CHINA TO THE RES­CUE AGAIN?

China is hot. The rest of the world is not. What hap­pens next is any­body’s guess.

WatchTime - - CONTENTS - By Joe omp­son

| 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.”

• Over­pro­duc­tion.

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-com­merce.

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.”

• Smart­watches.

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

• Mil­len­ni­als.

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.”

Swatch Group CEO Nick Hayek

‘The Swiss franc shock [of 2015] is haunt­ing us.’

Richemont Group Chair­man Jo­hann Ru­pert

‘There are too many watches in the world.’

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