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Changing times

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January 2009



In a mutating world, the best path for watchmaking is to be less in appearance and more in reality.

ChangingTime

To observe the world of watches over the last few weeks, a world marked by a number of major ruptures (financial meltdown, fall of the ultra-liberal economic model, the election of Barack Obama in the United States), has often been a surrealistic exercise.
At a time when traders are laid off by the tens and even hundreds of thousands (according to Le Monde, the Centre for Economic and Business Research expects 62,000 jobs to be lost in London’s financial City alone between now and the end of 2009), when bonuses are going up in smoke (in the City, they will amount to ‘only’ 3.6 billion pounds sterling in 2008 compared to 8.8 billion pounds in 2006), and when the famous ‘real economy’ begins to be very seriously affected, we nonetheless continue to hear the most reassuring statements from all around us.
At the end of September, the still very triumphant Federation of the Swiss Watch Industry (FH) announced that “the majority of export markets showed double digit growth in September. Hong Kong demonstrated strong dynamism, followed by the United States, which was below average but was getting back to normal during the last three months. Japan had stabilized its downward trend with only a weak decline in September. The three principal European markets enjoyed very similar changes that were near the average for the sector. In seventh position, China saw its numbers jump by 47.2 percent, the strongest increase among the Swiss watch industry’s fifteen largest markets.”
In October, this very same FH tempered its words: “With doubts surrounding the good September results, figures for the month of October confirmed the slowdown in watch exports which began in May this year. The total value of watch exports leaving Switzerland in October was 1.7 billion francs, the same level as last year (+0.1 percent). Showing a variation of +12.3 percent, the moving average over twelve months indicates that the rate is still positive and that 2008 will end on a good result, however, growth is clearly at a low ebb and will accentuate its decline at the start of 2009, or even later this year.”

Where is the exit?
‘Decline’. A very carefully chosen word because one thing is sure: no one, in the end, knows what is going to happen. This is not because these numbers do not reflect the amount of product that has actually exited Swiss factories to start their travels around the world, but rather because the respective sell-in and sell-out are not—or not yet—represented in these figures.
Right at the same time that the damaging effects of the economic crisis began to make themselves felt, we began seeing a plethora of new launches, new products, and the latest models come to market, as well as all sorts of celebratory festivities. New brands began sprouting up everywhere while new magazines and websites determined to revolutionize communication in the watch industry made their entrance onto the already overcrowded stage of the specialized press.
Obviously, all of these initiatives were started months before and then launched at great speed . . . and all at the worst possible time. How to stop them? But then why stop them? After all, in the middle of the enveloping fog, no one is really able to point out, for sure, the right direction.

Change: a question of survival
What is sure, on the other hand, is that what we call a ‘crisis’ is, in fact, a change leading to a new era. It is a necessary change, a painful change. And, as usual, those who will suffer the most are those who have the least. Yet, it is a vital change, a question of survival, nothing less.
Let’s look at the analysis by Jared Diamond, professor at the University of California, Los Angeles, and winner of the Pulitzer Prize in 1998 for his book Guns, Germs and Steel, The Fate of Human Societies. What does this geographer have to say? Notably, he asserts that the idea of development being synonymous with more growth and more consumption is, quite simply, suicidal. He affirms that Americans and the industrialized nations of the world must accept to consume less. They must lead the way, by example, to stop the mad race of the developing nations—China, India, and Brazil in the lead—to achieve the living standards of the Occident. What is at stake is nothing less than the survival of our society. And, he explains that the disappearance of the Vikings and the Mayas was the result of the over-exploitation of their ecosystems in a context of climatic change.
Does this sound all too familiar? Does it dramatically resemble our own situation? Diamond goes on to say that this scenario is not inevitable. The disappearance of these societies could have been avoided if they had questioned their way of life and their values.
The current economic crisis is not just an ‘accident’. It is simply the flip side of the deliberate depletion of our natural resources, global warming, and the dramatic degradation in the planet’s biodiversity. It is the result of the same race heading straight towards the abyss.

The bubble inside the bubble
The preceding paragraphs are perhaps a long detour from what we are focused on here—the watch industry—and our concerns for its future. The watch bubble—or, we might say, sub-bubble, which has expanded inside the vast financial bubble—is now bursting under the pressure of the ‘virtual’ crisis that has hit the real economy. As might be expected, the market is quite naturally turning towards what it perceives as sound value and high patrimonial potential (obviously what comes to mind are the remarkable examples of Patek Philippe, whose prices at auction seem to be immune to weakness, and the timekeeping fortress of Rolex).
These two brands have not—or perhaps very little—given in to the ‘impatience’ that has gripped a watch industry possessed by the new rhythms dictated by the giants of luxury. Imitating the tempo of the fashion world, watch brands have started introducing one new product after another, in a race that makes us think of the high-flying subprime game. In the domain of mortgage loans, it is the credit-worthiness of the borrower that was in doubt. However, in the realm of watchmaking, it was quite simply the ability to make good on its promises—in other words, to merely deliver the announced timekeepers to retailers who were already up to their ears in products—that created the bottleneck and caused the bubble to expand.
When, after having handed over your deposit, you must wait two or three years to receive (sometimes just barely working) what you had ordered—and during which time the same brand announces three new and even more spectacular items—you will most certainly begin to have a few doubts yourself.

A return to basics
The present deflation of the bubble can also be seen as an opportunity for the watch industry—the opportunity to return to its basics. In the current context of the deliberate depletion of our natural resources, doesn’t watchmaking have a wonderful advantage?
What other product can boast that it can function for dozens of years, and even more, without consuming anything other than its own energy? In what other type of product can we find such a condensed technical and aesthetic savoir-faire, such an accumulation of avant-garde technology and multi-century arts and skills?
Watchmaking as a craft has an historic opportunity in these changing times that we live in. It has a fabulous card to play—that of ‘quality’. To change our consummation habits means to consume less, of course, but it also means to consume better. ‘Better’ consumption signifies opting for the mid- and long-term. It means being attentive to the reality of ‘added value’ and it means being cognizant of the particular nature of the object in question.
Franco Cologni, President of the Fondation pour la Haute Horlogerie (FHH), had this in mind when he declared that a “paradigm shift” is occurring and that, in his opinion, “Haute Horlogerie is going to lose a little of its attributes as a pleasure object while transforming itself more into an investment tool. People thus are looking for sound value, real products and not abstruse financial abstractions. In this sense, the credit crisis will deeply mark the mentality of investors. The impulse buy will diminish in favour of a more reasoned purchase. Haute Horlogerie is now turning into a safe haven. During difficult times, we always come back to fundamental values, which augurs well for established watch brands – those that can claim true patrimony, an authentic identity, and real savoir-faire. We have certainly seen the end of just-for-show marketing.” (From an interview by Bastien Buss for AGEFI. See also our interview with Franco Cologni in this issue).

A changing culture
In its own way, the ‘crisis’ denotes an important cultural transformation. The inflation that has been symbolic, in terms of image, and concrete, in terms of size, of the gigantic ‘monster’ timekeepers - these ‘über-watches’ that have flourished nearly everywhere - is now over. It reminds us of the car lots full of unsold Hummers and SUVs. Featuring useless complications and testosterone-filled forms, these timepieces are all now OUT. They are being replaced by more rigour, more measure, and simply put, more reliability.
The notion of after-sales service - and therefore assurance for the long term - is thus reclaiming its rightful place, which should be front and centre. (In this regard, it is strange - but maybe not so strange - to see a net increase in the number of vengeful messages that angry consumers and retailers alike have copied us on concerning the mediocrity of after-sales service for all categories of watches and brands.)
Yet, watchmaking still has a good hand of cards. One of them was just recently highlighted in the eighth study on luxury goods conducted by the strategy consulting agency, Bain & Company. Watches ‘are generally the first luxury article purchased in emerging economies,” says the report. The watch industry should thus be able to weather storms much better than many other sectors. But there is a condition: companies must recognize that they cannot return to the past, that it is not enough to ‘put their back to the wind, waiting for the storm to pass,’ but that the crisis signifies the emergence of a new era.

The mid range has not had its last word
Most of the ‘analysts’ are in full agreement: it is the mid-range of the market that will suffer the most during the current downturn. (We admit that even this word ‘analyst’ makes us smile a bit since aren’t these the same oracles who officiated before the crisis, the same who did not see it coming, and the same who still preside today?)
I, for one, however, would like to take exception to this majority opinion. This is in spite of the latest statistics from the FH that underscore the decline of more than 20 percent of exports of watches valued at between 500 and 3,000 CHF (price at export). More precisely, I have the impression that the category divisions that we use today in the luxury sector are going to change. When a store such as Hennes & Moritz sells a collection designed by Karl Lagerfeld for an inexpensive price, is this luxury or is it not? Is it in the ‘low end’ or the ‘mid-range’? Or, we might ask: regardless of price, is this collection in the ‘haut de gamme’ segment in its own special way?
In the chaos of creations from the newest watch companies, the trade press has had a tendency to attach great importance to those ultra-niche brands offering concept watches, while ignoring the novel creativity that the mid-range has shown.
A brand such as Louis Erard, for example, is following an exemplary strategy in this area. (It is not alone, however, as we can also cite Frederique Constant and, in another domain, the interesting rebirth of Marvin, while there is hardly a need to mention the vigorous health of Raymond Weil.) The heart of the Louis Erard offer is situated between 200 and 500 CHF at export, which ultimately means retail prices of between 600 and 2,000 CHF. One distinct advantage of this particular positioning is that there is not too much competition in this space. “And, because all our competitors have a tendency to move upmarket, they encourage me, on the contrary, to remain anchored in this segment,” explains Alain Spinedi, the brand’s CEO, “even if this presents a complicated challenge.” He continues that “it is not correct to say that this segment is ‘not expensive.’ No, 1000 CHF is not ‘nothing,’ especially outside of Switzerland. On the other hand, it is a definite advantage for distribution, placement, and stock, especially today when cash flow is a key element.” We might point out, as well, that, in looking over the long term, prices in this segment have doubled between 2000 and 2008.
In a nearly incantatory manner, Spinedi proclaims that “the beauty of a product should not be reserved only for the millionaires. In fact, we offer watches in the Haute Horlogerie sector at affordable prices, and this is exactly what a whole group of people are looking for, a group of people that have felt mistreated by the large groups.”

Redrawing the watch landscape
Perhaps it is this new fracture line, in these changing times, that will redraw the watch landscape. It is not so much a demarcation based on economic divisions as it is a selection process by the consumer - and the retailer - that includes a balanced and fair price (‘fair’ being three, four, five, or even six figures, depending on the actual sophistication and the rarity of the product). This could herald the end of daylight robbery and marketing for the sake of marketing.
The categories of low, medium, and high-end sectors that the brands use to classify themselves are now perhaps, thanks to the ‘crisis’, beginning to fall apart. “Less in appearance, and more in reality,” we might say in other words. And, it is perhaps also that times are changing.


For Olivier Bernheim, CEO of Raymond Weil, some good comes out of the crisis
Olivier Bernheim shares his views with Pierre Maillard.

“Sincerely, I think that brands such as ours or, for example, Omega, Longines, Favre-Leuba, or even prestigious companies such as Rolex and Patek Philippe, will not suffer too much from the current economic crisis. Why? This is because, on one hand, they offer a price/quality/legitimacy ratio that, each on their own level, is totally convincing. On the other hand, they are also established globally and have a good distribution network.
“We have noticed this even quite recently. While business is bad in the USA, in Ireland, in Spain - a market that is collapsing - in Singapore, and is stagnating in Russia - but not in the other Eastern European countries - we have enjoyed historically good sales in October and November in the Middle East and excellent sales in the rest of Europe.
“And in these examples, I am speaking only of the sell-out. Yet, with an average retail price of around 1,700 euros, we should be, according to the ‘analysts’, in the eye of the storm. But we must believe that, for a large share of consumers, whose lives are not directly affected since they were not involved in risky financial investments and since they have a different cultural approach to consumption, a brand such as ours - an enduring and family-run business with a well thought out offer, is reassuring and inspires confidence.
“Speaking of ‘confidence’, hasn’t it come back to the centre of things precisely because of the crisis? We at Raymond Weil have been rewarded because we have not given in to a certain watchmaking intoxication that has taken over many others in the industry. We prefer to advance one step at a time, without creating big media splashes but by working our markets and always placing our product and our name first.



Source: Europa Star December-January 2009 Magazine Issue