CHINA TO THE RESCUE AGAIN?
China is hot. The rest of the world is not. What happens next is anybody’s guess.
| China is hot. e rest of the world is not. What happens next is anybody’s guess.
In 2009, with Swiss watch sales in free fall and Swiss watch executives in panic (exports dropped 22.3 percent that year), China came riding out of the East, like a white-hatted, white-horsed hero, to save the Swiss-watch day. Sales came roaring back in 2010 – exports were up 22.7 percent – and the China legend was born.
Seven years on, the Swiss watch industry is in trouble again. Sales have declined for the past two years and 2017 is off to a shaky start: e value of Swiss watch exports was down 3.6 percent through the first four months of 2017 compared to the previous year.
ere is, however, one ray of hope: China. Mainland China is back, after lying low for a few years during the government’s 2012 crackdown on corruption. In 2017, it is the hottest watch market in the world by far. Swiss watch exports there surged 39 percent in April and are up 22 percent through the first trimester. “Mainland China has been really quite strong and has been for nine months,” Richemont chief financial officer Gary Saage told financial analysts in mid-may.
Understandably, many in Switzerland are rooting for China to reprise its role as the Swiss-watch savior. Can China do it again? Maybe. But 2017 is not 2010. In 2010, China teamed up with Hong Kong, Switzerland’s top market, to lead the sensational recovery. at won’t happen this time. A streak of 25 consecutive months of export declines to Hong Kong finally ended in March. But Hong Kong is not out of the woods. Exports fell by 17 percent in April. “I wouldn’t say there are signs of life there,” Saage told the analysts. “I wouldn’t call a bottom. It’s getting less worse.”
Hong Kong is proof that the headwinds that sent Swiss watch exports spiraling downward for the past two years are still strong. Indeed, they threaten a third straight down year for the first time since 1932. Another indicator: China was up, but eight of Switzerland’s top 10 markets were down in the first four months of 2017, including the U.S. at -8 percent. (See table.)
e power of those headwinds was palpable at Baselworld, the world’s largest watch fair, held in late March. e mood, like the attendance, was down. On the last day of the eight-day show, show management made a concession to the tough times. It announced that Baselworld 2018 would be two days shorter because “the industry is going through a challenging phase.” Behind the scenes at Baselworld, those challenges were the talk of the show. Here’s a quick look at half a dozen of them, each of which will make China’s rescue mission more difficult than it was in 2010.
• Swiss franc.
“Never forget, in January 2015, the Swiss watch industry had the Swiss franc shock,” Swatch Group CEO Nick Hayek, Jr. told Watchtime at Baselworld. at’s when the Swiss National Bank removed the artificial peg it had established for the Swiss franc against the euro, which sent the Swiss franc soaring. “is is something that is haunting us,” Hayek said. e overvalued Swiss franc is the biggest factor in the current downturn, he thinks. e impact on sales and profits has been enormous. e Swatch Group, for example, estimates that the strong franc resulted in a loss of 57 million Swiss francs in net income in 2015 and SF28 million in 2016. It created instability in the market, Hayek says. “Some of our competitors [he cites the Richemont Group] increased prices like hell to compensate for the Swiss franc. And they priced themselves out of the market because we had a slowdown. en they decreased the prices. is destabilized the retailers. It created a deflationary idea. As a consumer, you will wait to purchase because you think prices will go down further.” e industry mishandled the currency situation, Hayek says. “We created this mess ourselves.”
For Richemont Group Chairman Johann Rupert, the watch industry’s biggest problem is overproduction. “ere are too many watches in the world,” Rupert said at the Richemont Group’s semiannual meeting with financial analysts in mid-may.
When the downturn came in 2015, the industry did not adjust supply to demand. Richemont was as guilty as any other manufacturer, of course. But Richemont has taken its medicine. Last year it bought back 249 million euros’ worth of unsold watches from retailers to reduce their swollen inventories. It also laid off 300 employees in Switzerland. And it is now aligning supply with demand, Rupert said. “For our major maisons, our sell-in is less than our sell-out. So the stock is gradually reducing.”
at needs to happen throughout the industry, Rupert said.
“Is your sell-in smaller than your sellout? at’s really the question to ask the whole industry.”
In some cases, the answer is yes. Jeandaniel Pasche, president of the Federation of the Swiss Watch Industry, told Watchtime, “Companies are cutting back production. ey don’t want to destroy their distribution.” ETA’S announcement last fall that orders for mechanical watch movements for 2017 had dropped significantly backs up Pasche’s claim.
But in many cases, the answer is no, Rupert says. “Our retail partners, the big and even the small, [are] still being force-fed like geese producing foie gras with people [i.e., brands] who still sell in more than they sell out,” Rupert said. “It’s bad for the whole industry.” Says Frank Müller, founder of e Bridge To Luxury consultancy in Dresden, Germany, “e industry has been arrogant and undisciplined after the Lehman Brothers collapse [in 2008]: overproduction, raising prices, opening boutiques.” Now it is paying the price for all of that, Müller says.
• Gray market.
e high-supply/low-demand syndrome of the past two years has created record levels of watches in gray-market channels. With manufacturers, distributors and retailers dumping goods there to make room for new merchandise, gray-market retailers are awash with watches. Especially in the United States, the gray market capital of the world. “Many brands are using us as a dumping ground,” says veteran U.S. watch distributor Mark Wasserman, who distributes the Swiss brands Traser, Edox and Claude Bernard. Wasserman says retailers tell him they can buy some watches for less on the Internet from gray-market retailers than they pay buying wholesale from the brands themselves. “People are still buying watches,” said an American sales director for a Swiss watch brand. “But they are buying them in the wrong distribution channel.”
e surge in gray-market sales points to a momentous change underway in consumer shopping behavior: the shift away from brick-and-mortar stores to online shopping. at shift is speeding up in the United States and is at a tipping point, retail analysts say. Shopping malls, department stores and traditional retailers are losing traffic; many are closing. e shift is impacting watch sales, as watch brands remain reliant on brick-and-mortar stores (jewelers and their own boutiques) and reluctant to explore online retailing. Retailers are feeling the pain. “ere are 20 percent fewer people in the store this year,” one A-list U.S. retailer said at Baselworld. “Each month we worry we won’t make our budget.”
e impact of smartwatches, particularly the launch of the Apple Watch in April of 2015, on the traditional watch market continues to be debated in watch circles. e
Another hot topic is Millennials. Does the generation born between the early 1980s and the early 2000s pose a challenge for traditional watchmakers? Opinion is divided. Some say that Millennials don’t want watches and have a different notion of luxury than their parents. ey value experiences more than possessions. “e new generation may wear a watch or they may not,” says e Bridge To Luxury’s Frank Müller. “We may skip a generation in China. ey don’t work like their parents. ey don’t want the stress and hassle. ey say, ‘I don’t need a Mercedes.’”
Or a watch. Yves Vulcan, CEO of Darwel, a marketing and communications agency with scores of Swiss watch clients, says that given that mobile phones provide the time, “ere is a crisis in the sector. Why buy a watch?” e industry needs to give the new generation a good answer, he says. consensus is that smartwatches have hurt mid-range watch sales but not the luxurywatch segment.
Fashion-watch leaders like the Fossil Group and the Movado Group acknowledge that the Apple Watch has hurt their sales. Both reported steep drops in revenues and profits in 2016. “Apple has played a disruptive role in the fashion-watch category,” then Movado Group President Richard Quintero told financial analysts in March. (Quintero was laid off at the end of April.) Fossil CEO Kosta Kartsotis told analysts, “We didn’t have the technology capabilities to compete with smartwatches, leading to a decline in our market.” Both brands are fighting fire with fire and have invested heavily in smartwatches.
Switzerland’s luxury-watch producers, however, don’t see Apple as a threat. e comment of Jérôme Lambert, the former CEO of Montblanc now head of operations for the Richemont Group, is typical. “Can new entrants [in the watch industry] from California ruin the Swiss watch industry? Probably not,” he told Watchtime in January.
Others aren’t so sure. “e smartwatch is a huge problem,” says Soren Jenry Petersen, president and CEO of Urban Jürgensen, the Bienne-based producer of high-mechanical watches. Petersen worked for Nokia for 20 years and saw how technology can rapidly alter an industry. “I haven’t met with anybody [in Switzerland] yet who sees this [downturn] as anything other than a slump. ey don’t see the threat from the smartwatch.” Apple will continue to improve the watch, he predicts. “By version 3 or 4, everyone will be thinking this is a good thing to have. Forty million to 80 million people will want this.”
Others say Millennials are getting a bum rap about their alleged indifference to wristwatches. “It’s fake news,” says Nick Hayek. “In 2000, you had fewer young people who wanted to wear a watch than today.” Others point to the rapid success of Internet watch brands like Daniel Wellington in Europe and MVMT in the United States. ose brands targeted Millennials and Gen Z, and prove that watches, properly marketed, do appeal to young people.
How daunting these challenges prove to be in 2017 will determine whether Switzerland gets a China-rescue sequel or its first three-year slump in 85 years.
Hayek foresees the first scenario. He predicted in March that sales for the year will be up between 5 and 10 percent. “I don’t see why not,” he said.
Rupert foresees the second. “How long will it take for the watch industry to recover?” he mused in May. “I think there still exist stock in parts of the world – America, parts of Asia – so it’s going to be a gradual process.”
American jeweler Roberto Chiappelloni, owner of Manfredi Jewels in Greenwich, Conn., offered perhaps the best perspective on the current state of the watch world: “e watch industry is in pain,” he said, “but it beats digging ditches.”
‘The Swiss franc shock [of 2015] is haunting us.’
‘There are too many watches in the world.’