Patek Philippe: perfect timing?

Jitjaroen Channarong/Shutterstock

Brief history
This family-owned watch company (established in 1839) has survived the digital-watch
revolution that swept the globe. Patek Philippe is a manufacturer of very high-end, superior-
quality timepieces and has a following of dedicated collectors. The essence of the Patek
Philippe brand is reflected in its enduring slogan ‘you never actually own a Patek Philippe,
you merely look after it for the next generation’. Since its inception, Patek Philippe (‘Patek’)
pursued a vision of carving a niche through the offering of these very high-end watches.
Royalty, dignitaries, top CEOs of the world’s largest and most successful companies became
customers and followers. This was achieved through innovation and ingenuity, but also the
relentless pursuit of a branding strategy that put it at the top of this very competitive
market. Its clients, not only connoisseurs of fine timepieces, are also very successful in their
respective fields, and their reputable standing within society, their business acumen, and
their wealth would be reflected in their ownership of a Patek Philippe.
However, it has not been all plain sailing for the brand, as Patek was poised to
become a victim of its own success. One of its brands, the Nautilus Ref. 5711 watch, had
become too sought after. The Nautilus Ref. 5711 developed an almost mass-market appeal
over time that is contrary to the brand’s usual niche-market appeal.
The product portfolio
Patek predominantly manufactures its watches using precious metals (for example rose
gold) and this continues to be the case. Some of Patek’s higher-end watches within the
brand portfolio command high prices, such as the Ref. 5303, which retails for around
$797,000, while the Ref. 5370P-011 Split-Seconds Chronograph retails for around $281,690
and the recently launched Ref. 5270J-001 Perpetual Calendar Chronograph has a price tag
around $183,000, depending on the daily exchange rate. One of the more complicated
watch mechanisms can be found in the Grand Complications range, with the 5208R-001
selling for approximately $928,000.2 Based on the proprietary mechanical systems within its
range, Patek holds more than 100 registered patents. The Nautilus range, made of stainless
steel, was first introduced in 1976 as ‘one of the world’s costliest steel-made watches.’ The
company produces only a limited number within its current brand portfolio per annum –
around 58,000 units by most accounts, as the production total is not made public.

Competition
Many brands would like to be regarded as competition for Patek timepieces, purely as a
benchmarking exercise. Many of the experts, when pressed, would admit to the brand
having three main competitors: Vacheron Constantin, Audemars Piguet (‘AP’) and possibly
Rolex. According to PrestigeTime, the ‘big three’ watchmakers, in no particular order, are
Patek, Vacheron Constantin and AP. Rolex is conspicuous by its absence from this list; this is
probably a result of Rolex’s main differentiation being that it is essentially regarded as more
of a sporting watch brand. The essence of the Rolex brand is that of a watch that will
accompany you on any extreme adventure, whether to the highest point on Earth or the
deepest depths man can go to. However, it does have the distinction of being the most
recognized brand in the world.
There is one other major difference between Patek Philippe and some of its closest
rivals, which produce watches mainly as fashion accessories. Patek Philippe produces
timeless watches, essentially building on the ‘perfection and artistry’ of its timepieces,
through its watchmakers. As a result, many of its timepieces have become cult objects,
having built a dedicated and loyal market following, fetching ever-increasing prices when at
auction.

The Nautilus Ref. 5711

The Nautilus 5711 1A-010 (endearingly referred to as the Ref. 5711) was initially introduced
into the Nautilus range in 2006. In 2021, the Nautilus range had already been in existence
for approximately 44 years. It stood out as a stainless-steel watch (albeit extremely well
made) against the other precious-metal models from Patek. Against all odds, the Ref. 5711
became hugely popular. Second-hand models sold for up to three times the price of a new
unit, with a new Ref. 5711 costing around $30,000 just prior to its being discontinued.
Commentators are still not too sure exactly why this one model became so sought after.
In late 2018, the model arrived at a critical juncture within the company’s brand
portfolio. Demand had consistently outstripped available stock and production figures,
resulting in long waiting lists spanning several years. The company had already been at a
crossroads for a while and this added to the challenges the brand was facing. Surely this was
the kind of problem that every executive manager dreams about? Ironically, it is worth
noting that a previous Nautilus model, the Ref. 3700/1A, the original steel piece, was
discontinued in the 1980s when sales fell and it was seen as a remnant of a previous era.
 Focusing on one model only would have negative implications for the value of the
company and the entire brand portfolio in the long run. It was simply not feasible, according
to the president of Patek, Thierry Stern, to increase production to meet demand. With a
logistics and production model that runs two to three years in advance, it is a very unique
business model. In an interview in 2018, Stern said he was looking 10 years into the future
in terms of brand portfolio planning. But is it wise to discontinue a best-seller at the
apparent height of its popularity?
Regarding the huge demand for the Ref. 5711, he stated that he sets a limit on the
number of units produced annually, in pursuit of quality. Too much quantity and quality will
be lost: ‘And that’s absolutely not what I’m willing to do, and I believe that the clients are
not also willing to see that.’ A company such as Patek Philippe thinks in decades, not mere
fiscal years. In Stern’s words, ‘today we are meeting maybe 10 per cent of the demand, and
it is going to stay that way.’ Referring to the future: ‘for us, this is not a race to make more
money,’ he said, ‘it is a race for beauty, for the long term, and for greater choice within our
collections.’

Patek’s challenge: a counter-intuitive strategy?

The hammer blow fell for the Ref. 5711 when Stern decided to discontinue the model and it
was removed from the brand portfolio in the ‘run-out list’ for 2021. There was no fanfare –
it just disappeared off the stock lists. In fact, according to the company’s website, ‘2021 will
[would] be the last production year’. Even this act was page 187according to standard
practice, Stern noted – models are not ‘retired’ by public announcement and the Nautilus
did not receive special treatment in this regard. However, before the announcement was
made, ardent followers had already unearthed the impending change and made it known,
causing great concern among its loyal customers – especially those waiting patiently for the
opportunity to buy their Ref. 5711.
‘We are doing this for our clients who already own a Patek Philippe and to protect
our brand from becoming too commercial,’ Stern told the New York Times when
questioned. The watch had become a symbol of wealth. People were buying it to flash it
around. Others were buying the Ref. 5711 purely for resale purposes. And when demand for
the Ref. 5711 outstripped supply, rather than move to other brands, potential customers
insisted on being added to dealers’ already exaggerated waiting lists. In some cases this
amounted to an eight-year wait; for many now an indefinite wait.
Ask the question again – surely when your brands’ sales cannot meet demand, this
presents a ‘problem’ that many watch manufacturers would love to have, right? Arguably,
demand for Patek watches outstripping supply for some years now is one of the main
contributors to the brand’s desirability. Furthermore, it takes Patek 15 years to train a
watchmaker to its exacting standards. Generally, in this high-end niche market, one does
not oversupply. But the Ref. 5711 went further than that. It became the watch to have – and
so people were buying the brand for the sole purpose of reselling it at a huge profit, and the
company was making good profits in the process as well.
According to Stern, what was happening was that the entire brand portfolio was
being overshadowed by one model. He famously told the New York Times that Patek could
not put one watch ‘at the top of our pyramid’. That would detract attention from the other
products within its portfolio – some much better than the Ref. 5711, more intricate and
more expensive. In Stern’s words, ‘we have many other models that are more sophisticated
and arguably more beautiful’.
 It is true that rarity breeds desire. The Ref. 5711 was already scarce. What, then, if it
has what is called a ‘Tiffany dial’? Tiffany & Co. has been a Patek retailer since 1851, and
Patek allowed certain retailers to stamp their name on the dial of some of its models.
Nowadays, only Tiffany has such an agreement, and it will not say how many Ref. 5711 dials
it stamped or sold. So the scarce has become even scarcer. These stamped watches are now
regarded as among the rarest in production. A stamped Ref. 5711 that was sold in July 2018
at Tiffany & Co. was sold again at auction in Geneva four months later for $124,362 – an
immediate and huge pay-out for the seller, creating a world record for a Ref. 5711,
considering that the official retail price at the time was $29,803. This is still a far cry from
the sale of the Patek Philippe 1518 model, which sold for $11.1 million in 2016, still the
highest price paid for a vintage Patek Philippe wristwatch at the time.
This ‘profiteering’ off the sale of Patek models does not align with the vision of Patek
Philippe, although it undeniably adds to the appeal. While the news broke early in 2021 that
the hammer has definitely fallen on production, the company had introduced four new
Nautilus models, including a successor for the navy-blue 5711. The new model, which would
be made in 2021 only, has a green face. What the future holds beyond 2021 for the Patek
brand is not known, except that Stern has relented a little on the discontinuance of the Ref.
5711. He said that there would be a victory lap, and it would not just be those units in the
production pipeline. It would be a surprise final run, but production of the Ref. 5711/1A
would definitely conclude in 2021. Stern’s warning remained clear though: ‘it won’t be
enough for everyone who is waiting for one’.
viewimage/Shutterstock

Stern has two focus points for Patek. The first is to maintain its course as a leader page
188in this industry. New models are constantly seeing the light, sometimes bringing new
technology to the market. The second is protecting the value of a Patek Philippe timepiece
for the customer. This was summed up when Stern and his father, Philippe, spoke to the
Financial Times in 2021: ‘it’s not only the dial; it’s also the movement … otherwise value will
be down, and that’s not good’.18 Continuing and persevering with this business philosophy
seems to be working well for Patek Philippe.

Questions
1. Consider at which stage of the product life cycle the Nautilus Ref. 5711 finds itself
and evaluate the associated impact on the marketing mix.
2. Analyse the value and the associated benefits that the Nautilus Ref. 5711
contributed to the Patek Philippe brand portfolio.
3. Comment on whether or not the decision to discontinue the Ref. 5711 was a wise
one.
This case was written by Dr Theo Marais, Lecturer at IMM Graduate School and Terence Hermanus, Senior
Lecturer at Cape Peninsula University of Technology from published sources as a basis for class discussion
rather than to show effective or ineffective management.