How Time's Running Out for Swiss Watchmakers
WHY YOU SHOULD CARE
Despite recent sales growth, pressure is rising for brands to build a strong web presence.
By Ralph Atkins
Zurich’s Bahnhofstrasse has long been one of Europe’s most prestigious luxury shopping spots. Its watch and jewelery sellers especially like to boast of their 19th-century heritage. Bucherer, for example, is undergoing modernization but the construction hoardings remind passers-by that the chain was founded in 1888.
The global outlook for Swiss luxury watches is reminiscent of recent, happier times. Swiss watch exports in the first three months of this year were 10.1 percent higher than a year earlier — the fastest quarterly growth rate since 2012, according to the Swiss watch federation. But the prosperous mood does not disguise the industry’s challenges. When the Apple Watch was launched three years ago, the worry was whether smart devices would replace mechanical Swiss timepieces as a must-have wrist accessory. Today’s Bahnhofstrasse includes an Apple store.
The tech company’s business model, based increasingly on selling through its own stores and online, highlights a different weakness of Swiss watchmaking: Its heavy reliance on a distribution model of selling via third-party retailers and bricks-and-mortar stores. Some 90 percent of Swiss watch sales by value are still made via third-party retailers, according to Morgan Stanley — much higher than in other luxury sectors such as jewelery and leather goods, where the equivalent figures are roughly 30 percent and 40 percent. In the next five to 10 years, “we think it logical to expect most of the large watch brands to have migrated to an Apple distribution model,” a recent report by the U.S. bank concluded.
The recovery in watches is not global, it is very China-centric, while trends in the U.S., Europe and the Middle East remain subdued.
Thomas Chauvet, Citi luxury goods analyst
The traditional view among watchmakers has been that their products are too expensive, and purchases too emotional, to be transacted online. Some high-end brands — including Rolex — believe that remains the case. That view is changing. The latest brand to dip into e-commerce is 143-year-old Audemars Piguet, which in April announced an online boutique in partnership with China’s JD.com.
Not only are consumers becoming used to buying high-value items online but the plethora of watch enthusiasts’ blogs have also made them savvier shoppers, says Edouard Aubin, a luxury goods analyst at Morgan Stanley. On a 10,000 Swiss franc (8,400 euro) watch, the retailers’ markup may be as much as 4,000 Swiss francs, he says. “Customers are better informed than the staff in the shops, so what is the value added?” Aubin asks.
Morgan Stanley analysts argue that taking control of distribution, especially via e-commerce, would allow watchmakers to capture retailers’ high markups, reduce supply chain inefficiencies and allow watchmakers to get to know their end customers better — a powerful advantage in an age of big data. The danger of not having a significant online presence is that they could surrender ground to popular online stores operating in the “gray market,” which sells excess stock at a discount.
Getting it right is important. The Swiss watch industry has only recently returned to growth. In 2015 and 2016, exports were hit by slow global economic growth, a clampdown on “gifting” in China, excessive inventory in Hong Kong and fears of terrorist attacks in European cities. Last year, Swiss watch exports rose again, boosted especially by sales to mainland China. But Thomas Chauvet, luxury goods analyst at Citi, warns the pace of the rebound might slow.
“Unlike in soft luxury goods, the recovery in watches is not global, it is very China-centric, while trends in the U.S., Europe and the Middle East remain subdued,” he says. “The risk is of a rapid normalization [slower growth] in Chinese demand later this year.”
The biggest watch groups emerged strongest from the recent downturn. Rolex, Swatch and Richemont all boosted their shares of the global market, according to calculations by Vontobel bank in Zurich. In the case of Swatch, its 2017 sales grew twice as fast as Swiss watch exports. Reliance on wholesale sales channels remains high even among brands owned by the two biggest listed Swiss watchmaking groups, Swatch Group and Richemont, despite their efforts to build their own retail networks.
Ironically, third-party retailers have helped the biggest brands establish a lead over smaller rivals, driven by the increasing dominance of the largest stores such as Bucherer in Switzerland, Wempe in Germany and Emperor in Hong Kong, says René Weber, an analyst at Vontobel. Larger chains are more likely to focus on selling the biggest and best-known watch brands, says Weber. The risk is that the brands are tied to the fortunes of these retailers.
In terms of engineering a switch to online sales channels, arguably the furthest advanced among the big Swiss watchmaking groups is Richemont, which includes brands such as Cartier and Montblanc. Cartier products have been sold online in the U.S. since 2010, and in a significant expansion of its online sales strategy, Richemont in January announced plans to take full control of Yoox Net-a-Porter, the Milan-listed online retailer of luxury goods.
But Richemont’s profits in the year to March 31 were hit by the effects of 203 millon euros spent on buying back watches to reduce inventory at multi-brand retail partners, which followed the 278 million euros spent the previous year. Swatch Group, meanwhile, launched its first online store for its eponymous plastic watches as long ago as 2001, but appears to have been slower than its main Swiss rival in developing online sales channels for its luxury watch brands.
Chauvet says: “It seems that Swatch doesn’t want to end long-standing relationships with key distributors in western Europe and the U.S.”
From his own experience, Chauvet thinks it wrong to assume all customers want to buy online. “When I buy a watch I want to see a shop wall with many different brands, many different styles, technical features and price points — and I want to try each of them. Like when you buy trainers.”
Still resistant to online sales is Rolex. The notoriously secretive company rarely speaks publicly about its thinking on long-term strategy. But it does not sell its watches online and has just one store of its own, in Geneva. But analysts are reluctant to suggest the company is vulnerable. Rolex is reckoned to be highly profitable, with a tight control over retailers, which limits exposure to gray-market sales.
Moreover, like other top luxury watch brands, Rolex thrives on product scarcity. “Rolex and [independent, family-owned brand] Patek Philippe still have waiting lists for their products — sometimes several years. So they have a different story,” says Weber. “Yes, I think we will see a trend toward e-commerce by Swiss watchmakers but these brands don’t have to hurry.”
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