If you just look at KDDL Ltd, it would appear to be a boring watch component manufacturing company. But things get interesting when you start looking deeper in the company. While KDDL was started by Mr Yashovardhan Saboo, the initiative for Ethos Ltd, a subsidiary (77% stake) of the company is taken by his son 'Pranav Saboo' , who is the CEO of Ethos Ltd. Company has been raising money from the public market to help assist the fast growth of its subsidiary. Ethos limited is the largest retailer of luxury watches in India.
Now coming to the parent company, KDDL Ltd, is engaged in the manufacturing of watch components and precision engineering products. KDDL has been manufacturing watch dial and watch hands over 30+ years and supply to domestic and international luxury watch brands.
Given KDDL's long standing relationship with these luxury watch brands, they thought of taking it to the next step. They opened first luxury retail watch store in Jan 2003 at Chandigarh. In 2008, the retail biz of KDDL was hived off to a new entity by the name of ' Kamla Retail Ltd; and was renamed as 'Ethos Ltd' in 2012.
In this blog, I will talk about the subsidiary company of KDDL - Ethos Ltd. Ethos Ltd now drives more than 75% of the consolidated revenue of KDDL.
Watch Industry
Watch industry comprises of both organized as well as small scale unorganized sector. Organized sector caters to 40% of the demand.
Market size =13500cr in FY20. Expected to grow at an healthy CAGR of 10.6%
What might be driving this growth of watch spend?
Given that Watch is an discretionary spend. Increase in disposable income helps in the growing spending in discretionary income
Opening of more organized channel of purchase
Increase in penetration of smartwatches in mid and premium segment
In India luxury watch market accounted for 24% of overall watch market whereas globally average stands to be 59%.
Below is a table explaining how the luxury watch market is categorized:
Ethos Ltd
Ethos Ltd is focused on retailing of Luxury watches primarily through its physical stores in India. Company opened its 1st retail stores in January 2003 in Chandigarh. And as of 31st Dec 2021, company has 50 physical stores in 17 cities.
Ethos is now the largest luxury and premium watch retailer in India having a 20% market share in luxury watch segment and 13% in Premium & Luxury watch retailer. Ethos Ltd offers a wide range of luxury watches at various price points across mid-levels and premium styles.
Company also offers aftercare service including repairs, restoration, movement overhauling, ultrasonic cleaning, etc. Ethos also has first mover advantage in the second hand luxury watch market i.e. Certified Pre wned luxury watch market. I have explained in details in the section below.
Brands offered by Ethos: Omega, Rado, Rolex, Tag Heur, Longines, Tissot, Seiko, Raymond Weil, Frederick Constant, etc
Exclusive retailing partnerships with ETHOS: Carl F Buchnerer, Raymond Weil, Oris, Corum, Permigiani, Moser, Titoni, Louis Erard etc
It might seem that anyone can open such outlets but it is not that easy because of the fact that relationship with Luxury brands owners takes several years to develop and are difficult to replicate. Ethos has benefitted immensely from their promoters' long standing with luxury watch brands developed over the years.
Also, Brand owners control distribution through strict, selective distribution arrangement which varies from store to store. Brands place a wide range of requirement on how their products are to be displayed, sold, etc that requires lot of experience and knowledge about luxury watch market. Luxury watch brand owners closely monitor product presentation and customer experience. They also Seek to avoid excess stock in the market.
Now coming to the next most important part of the business i.e. Distribution.
In terms of distribution, company sells its product through physical outlets as well as online channel.
Ethos Ltd runs stores in several different format:
Ethos Summit: Offers Bridge to Luxury, Luxury and High luxury brands.
Ethos: Luxury + premium + fashion
Exclusive outlets for brands such as Rolex
Ethos not only runs its multi-brand outlets but also opens exclusive brand outlets for some of the brands such as Rolex.
Company has its own digital platform Ethoswatches.com . It is meant to provide information as well sales of Premium, Bridge to luxury and fashion category. Ethos has an average 17mn page visits per year, highest globally among watch retailers.
Co also offers 'Bridge to Luxury' & 'Luxury' watches through third party e-commerce platform.
Co also sells through Luxury marketplaces in India: Ajio Luxe, TaTa Cliq Luxury. On company's website visitors are assigned highly trained watch consultants who help them to chose from wide array of available choices.
It is heartening to see that the company derives 37% of sales through online sales which is increasingly being the preferred medium of shopping.
In luxury watch business, customer relationship is an essential component of success. Lot of customers prefer face to face interaction and have established relationship with their sales team.
Just to add, Business is import driven where the watches are imported from abroad, mainly Switzerland. All of company's product are transported via air transport from abroad to India.
Key Stats- Ethos Ltd
As you can see in the image above, repeat sales constitute a large part of the company's sales, implying customer loyalty to Ethos. Also, the Average selling price of watches has almost doubled from 74,000 in FY19 to ₹135,300 in 6MFY22.
To enhance company' presence in mid priced segment & European brands company acquired 'Estima AG' a swiss company.
Club Echo:
It is the loyalty program of Ethos with registered members. Annually 35% of business comes from repeat buyer registered with the loyalty program.
There are 2,76,000 club echo members.
Retail location:
Luxury watch EBOs & MBOs are mostly located in Premium and Luxury malls and high streets.
Of the 50 Ethos stores:
Ethos Summit(Flagship ad large stores) :- 14 stores
Ethos Watch Boutiques:- 17 stores offering bridge to luxury/premium products
Mono brand boutique: 9 stores offering a single luxury watch brand
1 airport store
1 CPO store
Company has its own digital platform Ethoswatches.com .
Delhi continues to be the location generating the highest sales.
Growth opportunity:
For any category specialist, growth can be achieved through category extension. Company can offer other luxury items in addition to luxury watches such as eyewear, Jewellery, Luggage, Cosmetics, Writing instruments etc
An example of that would be Ethos's recent entry into the Jewellary segment by signing a contract with Messika group, a French jewellery company, to be the exclusive partner and reseller for Messika Jewellery in India. Another one would be of franchise contract with German Luxury luggage brand 'Rinowa'(Part of LMVH) for opening its first store in Mumbai.
Certified Pre Owned (CPO) Luxury watch market:
Adoption of second hand luxury watch market is emerging as the key reason for the growth and acceptance of luxury watches. Globally the second hand market (CPO) is 33% of the overall Premium and Luxury watch market compared to 0.2% in India.
CPO luxury watch market in India is just 40-50cr of which 80% is unorganized. Only about 8-10cr of the market is organized.
Key players globally for CPO market:
Watchbox
Watchfinder
Chronext
There lies a great opportunity for ETHOS to drive the CPO market in India with its Pan India presence. And CPO market also act as the enabler for the overall growth of the luxury market by :
Provide an entry point for the aspirational consumer segment
Enables discovery of fair prices
Develop the market of collectibles
Ethos has been retailing certified pre-owned luxury watches since FY19. Also offers 2 year warranty of CPO luxury watches. It helps the company to provide liquidity to watch owners who want to trade in for a new watch.
CPO offers higher profitability.
Marketing:
While its luxury stores act as a means of advertisement. Other forms of advertisement are events, digital ads etc
Events by brands carry both ethos brand name and relevant product brand name.
'The Watch Guide', in house magazine offers curated relevant content for watch enthusiasts.
They also have in-house team of photographers and editors.
KDDL Ltd/ Ethos Ltd - Financial Analysis
The fast growth seen in KDDL's recent quarters is driven by Ethos's sales growth. I was expecting healthy margins but it has been quite average.
As seen in the image below, there are healthy margins shared with the retailers by these luxury watch brands. But still the company has an EBIT margin of just 10%. This would be likely due to the high operating cost such as very high rental costs, high salaries required for highly skilled store employees etc
Only once the sales per store increases, the margins could be improved.
Now with things normalizing, company have been trying to improve the financial matrices. They have been able to improve our stock carrying months from 7.9 months in September 2020 to 7.3 months(it is the max they can achieve according to the management) in September 21 on the back of careful planning of inventory and purchase decisions
Also, many malls which gave about 70-80% rebate on mall rentals last year have started to charge full rents now, that also impact the margins.
If you look at the revenue of the company is the last few years, it has been stagnant. As the watch spend is discretionary in nature, it depends a lot on the economic condition in the country which has been sluggish since 2018 followed by COVID induced lockdowns.
Competitive Landscape
Competitive strength:
Access to a large base of luxury customers
Luxury retail spaces in the country are limited, in particular to those being allotted to watch retailers. Most of these locations in luxury malls has been secured by Ethos making it difficult for their competitors to find suitable location to retail watches.
Company makes efforts to follow and monitor the development of luxury malls in India and contracts majority of the space allocated for watches before any competitor may initiate the process.
Relationship with Luxury brands owners takes several years to develop and are difficult to replicate. Ethos has benefitted immensely from their promoters' long standing with luxury watch brands developed over the years.
Owners of luxury brands usually do not permit online distribution of their products unless the authorized distributor also distributing its through their physical stores.
Brands command significant pricing power which has enabled Ethos to raise prices of their product almost every year. Average selling price has doubled in last 4 years.
Company has a good understanding of the luxury customers and related environment in India. Company can use this to foray into the other luxury products such as Jewellery, Eye ware, luggage, writing instruments etc
Company keep on evaluating gaps in their portfolio and keep adding brands
Being the largest retailer of luxury watches, other brands are likely to come to them first for retailing.
Key Challenges
India imposes very high import duties on imported products. For watches, the import duty stands at 40.8%. Due to which India is losing out market to other Asian countries.
Sourcing condition for manufacturing imported watches in India is onerous.
A major challenge faced by the online marketplaces is the prevalence of counterfeit watches in Indian luxury watch market. That dampens the trust factor while shopping online which is now being mitigated by these luxury e-commerce platform which shares details of imports, importers etc
Given that watch is a discretionary spend, slowdown in the economy directly impacts the industry. One of the key negative factor relevant to the luxury watch market in India.
Sales of these products depend a lot on the per capita income of any country. Per capita income for India stands at $2100 as 2021 (168th out of 216 countries, behind Bangladesh, Nigeria, Kenya). Only if the per capita income cross $2500, the luxury market will pick up significantly.
Whether to go for pure retail play, which is Ethos Ltd or KDDL ltd, which is a mix of traditional watch component with higher margin but negligible growth plus the high growth Ethos' retail business, I personally would go for the pure play retail business. Margins for the retail business will catch up as the business picks up scale.
As of now the growth comes from opening of new stores, adding of new brands, products etc but the inflection point would come when the same store sales start showing good growth, which is likely to come post the economy starts showing good growth.
If you want to read more on this sector, you can read:
Prospectus of 'Watches of Switzerland' - Retailer of luxury watches in UK - Link
Ethos Ltd- DRHP- Link