RETROPERSPECTIVE - The Watch Year 2012/2013: Consolidation of the empires

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April 2013

The figures are there, impressive, unmistakable: in 2012, the Swiss watchmaking industry passed the historic barrier of CHF 20 billion at export (figures declared at customs), reaching 21.418 billion. This is a growth of nearly 10 per cent compared with 2011 and 32.5 per cent over 2010. To this we have to add the Swiss domestic market, then multiply everything by a factor of 3, 4 or 5... depending on the margins that vary greatly from one brand to another to estimate the global turnover of the Swiss watchmaking industry. Let us say, for the sake of argument and for want of any means of measuring the statistics more precisely, that this is around CHF 60 billion.

Whatever the details behind these figures are, one thing is becoming more and more obvious: Switzerland—a dwarf in terms of the number of watches produced worldwide, accounting for a mere 3 per cent (36 million watches) of the 1.2 billion timepieces produced each year—holds the lion’s share in value at 60 per cent, and reigns supreme at almost 100 per cent in terms of image.

The true average price: that of the mechanical watch
Of course, these triumphant figures need to be looked at more closely in order to draw any conclusions. Two elements in particular are of interest to anyone who is trying to discern any strong trends behind the statistics: the developments in the number and value of watches exported and the distribution of these exports among the different producers.

6.9 million mechanical watches alone account for CHF 13 billion!

The first thing we notice is that, in terms of volume, the number of pieces exported is down 2.7 per cent compared with 2011 but that the value has increased by 11.3 per cent. This automatically means that the average price of a Swiss watch at export has increased.

In 2012 the average price of a Swiss Made watch at export was officially CHF 693. But this average price needs to be put into con- text. It needs to be compared with a much more significant average price: that of the mechanical watch. This is CHF 2,222! So around 6.9 million mechanical watches thus account for CHF 13 billion, leaving CHF 4.8 billion to be spread across just over 22 million electronic timepieces (many of which are from Swatch) for an average price of CHF 219. This means that some 7 million watches account for 75 per cent of the value of Swiss exports (the difference also includes movement exports, which we have not taken into account).

In global terms and by extrapolation, we can there- fore say that only 7 million pieces represent almost half of the total value of the global watch industry. According to the statistics, this share is increasing every year, following the same trend as the curve showing the distribution of wealth around the world. Although the watch industry is still quite wide of the mark, since according to the Global Wealth Databook published by Credit Suisse, which can hardly be considered as leftist propaganda, 1 per cent of the population holds 43.6 per cent of the world’s wealth and 10 per cent holds 83 per cent. But the trend, logically, is working hard towards this.

War machines
The second observation is that the empires are absorbing the lion’s share. The Swatch Group, Richemont, Rolex and LVMH alone account for almost 50 cent of the global sales of the world’s watch industry, the rest being shared among a multitude of different companies.

The Swatch Group, Richemont, Rolex and LVMH alone account for almost 50 per cent of the global sales of the world’s watch industry.

Each in turn, the groups announced strong increases in their operating profits. While the multibillionaire Rolex may remain tight-lipped and impenetrable as usual (as a foundation, Rolex has no obligation to make its figures public), Nick Hayek recently said that his group “has the potential to reach 9 billion in turnover in 2013 and 10 billion by 2014 or 2015”. Richemont, whose financial year runs to May, should see an increase of about 10 per cent and therefore exceed the €8.87 billion for 2011-2012 (although the third quarter results announced in early January, with growth of 9 per cent year-on-year, “disappointed” analysts).

The watches and jewellery arm of LVMH saw an increase of 6 per cent to reach €2.84 billion, with Bulgari consolidated into these results since June 2011. It’s clear to see that these three groups, without even considering Rolex, exceed CHF 20 billion in turnover, which is the entirety of the Swiss figures declared at customs for export, giving an idea of the true size of their increasing weight. The big groups, shepherded by the stock exchange, have become veritable war machines, but they all believe that they cannot continue to exhibit double-digit growth indefinitely, especially in China. Nick Hayek, for example, predicts “growth potential for the industry of 6 to 7 per cent in 2013”, adding in passing that “the industry has become less cyclical. Variations and amplitudes have largely been smoothed out (...) The watch industry has become much more stable. At least for the Swatch Group ...” he adds mischievously.

Colossal investments
The considerable advances by the groups will increase mechanically as a result of their considerable and continuous efforts towards industrialisation. We don’t want to go back into the detail of ETA’s decision to stop deliveries, if only to say that a final agreement with the COMCO (Switzerland’s competition commission) is expected soon (at the time of writing, we do not know what the tenor of this agreement will be). Whatever is decided, the considerable investments already made or planned by the big groups which are competing with the Swatch Group should allow them to gain an increasing amount of industrial autonomy for components and movements. But they will need another decade to reach this objective. At the start of 2012, the total investments in the watchmaking industry were over CHF 650 million. Richemont led the pack, planning to invest CHF 100 million in a new production site for Cartier, the same amount to turn Val Fleurier into a centre of movement production, 25 million for a new Panerai factory in Neuchâtel, 20 million to build a new production facility for Vacheron Constantin (out of a total of 130 million announced over the coming years), 15 million to extend Piaget, not counting the 100 million already spent on IWC over the past ten years.

Similar efforts are under way at LVMH with 25 million to create a new TAG Heuer factory, between 15 and 25 million for a Louis Vuitton factory in Geneva, 30 million to double the size of the Hublot factory and another 25 million to reorganise Zenith. Not forgetting Rolex, which inaugurated its new flagship in Bienne in 2012: 100 million invested for movement production. It’s a similar story with the independents. Recently, Audemars Piguet put down 25 million to build a factory in Geneva, and Chopard continues to increase the production of its own movements, to give just two examples.

The considerable efforts towards industrialisation will mechanically increase the groups’ domination.

Far from just watching these offensives, the Swatch Group has also reacted. Recently, Nick Hayek announced that his group would continue its efforts in 2013 and planned to invest another 400 to 500 million “to finish buildings under construction, launch new industrial projects and add to our machine park”, at the same time mentioning in passing that ETA, which is finishing a new production centre in the Swiss Jura, is now capable of “producing 14 million movement components per day”.

Room for progress
The recent decision by the Swiss national council (the parliament) to agree to the Federation of the Swiss Watchmaking Industry’s insistent demands to increase from 50 to 60 per cent the value of Swiss components required in a watch in order for it to be awarded the label Swiss Made, although contested by around 10 per cent of the industry, will undoubtedly strengthen the process of industrialisation that is under way. But it also risks increasing the cost price of the watches! Unless new industrial solutions, using greater automation, can compensate for this.

François Thiébaud, CEO of Tissot (Swatch Group) recently told us that “with the increase in the standard of living in emerging countries the potential for growth is enormous and Switzerland could quickly take 10 per cent of the world watch market in terms of quantity, increasing from the current 20 billion at export to 100 billion! But for this to happen we need to continue our massive efforts towards industrial expansion, because we need entry-level products as well as ’grands crus classés’, which we are fortunate to have but which are not our daily bread and butter.”[SEE THE INTERVIEW IN THIS ISSUE.]

“We need entry-level products as well as ’grands crus classés’”

But apart from the Swatch Group, with Tissot producing several million watches per year, the entry- level segment, or even the mid-range segment, has largely been deserted by the other groups, which are all investing in the high-end (with the exception, perhaps, of TAG Heuer or Cartier, which have strengthened considerably the “lean” production of their entry-level products—if we can call them that, since a Tank Solo in steel with a quartz movement still costs nearly CHF 2,000, compared with Tissot’s new self-winding, COSC-certified chronometer, which sells for CHF 800). The incessant move higher up in range seen over the past years, which some- times seemed to be running away with itself, may well soon reach its limits in markets that are starting to become saturated with high-end timepieces.

If China stalls...
Everywhere we can sense a vague anxiety in the air, a small but insistent refrain of market turnaround. The signals from China (Europa Star, present in China since 1994, opened a permanent office in Shanghai in April 2012, managed by Jean-Luc Adam) are contradictory to say the least. The Chinese market clearly stalled last year, with a tiny +0.6 per cent compared with 2011, which was undoubtedly a record year with +49.2 per cent. It’s therefore easy to conclude that we have stocked the shelves for several years! This impression is confirmed by our local observers, who are astonished to see huge flamboyant stores every- where but with few apparent customers. But China is still officially the third biggest market for Swiss watches, with 1.6 billion in exports.

And for some brands, including big names, this market is the main source of sales. But the signals sent out by the political transition that is under way, the fight—announced for the umpteenth time—against corruption, sinecures and other business “gifts” (many of which are Swiss watches), campaigns against luxury, bans on advertising... are starting to cast a shadow. What if, stigmatised, the Swiss watchmaking industry became a hostage to China’s internal political struggles? “Luxury, Beijing’s bargaining chip”, ran the recent headline in the Le Monde newspaper. In her analysis, Nicole Vulser explained that “Beijing is concerned about the possible damage that luxury could cause in its internal market among less well-off members of the population, who dream of logos, and the insolence of prices that highlight the chasm between the richest and the poorest.” And she adds that, for export markets, “China uses a quid pro quo for luxury at the WTO (...) Because it is helping to make Old Europe richer, China is starting to let people know this and use it in its negotiations with the WTO (...) pulling on the sensitive strings of luxury to obtain concessions elsewhere”.

So there are numerous indicators that suggest we may not be able to count on the sustainability of the Chinese Eldorado in the same cultural, social and regulatory framework. This is also one of the reasons why the entry-level and mid-range have a fundamental role to play, precisely for a long-term view of the Swiss watchmaking industry’s development. The same is true whether we talk about China or new commercial battlegrounds such as South America or India, an eternal promise that has never really been kept. In battles you need a lot of foot soldiers. Basic but quality foot soldiers!

Service at the heart of the battle
A recent survey conducted by Europa Star in China highlighted the strategic importance of customer service. Neglecting this could have serious repercussions over the long term. In a market like China, the negligence of watch brands is sometimes shocking and we heard from a number of outraged people.

“China is pulling on the sensitive strings of luxury to obtain concessions elsewhere.”

And as the country’s watchmaking culture spreads, the customer expects more in terms of what the product promises. The disappointment is all the greater and the confidence dented when one has to wait six months, moving from centre to centre (and paying at each one), or even being sent to the competition, as a web-savvy Chinese collector of high-end pieces told us.

“The giants of luxury, who have so far sold in abundance without asking too many questions, should seriously rethink how they attract this rich clientele,” Nicole Vulser says in her analysis. It is now more strategic than ever to offer a customer the best possible service. Here too, industrial power is a clear advantage. Isn’t one of the Swatch Group’s strengths the fact that it has been selling ETA “tractors” worldwide for decades, which thou- sands of watchmakers around the world are capable of servicing? It’s a way to drastically reduce lead times for repairs, especially when so many “manufacture movements” have to be sent back to Swiss pastures for attention!

Service, Please! is our name for this new section that provides good and not-so-good examples, because service has become imperative and should be included in the Swiss Made label.

Concerns among the independents
We often reflect the concerns of the independents in our articles because we believe that a broad-based industrial fabric, consisting of various brands and independent sub-contractors, is vital for the good health of the entire industry. Biodiversity is vital for any organism that hopes to survive and when only the dinosaurs remain, they slowly become extinct or start eating each other.

Biodiversity is vital for any organism that hopes to survive.

But beyond this “ecological” question, there are also serious economic consequences at stake. Only a diverse industrial fabric will allow us to explore new avenues and assist creation and innovation in a varied and bustling industry, producing everything and anything.

But besides a handful of big and robust independent brands (which produce anything from machines for millionaires, like those of Richard Mille—a real phenomenon—to a powerful Raymond Weil in the mid-range segment, via a series of big brands which I will leave you to list yourself... Patek Philippe clearly alone in its own separate category), there are numerous fragile cases.

In difficulty upstream, with the Damocles sword of movement supply hanging over their heads, and downstream, with it becoming increasingly difficult to gain access to retailers, independent brands are experiencing tough times that may even put their survival at stake.

Condemned to watch the strategy games being played before their very eyes by the great watchmaking powers who want to occupy all battlegrounds, they have no choice but to fill in the gaps. All the groups have brought their operations together under subsidiaries and control the territory directly. The profession of agent is under threat and there are fewer and fewer middlemen. Those who are not already backed up by a retail network have to go door to door, from one already full show window to another. Sometimes the edict comes from above and they are asked to move on! Among those who manage to get by are the brands who are active in über horlogerie, producing tens or even hundreds of pieces per year. Singapore, among other markets, loves them because of their iconoclastic way of breaking codes, or even inventing new ones. Here too, there has been a lot of excess, but the most talented and the sharpest have done well and are now a fully-fledged part of the watchmaking landscape, like De Bethune, Urwerk, MB&F and others, or in an entirely different category, Laurent Ferrier, for example. And come what may, there will always be a demand, from a rich and passionate minority, for these beautiful “egoist” machines, as Max Büsser himself calls them.

Retailers in the hot seat
Another watchmaking profession, the retailer, also has some cause for concern. Following the trend started by the big fashion groups, watch brands have for some years been increasing dramatically the number of their own-name stores. They claim that these are not in any way in direct competition with existing retailers, but this often smacks of wishful thinking. At the same time, the big brands have also “streamlined” their distribution networks, closing a number of doors. “The aim is to achieve a quarter of our total turnover through our own stores,” Marc Hayek recently explained to Le Temps’ Bastien Büss, regarding the distribution of Blancpain and Breguet. This example is as good as any, with margins which, in some territories, are well above a quarter.

But paradoxically, as we have often been told, these closures have offered new opportunities to independent brands, who have been listened to more attentively. Niches have been opened up and, nature hating emptiness, independent brands filled them up straightaway. So all is not said and done. And while the watch business may well be moving towards fewer brands, fewer intermediaries, fewer show windows, we must also take into account the social and cultural changes that are affecting our worried society.

To be or to have?
In a recent report entitled Luxe Redux: Raising the Bar for the Selling of Luxuries, the Boston Consulting Group sought to identify the changes that are under way.

The first trend observed, and the most significant according to the authors of the study, was the move away from a luxury of possession to a luxury of experience. While the baby boomers behind the success of luxury from the 1980s to today are now getting old and are less interested in accumulating wealth, generation Y is defined more by doing than having, by experience rather than possession. A watch may therefore increasingly have to compete with an extraordinary trip, for example.

The move away from a luxury of possession to a luxury of experience.

Furthermore, by expanding, luxury also loses its singularity. As with fashion, its boundaries dissolve, like the great designers who have produced so-called capsule collections for major retailers such as H&M. But according to the report’s authors, the global watch industry should escape this confusion of masstige (prestige for the masses) and is given as an example of one of the only sectors where a piece that costs $50,000 can co-exist alongside one that costs $50. Indeed!

Recruit and train
Another major challenge that the watchmaking industry faces in its development is the growing difficulty of finding sufficient personnel. Because the huge investments we listed above imply recruiting and training competent staff.

“This year, Swatch Group created three new jobs in Switzerland every day, perhaps even more,” says Nick Hayek. According to the watchmakers’ employers organisation (CIPH), “we will need to train or find 3,200 new employees by 2016.” A huge figure, especially for little Switzerland, whose catchment area now extends well into France [see the report by Antoine Menusier in this issue on Switzerland’s border regions]. All professions are affected by this, from watchmakers to polishers, dial makers, microtechnology designers and micromechanics.

For brands, the quality, training and loyalty of the sales staff have become crucial.

But this urgent need for qualified staff is not just felt on the production side but also in distribution and service. The sales staff in a shop is an important advocate and can influence the customer’s purchases in a decisive way. For brands, the quality, training and loyalty of the sales staff have become crucial. And it is where demand is strongest, in the emerging economies, that it is the most difficult to find personnel with the necessary qualifications. The brands are well aware of this and have started to set up comprehensive programmes. The same is true of customer service. In China, for example, where the notion of service itself is embryonic, these efforts will also require a real change in culture to be pushed through as the demands of an increasingly knowledgeable customer increase.

And the show goes on...
BaselWorld takes on a special importance this year. Not just because it has been given a prestigious new architectural showcase but also because this embellishment does not correspond with an increase in exhibition surface but actually hides a reduction in the space available. So in the end there will be less room—but with a higher quality and at a higher cost—and fewer brands present, but with bigger stands.

This conscious reduction in the number of stake- holders present on watchmaking’s big stage fits well with our analysis of the sector, where the “marginal” offer is increasingly being lost to the mainstream. So smaller brands will have to paddle even harder to make headway. But the magical thing about the watchmaking industry is that, notwithstanding all the difficulties and obstacles, it still holds a considerable attraction for young entrepreneurs, designers, watchmakers or quite simply dreamers. And as long as a profession makes people dream, it has a future.

Source: Europa Star April-May 2013 magazine issue