timely than they can rely upon sea shipping companies to deliver.
That's part of the reason air freight costs have been rising so dramatically - the switch from sea freight. But I think I also read or heard about fewer flights, because fewer crew, or whatever.
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That article, and most like it, tend to focus on the logistics involved in getting finished goods from one point to another. But more troubling is a similar article I read not long ago, which pointed out that the log-jam in international shipping is creating lots of delays in getting raw materials.
You can't get plumbing fixtures from your factory in China if the factory can't get the raw materials they need from wherever.
The article predicted we'd see MASSIVE product shortages and price inflation, by the end of this year, just when the holiday shopping season kicks into high gear.
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Over three years ago now, I predicted a sea-change (no pun intended) in the watch industry would take place in 2020, bringing about higher costs, and higher prices. It had nothing to do with Covid.
I had to look up the meaning of "event horizon". Apparently it specifically refers to the theoretical boundary around a black hole, which acts as a barrier to light, but generally has come to mean any "point of no return". Personally, I don't like that definition. "Horizon" typically refers...
www.watchuseek.com
My reasoning was pretty simple - I foresaw Swatch Group cutting off supply of ETA movements to third parties in 2020, when the WEKA/COMCO agreement expired, and possibly worse, cutting off the likes of Selitta from access to ebauches and nivarox hair springs. I figured that would cause a big shift towards Japanese or Chinese movements, and we'd see their prices and lead-times rise, the same way they did in 2015.
The Japanese have an aging and shrinking workforce, so they can't just "make more". It's not that easy for them to increase production capacity when there's an increase in demand. I figured supply would remain pretty level, and might even shrink, but it definitely wouldn't increase dramatically.
Meanwhile, during my trip to China, earlier that year (2018), my vendor explained the rising wages and cost of living in the industrialized parts of China would inevitably lead to higher production costs for businesses like mine.
I wasn't really thinking about what Chinese movements would cost, just thinking about all the other parts and assembly. But logically, if whatever Swatch is doing leads to people seeking out alternative movements (like the Chinese-made ETA clones now becoming more commonplace), and the cost of Chinese labor is going up, we shouldn't be surprised if Chinese movements aren't as cheap as they were four or five years ago.
I figured 2020 would be the year the fit hit the shan, and everyone - brands and consumers alike - would simply have to adapt to higher watch prices. I was just waiting to see all brands gradually acknowledging reality, by raising their prices, starting sometime in 2020.
That didn't really happen. Not exactly.
I'm sure ETA movements are harder to come by, and they're more expensive, as are Selittas and Miyotas and Seikos. I think we probably are dealing with higher labor costs, at least somewhat.
I know we're definitely seeing longer lead times, though I'm not exactly sure why that is. Perhaps it's logistics - factories need more time to get raw materials due to longer shipping times, and / or they have smaller workforces due to Covid, maybe.
Case in point - I'm looking at an email exchange between Rusty and our vendor, about the new Atticus models (Daedalus and Pharos). The major parts that take longer to produce (cases and bracelets) are already made. Two years ago, getting new dials made, and watches assembled, when you already have the cases and bracelets on the shelf, might take 60 days. Now, they're saying 75-80, and to expect delays on top of that. So, basically, we're talking 90 days, or 50% longer than it used to take.
But the "silver lining" (if you can call it that) with Covid seems to be the fall-off in demand from a weaker economy. It's hard to raise prices when sales are slower, due to weaker demand. If your financial situation hasn't been hurt by Covid, it's been a great time to buy watches.
I'm not gonna lie - I see it, I feel it, and I think a lot about it. My costs have gone up, and I haven't raised prices much, if at all, for the simple facts that A) I'm not seeing a lot of my competitors raising prices yet, and B) I haven't felt like I
have to raise prices because we can't keep up with demand.
For the moment, it seems like our prices are "correct", at least judging by inventory levels and turnover. They're definitely not "too low", using those metrics. But the truth is I'm working harder now, a lot harder, than I was two years ago, but I have less to show for my efforts. I'm back to being under-paid for what I do, and it sucks.
I don't think I'm alone. I think most small businesses are in the same boat. I've been paying attention to the signs - literal and figurative. I see a lot more empty commercial spaces, and even when a business is there, they seem to be short-staffed, or reducing the hours they're open, and incrementally raising prices, but from what I hear, not really enough.
There's a sandwich chain that recently started here, "Nick Filet". I met the CFO and co-founder when he was filling in behind the counter one day, a few months back. He was telling me that they couldn't get any lobster to make lobster rolls, at any price, the week before, and his steak prices recently went up 40%. I looked at the menu, and noticed sandwich prices only went up 20% from my previous visit.
40% wholesale cost increase. 20% retail price increase. That's all he thought they could do, without it hurting sales.
I felt his pain. I recently re-ordered UV torches. My total costs went up 70% from two years ago. I only raised prices on them 40%, from $5 to $7. I'm just eating the other 30%.
It's in everything - the little plastic cards and those silicone "smart wallets" we include with every watch cost me more now, to buy and ship, than they did 2 years ago. They're a tiny component in my total cost of the product, but it all adds up.
My shipping costs on the latest shipment of leather travel cases were 4x what I paid two years ago. The boxes themselves only went up by about 20% in that time, but together, I'm looking at a major cost increase. That last shipment of boxes basically cost me double what they cost me when I started my business, just 8 years ago.
But I worry most customers simply wouldn't understand, if those cost increases found their way into my prices. The market is still partying like it's 2019.
It's not sustainable. No business can maintain for very long when materials costs go up 40%-70%, and shipping costs go up 300%-500%, but they don't raise prices, because they feel like they can't.
Welcome to the "new normal", maybe. I wouldn't get too used to it. My gut tells me there's at least one more shoe yet to drop. I can slow down on production, and wait for the market to catch up, but even doing that, it means I'll be replacing what we didn't make today with something that costs even more to produce next year, and which will need to sell at an even higher price.