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Swiss watch industry woes

Swiss watch industry woes

Thursday, 01 December 2016
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Carol Besler

“Watches are functional art.”

Carol Besler covers watches and jewelry worldwide.

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4 min read

It is no secret that 2016 has been a tough year for the Swiss watch industry, with companies issuing profit warnings that unambiguously predict no immediate end in sight for the slump.

Compagnie Financière Richemont SA announced a 13% sales decline (12% at constant rates) for the first six months of its fiscal year (May-August), with jewelry sales – a saviour in previous watch-sales slumps – retreating by 13%. Richemont also said operating profit has fallen by 43% over the period. In July, the Swatch Group reported a 52% plunge in first-half profit. Richemont brands include Cartier, Montblanc, A. Lange & Söhne, Panerai and Jaeger-LeCoultre. Swatch Group brands include Breguet, Blancpain, Omega, Harry Winston, Glashütte and Tissot. From January to October this year, Swiss watch exports declined by nearly 28% in Hong Kong, by 20% in France, and 10% in the U.S., a fairly mature market for luxury watches. In Canada and some Middle East markets, sales increased.

Several factors have contributed to the decline in luxury watch sales: the strong Swiss franc, China’s crackdown on luxury gift-giving, tumbling oil prices, currency turbulence in Russia, uncertainty associated with the U.S. election and terror attacks in France, where tourism has slumped. In all of Europe, sales have increased only in the UK, particularly following the Brexit vote, which weakened the pound and thus the price of luxury watches.

Price war

LVMH, with brands including TAG Heuer, Bulgari, Zenith and Hublot, fared less poorly than others, reporting a 4% growth in revenue for the first half of 2016 (a figure that also includes Bulgari jewelry sales, though), with flat profits. The company says it gained market share for all brands, particularly TAG Heuer, which launched the highly successful Connected smartwatch last year, for which it will double production capacity in the coming months.

TAG Heuer Connected Watch Cristiano Ronaldo
TAG Heuer Connected Watch Cristiano Ronaldo

As for coping strategies, price reductions are widely anticipated, something that has been a long time coming say aficionados: “pigs get fat, hogs get slaughtered,” was the comment on one recent watch blog. Companies are also likely to revise product development, boosting lower-priced categories and putting the brakes on new high-horology showpieces. Even Apple has decided to discontinue the $10,000+ 18k gold luxury Smartwatch from its product range, making the ceramic smartwatch the most expensive in the collection, starting at $1,249 (TAG Heuer’s Connected retails for $1,500). Strategies will become clearer following the Salon International de la Haute Horlogerie in January and the Baselworld fair in March, the industry’s two key trade shows. Holiday sales will be crucial this year. The U.S. National Retail Federation is predicting a 3.6% increase this year, which exceeds the 10-year average of 2.5%.

Companies that produce their own in-house movements, dials and cases have an edge over those who don’t.
Vertical integration is key

“In mature markets as well as in markets that are in crisis, the only way to bring growth back is through innovation and creativity,” says Jean-Claude Biver, CEO of TAG Heuer and Hublot. As for the strong Swiss franc, he comments, “The Swiss franc has been an issue since 1974, when I started in this business. At that time one dollar was like four Swiss francs, and we survived.” He adds: “Unless we don’t get rid of terrorism, Europe will remain an important attraction for foreign tourism. Europe will also recover from its political, economic and financial crises and we should maintain our projections for next year in Europe.”

Jean-Claude Biver
Jean-Claude Biver, CEO of TAG Heuer and LVMH Watch Division President © TAG Heuer

Vertical integration is another saving grace. Companies that produce their own in-house movements, dials and cases have an edge over those who don’t, and independent companies that are family controlled – such as Chopard, Patek Philippe and Graff – also claim an advantage. Nicolas Sestito, CEO of Graff Luxury Watches (Graff is primarily a diamond company that successfully ventured into watches in 2008), says, “Because we produce everything in-house, we can be very flexible in our production. We are a speedboat compared to the big companies, which are like cruise ships, which turn around very slowly. We can turn around faster. It is also an advantage that we manage our own distribution.” Many brands, including those owned by Richemont, have had to buy back product from their retail partners in recent months.

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