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Putting a price on Swiss watches
Economy

Putting a price on Swiss watches

Tuesday, 13 May 2014
By Quentin Simonet
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Quentin Simonet

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5 min read
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The rising price of Swiss watches is a major trend of recent years, and one that shows no signs of abating for as long as Swiss-Made continues to shine.

Latest figures from the Federation of the Swiss Watch Industry show that the average price of a Swiss watch climbed to CHF 733 last year, an increase of 5.9% on 2012, and has more than quadrupled since 1992 when it came to CHF 160. And these are export prices; the end customer wishing to purchase a Swiss watch will pay at least twice that. By way of comparison, the average price of a watch exported from China came to USD 3 in 2013, posting no change on 2012. In the same timeframe, exports from Hong Kong went from USD 19 to USD 21.

Cost of Living Extremely Well Index vs American Consumer Price Index
Higher and higher

These creeping prices are not just the work of inflation, far from it. “It’s a combination of various factors but globally it comes down to the strong growth we’ve witnessed in recent years,” comments Serge Carreira, a fashion and luxury specialist who lectures at Institut d’Etudes Politiques in Paris. In a recent analysis, French daily Le Monde propounded that the hypnotic appeal of certain brands alongside the growing ranks of the extremely wealthy worldwide gave luxury groups, and therefore watchmakers, licence to push their prices ever more skywards each year. Indeed, the Cost of Living Extremely Well Index, invented in 1976 by Forbes magazine, has gained 800% in 35 years. Over the same period, the American consumer price index went up by 300%. Between 2001 and 2011, prices increased 62% in fashion and leathergoods, and 78% in watches and jewellery.

“These increases must be viewed within a wider framework, where the number of affluent people and the amount of money in circulation have shot up. In this context, the cost of luxury products such as Swiss watches, London apartments or French bags increases at a much faster rate than general inflation,” notes Luca Solca, an analyst with Exane BNP Paribas who delivers some eloquent statistics regarding watches: a Rolex Datejust in steel cost USD 1,200 in 1984. Eight years later it had already doubled to USD 6,000 in 2012 dollars. Over 42 years, the bank estimates that the price of this particular watch increased by an average 8.1% a year. This is what specialists refer to as “pricing power”, which is a brand’s capacity to increase its prices without reducing demand. In other words, perfect inelasticity.

Exclusivity also plays a part. Some brands deliberately restrict production of certain or all of their models, creating a scarcity which can have a non-negligible impact on prices. The multitude of limited editions in the watch segment is an excellent illustration.

The cost of innovation can be very high, yet this cost is difficult to grasp from the outside.
Serge Carreira
Innovation and precious materials

At the risk of oversimplifying, there are four main reasons behind this price hike. First, creativity and innovation, evidenced by ever more complex products. To the casual observer, it may seem watches have changed little in recent years, whether in movements or exteriors, but this would be missing the full picture. A growing number of brands have developed their own calibre, sometimes several, and in-house production automatically leads to a higher retail price. Breitling is a good example: watches fitted with its in-house B01 calibre cost CHF 8,000 on average, compared with CHF 6,000 for models driven by a Valjoux movement from ETA (part of Swatch Group).

Hublot has engineered its own spectacular upscaling with the introduction of an in-house movement, dubbed Unico. Omega, meanwhile, has extended its exclusive Co-Axial escapement to all its ranges with subsequent and considerable gains in quality and reliability. And that’s not all: the Swatch Group brand intends making further advances thanks to its research into anti-magnetic technology. “The cost of innovation can be very high, yet this cost is difficult to grasp from the outside. If these investments result in greater reliability and creativity, and at the same time boost brand image, then price becomes a secondary consideration,” notes Serge Carreira. On the other hand, increases in the retail price of entry-level products with no real added value is harder to justify. Particularly as customers these days are far more savvy.

The second reason lies in the more pronounced use of precious materials. “In the past few years, the price of gold and diamonds has gone sky-high, which can also justify inflated retail prices,” Carreira continues. The use of new materials comes under the same heading. For example, Hublot recently launched a watch with an osmium crystal dial, a metal so rare that experts estimate global reserves at 200 tonnes, compared with 13,000 tonnes for platinum which is hardly commonplace itself. And rarity has a price. Serge Carreira for one isn’t surprised by the profusion of new materials in today’s timepieces: “brands must keep the ideas flowing,” he says. In a similar vein, the métiers d’art such as engraving or enamelling are increasingly prominent.

Much of the difference in price is due to the more complex technology which requires very specific expertise.
Damian Künzi
Mechanical magic

Thirdly, not content with making watches, brands have also opted to sell them directly to customers by opening stores on the world’s most prestigious thoroughfares and in coveted locations. A global network of points of sale has thus emerged. And customers pay for this. Says Serge Carreira, “the increase in the price of luxury goods and watches would certainly have been less conspicuous without the competition to open points of sale at prime locations.”

A growing tendency to equip watches with mechanical movements is the fourth and final factor. A quarter of Swiss watch exports today are fitted with mechanical calibres, compared with less than a tenth in the early 1990s. And a mechanically-driven watch is generally ten times more expensive than quartz. “Much of the difference in price is due to the more complex technology which requires very specific expertise,” explains Damian Künzi, an economist with Credit Suisse. Furthermore, mechanical watches have gradually acquired the status of luxury, hence more expensive, products, as Swiss export figures clearly show. Since the late 1990s, their weight in the sector’s total export revenues has continued to grow. Whereas mechanical movements accounted for less than 50% of exports in the 1990s, they now represent 77% in monetary terms whereas in quantity they account for just 26%. Will watch prices continue their upward trajectory? For Serge Carreira, the answer is a resounding yes, though to a lesser extent than in the last decade. Who can put a price on a passion?

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