An enviably stable sector
Watchmaking has entered a new pattern, according to Nick Hayek, the boss of Swatch Group. Only recently, the sector was still considered to be a highly cyclical industry. Not any more. Upswings and downturns have largely levelled off since the last crisis in 2008, at least for the major groups thanks to collections that cover most segments, innovation in products with longer lifespans, the creation of subsidiaries in the markets, and a global distribution network. Watchmaking has moved on from cyclicality which, as the auto industry is currently reminding us, is a logic with potentially dramatic consequences. The watch segment has become significantly more stable, even though the markets might still have their mood swings.
Big groups set the pace
Who ended 2012 on top? The lack of published figures makes it difficult to draw up a list of winners, leaving analysts to rely on aggregate data. Based on announcements, the two big winners in 2012 were Swatch Group and Richemont. Respectively number-one and number-two in the branch, these two multinationals increased their market share with above-average growth. Swatch Group, which alone accounted for 34% of watch exports, reported gross sales in 2012 up 15.6% on the previous year (+12.2% at constant exchange rates). Richemont saw its watch and jewellery sales (which includes Cartier watches) rise by 16% and 20% respectively between April and December. On a like-for-like basis, increases hit 8% and 13% respectively. With organic growth of 6% for FY12, the watches and jewellery division at LVMH performed less well. Turning to other major players, sales climbed by 10% at Audemars Piguet and by 20% at Richard Mille.
The biggest names took advantage of their sales and geographic clout to widen the gap further last year. Smaller brands, meanwhile, are finding it more of a challenge to carve out their place in the sun and, more to the point, hold on to it, even though there was more to share out in 2012. No-one is cutting any slack and the battle is being fought on a global scale in a context of rampant globalisation.
It may be stating the obvious, but liquid assets have become a make-or-break component: firstly to seize opportunities when they arise – the recent acquisition by Swatch Group of Harry Winston is a case in point – and secondly to finance growth. Similarly, R&D units have never been more important because, in the words of Panerai Chief Executive Angelo Bonati, “today is already the past.” As a reminder, at end December 2012, Swatch Group had cashflow in excess of CHF 2 billion while Richemont was sitting on EUR 3 billion in net cash. Enough to face the future with confidence.
Bricks and mortar
Watchmakers are building factories, increasing capacity and extending their manufacturing sites on an unprecedented scale. Swatch Group’s decision to cut off supplies of parts is one of the reasons new constructions are springing up from Geneva to Schaffhausen. Quality isn’t the only thing at stake either, despite CEOs’ claims to the contrary; output is also destined to increase and should, albeit within certain limits, reverse the trend observed in 2012 when export volumes dropped 2.2%. Ultimately, capacity for the branch as a whole could well reach 33 to 35 million units a year compared with 29.1 million in 2012.
The importance of Chinese tourism
There can be no more denying that growth in the Chinese market has hit a wall. Instead, China’s tourists have picked up the baton and are spending more and more on their travels, with a tidal wave of store openings in Europe’s major tourist hot-spots, ready to take their share of the cake. An example? Jaeger-LeCoultre has cut the ribbon at its new store in Paris. At a mindboggling 500 square metres, it has the distinction of being the brand’s biggest boutique anywhere in the world. How long can this shopping fever last? A long time. Over the coming decade, Chinese tourism is slated to grow by an average of 17% annually, without denting local sales to any great extent. Analysts in fact expect consumption to bounce back in China as of the second half of 2013, although not at the rates that prevailed there in previous years. Ranging between 20% and 40%, these levels of growth owed much to a gift-giving tradition, a practice that was often linked to corruption which the government now condemns.
Experts describe the situation as a return to normal after growth that would be unsustainable in the long term.
Back to normal
2013 started well with healthy growth in January, according to Swatch Group. LVMH is reassuring about the outlook for the year. Richemont is more cautious, emphasising economic uncertainties and specifically developments in the Asia-Pacific region. Possibly the last quarter 2012 helped rein in enthusiasm, as exports grew more moderately over the second half of the year. September registered a fall of 1.4%; November stalled, gaining just 4.7% when the other months in the year posted double-digit growth; December dropped close to 6%. Experts describe the situation as a return to normal after growth that would be unsustainable in the long term.
CHF 35 billion of exports in view
Prospects are encouraging nonetheless. To say the least. The Federation of the Swiss Watch Industry, chaired by Jean-Daniel Pasche, is looking ahead to another record year in 2013, although it hasn’t quoted any figures to support its claim. Says Nick Hayek, the signals from the markets around the world clearly indicate continued healthy growth potential for the Swiss watch industry, and for Swatch Group. Looking at the longer term, normality no longer figures: “There is a realistic prospect of long-term growth in the Swiss watch industry of 5% to 10% per year,” declared the world’s number-one. Which would take the branch to dizzying heights. Taking the low estimate of 5% per year, and if Nick Hayek’s predictions are on target, in ten years’ time Swiss watch exports will reach CHF 35 billion, a stratospheric rise of 62% on 2012 or CHF 13.6 billion. The CHF 25 billion mark would be reached between 2015 and 2016, which is just around the corner, then CHF 30 billion in 2019. Even if the timing is a few months or even years out, it’s an exhilarating image.