What does it cost Omega to make a watch?

[philipcertain100]

I've read varying opinions in different threads about the retail price of Omegas and what it actually costs Omega to make them. I've read posters say that they think Omega can make a SMP-C for a couple hundred dollars, or $500.....which I think are both ridiculous estimates. There may be no way to calculate Omega's cost to make an SMP-C for someone not working at Omega, but it sure is fun to argue about.

The cost to make a watch includes R&D, admin support, materials, salaries/benefits, selling expenses, property costs, machine costs, and I'm sure other things. Its so much more than the labor and materials for one watch.

I would define Omega's cost of making a watch as this:

If Omega is wholeselling its watches to dealers at a price that allows Omega to cover all of its operating expenses (but not making any profit), then that wholesale price is what it costs Omega to make the watch. If Omega can sustain itself as a company and pay all its salaries and expenses, but not add any money to its bank account, then its making watches for simply what it costs Omega to make them. (The only large cost that I included in "operating expenses" that I might take out for purposes of calculating Omega's cost of making the watch is advertising expenses.)

So, here are the numbers I came up with.

SMP-C retail is $4400
SMP-C wholesale is $2640 (60% of retail)

Swatch Group made 18% in profits last year. Since Omega seemed to have a very good year, lets say Omega profits were 20%.

If Omega is selling the watch at a 20% profit, then it costs Omega $2200 to make the watch that they sell to dealers for $2640 ($2200 x 1.2 = $2640).

Omega's possible cost to make an SMP-C (including advert costs): $2200.

I know some people will think that's high based on the cost of the movement, COSC certification, and labor to put the watch together. But there is so much more to running a company than those costs. If you think you can make an Omega-quality watch for less than $2000, then go for it.

Earlier in my post I said that Omega's advertising expenses could be questioned as to whether they should be part of any calculation of Omega's cost to make a watch. Let's say that Omega spends 10% of their operating expenses on advertising. So, the $2200 cost for Omega to make the watch might be hiding $220 in advertising expenses. So if you remove the $220 in advertising expenses, Omega's cost to make the watch is $1980.

Cost for Omega to bring an SMP-C to a dealer (without advert costs): $1980.

I don't mind paying $3000 for something that costs a company $2000 to make.

The bottom line is, Swatch Group is making 20% profit. Omega is NOT making an SMP-C for a couple hundred dollars (including all company expenses) and selling it for $2640 to dealers--making more than $2000 per watch. Anyone who thinks that is drunk.

No doubt, there are some people saying, so Omega only makes several hundred dollars a watch? While the dealer buys at $2640 and sells for $4400? A $1760 profit? NO. The store has to pay rent, salaries, interest costs on inventory, etc., etc. Most of the store's markup is lost to operating expenses. If it was easy to run a watch store and make so much money, then more people would do it. (Don't get me wrong, many independent watch dealers do VERY well.)

And, there it is........so challenge numbers, refine my thesis, and let's come up with a good answer. This is just the starting point.

[peitron]

I think you're basically right. I'd just add that profit margins in luxury items tend to be greater than in mass consumption items. In luxury items, brand perception allows to extract greater profits. Think of Rolex, while it's unit costs are probably greater due to smaller scale, they can't be so much as to explain their prices. While there is no rule of thumb, I'd be surprised if profits are below 25% to 30%.

Just my 2 cents.

Sent from my BlackBerry 9700 using Tapatalk

[peitron]

PS. Remember, that 18% profit margin reported by Swatch Group is a blend rate, which includes smaller profit margins from mass items like $50 Swatch Watches, to larger profit margins from true Veblen goods.

This is a good read on luxury item profits:
http://www.economist.com/node/14447276


Sent from my BlackBerry 9700 using Tapatalk

[Nikoloz]

What you are talking about here, can be viewed as a basic P&L statement.

Which has gross margin costs, which are costs directly spent on R&D, production, material etc, as well as direct costs for salary of production staff, operating and structure costs.

But apart from that every statement consists of indirect costs(fixed costs), such as advertising, office staff costs (let's say accountants, and lawyers, which all in all have nothing to do with production of watches) corporate cars, travel, etc, etc, etc.

majority of companies tends to have more gross margin (direct) costs and less share of indirect costs (which in fact are not creating added value to consumers, but rather simply increasing the price), where i work btw, those costs does not exceeds 10% of total expences, to make their products more compatative compared to the others out there.

therefore if Omega cost structure looks like this

90% direct costs
10% indirect costs

then you are quite possibly correct to say that product price could be 2200*90% = 1980
the rest is history =)

based on the assumption above, aim of all watch companies should be decreasing share of indirect costs to make their product more valuable for consumers...

[jordangbj@aol.com]

if you believe it costs omega 2000 dollars to make a watch then youre the one thats drunk.

[philipcertain100]

Okay, smartguy, back up your statement with some logic and analysis. Lets see your reasoning.

if you believe it costs omega 2000 dollars to make a watch then youre the one thats drunk.

[Dch48]

It probably costs them less than half of what the retailer pays for it which is typically 1/3 of the MSRP. So for example, on a watch with a $400 MSRP, the dealer probably paid $133 and the production cost was probably less than $65. I would bet that in the case of watches costing in the thousands, the production cost is even less proportionate to the MSRP. Maybe only 10% or less. It almost certainly would never be more than 20% of the final MSRP. I'm not talking final company profit margins after all expenses. I mean just pure production cost per unit. Therefore, on a $4000 watch, $800 at the most. If it's a Quartz watch, probably a lot less.

[iam7head]

Look at the big picture, the MFG cost is only a small portion of the retail because you have to factor in R&D, retail network, corporate overhead, warranty/service cost, etc

your iphone probably cost Apple no more than 35 FOB to apple but they can't sell you at that price because who's going to paid the 4 million dollar on R&D? or the UI/UX software/firmware? those are no mfg cost but yet very important to the success of the product. You don't want to know how much a company can be charged with strategic design or branding, guess how much NBC's peacock logo cost?

<---deals with MFG all the time at work.

[exomoons]

It probably costs them less than half of what the retailer pays for it which is typically 1/3 of the MSRP. So for example, on a watch with a $400 MSRP, the dealer probably paid $133 and the production cost was probably less than $65. I would bet that in the case of watches costing in the thousands, the production cost is even less proportionate to the MSRP. Maybe only 10% or less. It almost certainly would never be more than 20% of the final MSRP. I'm not talking final company profit margins after all expenses. I mean just pure production cost per unit. Therefore, on a $4000 watch, $800 at the most. If it's a Quartz watch, probably a lot less.

True, the most expensive is probably the capital expenditures and running cost like electricity/water etc...after that its very cheap to produce a watch...probably less than watch we might think it is but of coz to promote their value and brand the price has to be skyrocketed.

[Monocrom]

One thing you learn soon enough after getting into this hobby is that you rarely get what you pay for when it comes to watches.

Ironically, that sometimes means getting more for your dollar. Seiko could raise the cost of their Monster line by $100, and it would still be one of the best values out there in watches. But yes, often you get less for your money. Generally, a lot less.

I love the current version of the SMP (despite the ceramic bezel) but at around $5,000 it's not the value it once was. And no, it doesn't cost Omega remotely that much to make an SMP. Even with marketing and R&D tossed in. By the way, let's be honest. The current SMP isn't a ground up, done from scratch, brand new design. So, R&D isn't a huge factor in the retail price. The Swatch Group wants to position Omega as a direct Rolex rival. That might happen in the future. Hasn't happened yet.