Eligin National Watch Company- Case Study

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ELGIN NATIONAL WATCH COMPANY The 93rd annual report of the Elgin National Watch Company for the financial year ending March 1, 1958 showed an operating loss for the year of $2,442,000. Sales had dropped from $42 million in the previous year to $31million. Net operating profit for the previous year had been $671,000. These results were naturally disturbing to the management. It was not difficult, however, to identify the major causes of the difficulty. Discount houses had been cutting long establ
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  ELGIN NATIONAL WATCH COMPANY The 93 rd annual report of the Elgin National Watch Company for the financial yearending March 1, 1958 showed an operating loss for the year of $2,442,000. Saleshad dropped from $42 million in the previous year to $31million. Net operatingprofit for the previous year had been $671,000. These results were naturallydisturbing to the management. It was not difficult, however, to identify the majorcauses of the difficulty. Discount houses had been cutting long established retailprices and had disrupted conventional distribution channels. At the same time low-priced imported watches had been cutting into sales of the more expensivewatches, further upsetting the market. Therefore, the Elgin management began anevaluation of its product and distribution policies.Elgin had been one of the best known American watch manufacturers ever since itwas founded in 1864. For years, it had enjoyed the prestige of making the finestwatches in America. A long established tradition of fine watch craftsmanship was amatter of pride for all personnel in the company. The Elgin reputation was stillstrong in 1957. In that year the company surveyed the market. Among questionsasked was, “What is your brand preference for the watch you purchase?”. The fiveleading brands thrown-up by the study, along with their market shares were asfollows: Elgin 30.9%, Bulova 29.4%, Hamilton 21.9%, Longines 14.9%, and Timex2.9%.Elgin had diversified in recent years into electronics, micronics (production ofhighly precise and miniature devices for guided missiles and aircraft), and a qualityline of abrasive products for the metal working field. The watch division, however,still accounted for considerably more than half the company's sales volume. In1958, the newer divisions were not yet operating profitably, but, for the most part,the operating loss in the preceding financial year was attributable to the watchdivision.In addition to the operating loss sustained in 1958, special write-offs of $4.5 millionwere made against earned surplus. Most of these special charges applied to thewatch division. They included a write-down of fixed assets which resulted fromplant relocations and consolidations and a more realistic valuation of the finishedproduct inventory which included many models of watches which were not sellingwell.Elgin's unfavourable results were accounted for partially by the recession of 1957-58, but the general unrest and confusion which had existed in the watch market fora number of years was a major factor. Following World War II, imports of Swisswatch movements had increased at the expense of the domestic movements.Bulova watch Company produced its own cases but Swiss movements were used inabout 50% of its finished watches. Gruen & Longines used Swiss movementsexclusively in their cases. Many “off-brand” Swiss watches were sold in the lowerprice field. On February 28, 1958 the Office of Defence Mobilisation ruled that theAmerican watch industry was not essential to national defence. This decisionprecluded the possibility that higher tariffs might be imposed to restrict imports inthe foreseeable future.Price cutting was another disruptive influence that was closely related to the influxof low cost watches. After World War II, discount houses became important factorsin retailing. The wide established margins on watches, typically 50% of sellingprice, and the well-known brand names made them popular promotion items for   - 2 -the discounters. The emphasis which these discounters put on price in theirpromotion of watches encouraged aggressive selling by manufacturers of low-priced watches. Some manufacturers began advertising fictitiously high prices sothat retailers could offer consumers what appeared to be larger discounts.Indicated retail prices as high as three times the retailers cost were common.These practices were at their peak in 1957. In addition to its financial loss thatyear, Elgin suffered a major loss in its share of the market. Elgin estimated thetotal number of wrist watches sold by the industry in 1957 to be 12.2 million, wellabout the 9.2 million sold in 1956. Elgin's share of the market, however, dropped asdid the share held by most of the major jewelled watch manufacturers. The majorpin-lever watch manufacturers gained in market share 1 . The disruptive marketfactors described above were major causes of Elgin's loss in market share, but themanagement did not think they were the sole causes. Elgin had not kept abreastcompletely of such changing trends as the increased demand for round watches;sweep second hands; and shockproof, waterproof and self-winding watches. As aresult, Elgin followed its competitors in introducing these changes.The market for watches had also been changing by price lines (Table 1).Table 1Share of Wrist Watch Movement  Unit Sales by price: Selected Years (Thousands) 1950 1952 1954 1956 1958Jewelled Watches a # % # % # % # % # % Under $30 2000 20.0 2686 24.6 2597 29.8 3293 37.0 3000 40.0$30 & over 7992 80.0 8233 75.4 6118 70.2 5607 63.0 4500 60.0Total jewelled 9992 100.0 10919 100.0 8715 100.0 8900 100.0 7500 100.0Pin-lever Watches b 4800 6300 5900 7700 8000 c  Total all Watches 14792 17219 14615 16600 15500 a Total jewelled watch market data from U.S. Tariff Commission; price breaksestimated from Elgin studies, and indicate retail value of complete watch, not justthe moment. b U.S. Tariff Commission c Estimated. 1 A pin-lever watch is constructed without the use of jewels as bearings. This is thetypical construction in watches retailing for less than $15.00.   3In 1950, jewelled watches selling for less than $30 accounted for only 20% ofjewelled watch sales, but by 1958 this was 40%. Watches selling below $30 weregenerally considered low priced, but this market consisted of two separatesegments -- jewelled watches retailing between $15 and $30 and pin lever watcheswhich usually sold for less than $15. Pin lever watches did not use jewels forbearings. The total volume in low-priced watches was large in dollars as well asunits. At manufacturers’ selling prices, the “$15 to $30” market totalled $23.5million in 1957 and the “under $15” market totalled $12 million.Elgin had always emphasised high-priced watches and the top price bracket, $75and up, had lost significantly in market share in 1957 as shown in Table 2.Table 2Distribution of Wristwatch  Sales by Retail Price: 1956 and 1957 a   1956 1957Price Units Percent Units Percent $75 and up 1,514,000 16.5% 1,380,000 11.3%$50 to $74.99 1,889,000 20.6% 3,000,000 24.6%$30 to $49.99 2,015,000 22.0% 2,666,000 21.8%$15 to $29.99 1,805,000 19.6% 1,728,000 14.1%Under $15 1,965,000 21.3% 3,460,000 28.2%9,188,000 100.0% 12,234,000 100.0% a Data compiled by Elgin National Watch Company. Data are for watches, not justmovements, as shown in Table 1. The large difference in the totals in Tables 1 and2 was primarily due to differences in estimating pin lever watch sales. During thisperiod, Timex was just getting started and a major portion of its production wentinto pipeline filling of new channels of distribution. The practice in repairing pinlever watches still under guaranty was to replace the movement. Elgin estimatedthat this would account for approximately 25% of the pin lever movements in Table1. Also, many pin lever movements went into timing devices other thanwristwatches. The Elgin Sample probably understated purchases of pin leverwatches because it did not include individuals under 15 years old, who buy anestimated one half to one million pin lever watches.Prior to 1958, Elgin had not produced a watch which could be retailed below$33.75 with the customary trade margin of 50%. Company policy had been positiveand explicit in refusing to produce a watch under the Elgin name to retail in thelower price brackets. The management had felt that selling a low-priced watchwith Elgin's name degrade the tradition of quality and craftsmanship built up by thecompany over many years. Some executives cited the Packard automobile as anexample of what would happen if a low-priced watch were marketed.They said that the Packard name at one time stood for the top in automobilequality. When that firm put out a medium priced car, its reputation suffered; itlost its top-quality market and failed to gain in the medium priced market. Theseofficials believed that, should Elgin try to compete in the lower price market, theresults might be similar to Packard's.As the low-priced watch market expanded, however, Elgin officials were undergreater and greater pressure to enter that field. Rather than compromise the Elgin   4reputation, they brought out in 1952 a lower-priced watch under the nameWadsworth, which sold primarily at $19.95 and $29.95. Executives believed thatwith adequate promotion this watch would capture its fair share of the lower pricemarket. Sales were disappointing despite the fact that low-priced watch salesgenerally continued to grow. Executives believed the Wadsworth was adequatelypromoted, but it never obtained more than 3% of the “under $30” market in anyyear. In 1956, Elgin estimated the Wadsworth accounted for about 2.3% of the“under $30” market, but this dropped to 1.9% in 1957.In a general appraisal of the watch market, Elgin executives concluded that therewas an increasing acceptance of inexpensive “fashion” watches such as the Swisstimepiece in the $20 to $30 bracket and of the cheaper pin lever watches,primarily American brands such as Timex. Appreciation for fine watches asjewellery was declining, particularly among the younger generation. No longer wasa watch bought or presented as a gift with the idea that it would be used for alifetime. The market for expensive watches was faced with increasing competitionfrom other goods and services such as hi-fi sets, outboard motors, sportingequipment, cameras, vacation trips, and other items which the expandingAmerican middle-class was enjoying in its leisure time.Elgin officials interpreted the development to mean that the expensive watch wasno longer the symbol of social standing it had been a generation before. Consumer'ssurveys indicated that the largest proportion of watches retailing for less than $30were purchased for teenagers as gifts.The tendency was to give less expensive watches which would be functional forsome years but which neither the giver nor the recipient expected to last alifetime. Style changes emphasising the latest in design and fashion were alsoencouraging the tendency to pay less for a watch and to buy more often.Watch ownership was high in all age groups so that a large share of the marketwould be in the form of replacement sales. An Elgin survey showed, however, thatthere were a significant number of men in the teen age and the 30 - 35 age bracketwho did not own a wristwatch or even any watch (Table 3).Table 3 Percentage Ownership of Watches by Age and Sex: 1957 M: Men; W: Women 14 ‐ 19   20    –    24   25 ‐ 29   30 ‐ 39   40 ‐ 49   Over   50   M   W   M   W   M   W   M   W   M   W   M   W   Use wristwatch 56   68   87   70   81   80   65   75   69   86   54   69   Own, but, don’t usewristwatch 4   1   2   4   1   2   1   2   1   1   5   2   Don’t own wristwatch 40   31   11   26   18   18   24   23   14   13   16   26   Use Pocket or lapel watch 0   0   0   0   0   0   0   0   15   0   26   3   Percentage of men/womenin the age-group 11.7   11.0   8.6   8.6   9.5   9.3   20.1   20.1   18.3   18.1   31.8   32.9   Elgin had distributed its watches directly to jewellers and high-class departmentstores for many years. Surveys indicated that 90% of all Elgin watches had beenpurchased at jewellery stores. Elgin's management had always felt a great loyaltyfor the established legitimate local jeweller who had distributed the product sosuccessfully. Such loyalty had almost become a tradition, and the management
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