The conclusion of the Deloitte Swiss Watch Industry Study 2020 makes for reassuring reading: “With the second wave of the COVID pandemic currently affecting Europe and the US, no one can say for certain how long the crisis will last. However, as the country’s third largest exporter and a pillar of the Swiss economy, the Swiss watch industry will adapt and recover. Regardless of how the pandemic plays out, the watch industry will look back on the year 2020 as the year of accelerated transformation.” Except that in the meantime, Morgan Stanley has put some numbers on this “transformation” and they are considerably less upbeat. The American bank forecasts a drop in Swiss watch exports this year of 32% in volume to 14 million units and a 19.5% contraction in value to CHF 16 billion. In value terms, this signifies a return to 2010 levels. More concerning, the decline in volume takes the industry to its lowest level since 1946: half the number for 2011, when the industry shipped a record 29.8 million units.
This compares with latest figures published by the Federation of the Swiss Watch Industry (FH), which for the months of January to October 2020 reports a 37% decline in exports in volume (10.7 million units) and a 25% fall in value (CHF 12.6 billion) – suggesting that Morgan Stanley is basing its forecast on an expected improvement for the year-end that would soften the blow. The FH echoes this in its analysis for October 2020, noting that “the rate of decline continues to slow”. The 7% drop in exports for October is the lowest rate seen these past nine months. Despite this, the FH warns that the industry is facing “the sharpest decline ever recorded over the last 80 years.”
The Morgan Stanley report describes how the situation is fuelling industry trends, starting with polarisation. Mega-brands and niche brands should fare better than those in the lower price segments, a prelude to renewed concentration. The report also points to accelerated premiumisation. According to Morgan Stanley, watches with a wholesale value above CHF 3,000 should account for an all-time high of 71% of Swiss watch exports in value versus just 10% in volume. Unsurprisingly, all eyes are on China, the only market to have grown since January. The US bank estimates that shipments of Swiss watches to Mainland China will increase by 24% for 2020 to CHF 2.5 billion. With a 15% share, this would make China the biggest export market for Swiss watch brands. Again according to the Morgan Stanley report, the United States is proving more resilient than the other main markets. The bank models a 15% contraction in the value of Swiss watch exports to the US to CHF 2 million, compared with a decline of 21% outside the United States.
Pre-worn shows no signs of wear
Turning to smartwatches, the Deloitte report concludes that the Swiss watch industry has “missed the boat”. Sales of the Apple Watch in Q1 2020 climbed 23% year-on-year whereas Swiss watch exports for that period declined by the same amount. Coronavirus or no coronavirus, smartwatches are as in-demand as ever and clearly part of the landscape. The good news is that “consumers are not completely digitalised when it comes to their timepieces.” They are, on the other hand, more and more tempted by pre-owned. One fifth of consumers surveyed by Deloitte said it was likely that they would buy a pre-owned luxury watch in the coming year. This proportion could well increase as brands step up the transition to e-commerce, auction houses hold online sales and traditional brick-and-mortar stores set aside areas for pre-owned watches.
A final point to emerge from these reports is the growing importance of sustainability for the watch industry; a concept that goes well beyond product lifespan to take in the supply chain and manufacturing. Consumers expect watch brands to demonstrate greater transparency and engage in ethical business practices. As Deloitte concludes, “investing in quality, tradition and durability will continue to be a unique selling point for the industry.”