DIALLING UP

Swatch prepares for the smartwatch challenge

While the global economy in 2014 was again beset by geopolitical and economic headwinds, Swatch Group was one of the few watchmakers that managed to ably navigate its way through the choppy waters.

In what was a milestone for the group, gross sales hit CHF9 billion for the first time (CHF9.22 billion), up 4.6 per cent year-on-year, while net income amounted to CHF1.42 billion with a return on net sales of 16.3 per cent compared to 22.8 per cent in 2013 (CHF1=Dhs3.88). Operating margins declined to 20.1 per cent vs. 27.4 per cent the previous year – distorted by a court ordered one-off payment the Swiss watchmaker received from Tiffany for breach of contract.

Meanwhile, the Swiss National Bank’s (SNB) decision in January to scrap the exchange rate, which had capped the value of the Franc at 1.20 to the Euro – in order to protect the country’s exporters by not allowing the Franc to get too strong – unsurprisingly stunned markets and reignited fears for the Swiss economy.

FRANC FEARS

Nayla Hayek, chair of Swatch Group Ltd, remains philosophical concerning the likely impact of the cap’s removal, however.

Though critical of how the SNB’s decision was communicated, arguing it created a climate of uncertainty for Swiss industry – even among the banks and not only in Switzerland either – Hayek says that currency adjustments “are part of the daily business of Swatch Group” and that they will deal with it, while closely observing the currency environment.

“The decision prompted us to adjust prices in Europe for some brands, such as Breguet, Blancpain, Omega and Longines, between five to 10 per cent. For volume brands such as Swatch or Tissot, we are not very keen to raise prices, as this segment tends to react more sensitively to such changes.

“Marketing investments and selling expenses in foreign currencies, or companies such as Harry Winston in the US or Rivoli in the Middle East, whose costs are also recorded in local currency, absorb part of the negative effect of the overvalued Swiss Franc,” Hayek adds.

Under existing Swiss law (dating back to 2013), at least 60 per cent of the cost price of industrial products, including Swiss watches, must be manufactured in the country if they are to be regarded as ‘Swiss made’. However, some flexibility remains as the 60 per cent may include R&D.

Hayek downplays the 60 per cent rule though stating: “We produce almost everything in Switzerland; the change of the currency cap has nothing to do with these costs.

“Except that the supply of raw materials from the European market, such as steel for example, might be less expensive. But these cost savings are negligible as they are by far not the main costs of a Swiss made watch.”

ARABIAN DELIGHT

Indeed, Swatch is cushioned to some extent – even taking account of the impact on export markets after the removal of the Swiss Franc-Euro peg – not least because the company’s brands compete in all segments, making use of a worldwide branch network with dedicated own-store chains, including the Rivoli network in the Middle East, in which the group upped its stake to 58 per cent in November 2013 when it acquired an additional 18 per cent (through its Technocorp Holding unit) from Dubai International Capital (DIC).

Swatch also has a substantial presence in Saudi Arabia, with a 33 per cent stake (taken in 2011) in Alzouman General Trading Company – part of the Alzouman Group Saleh Mohammad Alzouman Sons Company. It distributes Swatch and Flik Flak brands, mainly through more than 100 stores in the Kingdom.

The company also made a strategic move in 2013 when it acquired the Harry Winston jewellery making operation from Toronto-based parent company Harry Winston Diamond Corporation for $750m in cash, giving it access to a market – long dominated by Richemont and its iconic Cartier brand – for high-end bracelets, rings and necklaces.