RETROPERSPECTIVE - The Watch Year 2013/2014: three-fold VERTICAL INTEGRATION

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March 2014

It is always easier to look back and analyse what happened last year than to look ahead and try to predict, even in the most cursory way, what will happen in the future. Nevertheless, each year we try to do this with our “retroperspective”, to use this rather far-fetched term.
But before attempting this, we took a look at what was being said exactly a year ago and we note that the two main subjects that concerned industry observers at the time, the increasing domination of the major groups and their “advanced consolidation” on the one hand and the fate of the luxury industry in China on the other, were indeed the main things on people’s minds throughout 2013.

If we look at some of the statements made in the spring of 2013, we can see that some of the predictions, which were relatively prudent, more or less came true. Thus, in March 2013, Nick Hayek said that “the Swatch Group has the potential to reach 9 billion in turnover in 2013 and 10 billion by 2014 or 2015”. And it almost did: in 2013, the Swatch Group generated 8.817 billion Swiss francs in turnover, an increase of 8.3 per cent on the year, whereas Nick Hayek had predicted “growth of 6 to 7 per cent in 2013”.
These are very good figures, especially since the group considerably increased its profitability, with a 20.2 per cent increase in net profit to almost 2 billion (1.928 billion Swiss francs) and an operating margin of 27.4 per cent – better than LVMH (21 per cent) and the same as Richemont (27 per cent for the first half of the year, with the group closing its accounts at the end of March – in the middle of BaselWorld).
Having said this, the watchmaking and jewellery division of the LVMH group performed worse than its rival, with turnover in this category of 2.784 billion euros, a reduction of 2 per cent, but a 12 per cent increase in profits (to 375 million euros in 2013 compared with 334 million in 2012).

If we take a closer look at the total Swiss watch industry export figures we see that the industry overall is performing much worse than the groups.

If we take a closer look at the total Swiss watch industry export figures published at the end of January by the Federation of the Swiss Watchmaking Industry, we see that the industry overall is performing much worse than the groups. In 2013 we saw a measured increase of 1.9 per cent, or 400 million Swiss francs, to reach a total of 21.8 billion Swiss francs for 28.1 million units, a little over a million units less. The immediate conclusion: Switzerland continues its headlong rush to export fewer watches, but ones that are more expensive! But we have to be careful with this analysis because it was actually in the mid-range segment, specifically in the category of watches with an export price (not a final retail price) of between 200 and 500 Swiss francs, where there was the biggest increase: +14.2 per cent in volume and +12.7 per cent in value.

In the other categories, including the famous “watches over 3,000 Swiss francs” (a category that should one day be seriously reviewed, since it hides enormous differences covering watches for 3,000 Swiss francs and those at 100,000 Swiss francs) the increase was a lot less: +2.8 per cent in value. The same is true for the entry level (less than 200 Swiss francs), with a reduction in volume of 8.5 per cent, to 18.2 million units, which is a drop in the ocean compared with the billion watches produced in this category each year.

So Switzerland’s watchmaking industry seems to have restructured its offer slightly in 2013. This is undoubtedly due in large part to the substantial reduction in the Chinese market which, in 2013, imported “only” 1.446 billion Swiss francs’ worth of watches, a drop of 12.5 per cent. Over the same period, Hong Kong, which remains the number one market for Swiss watches, recorded a drop of 5.6 per cent.

RETROPERSPECTIVE - The Watch Year 2013/2014: three-fold VERTICAL INTEGRATION

Looking at these figures we see that this timid refocusing on the mid range corresponds logically with the good health of the European markets, which showed renewed vigour, in particular the United Kingdom, with a surprising +18.2 per cent, Germany with +9 per cent, astonishingly in Italy, too, which increased 4.6 per cent despite the crisis it is in. In the European contingent, only France, with a reduction of 9.6 per cent, lets the side down.

This refocusing on the mid range is very good news for the overall health of the Swiss watchmaking industry.

This refocusing on the mid range (which is very good news for the overall health of the Swiss watchmaking industry) was corroborated by Nick Hayek who, when his group’s figures were published, insisted that “if we are recording such growth rates it is also thanks to brands such as Longines, Tissot and Swatch. We are not just a luxury group.” (Read more about the Swatch Group in our article The Swatch Group has all bases covered in this issue).

The Swatch Group’s ability to cover the entire spectrum of watchmaking, from the plastic watch (and not just any old plastic watch, since the Sistem51 is a marvel of engineering, cf. our article in this issue, Stripping down the Sistem51) to the traditional grand complication, gives it a foundation that shields it from structural or ad hoc corrections in the markets, like the one we are seeing in China. All the more so given that the group is also the main supplier to its competitors for movements and regulating organs.
With these different pillars, the Swatch Group therefore appears to be the most stable power in the industry, and also has a mountain of cash (estimated at 2.5 billion Swiss francs) and, it is said, a considerable stock of watches and movements (the equivalent of 433 days, according to the analysis of Exane BNP, quoted by Business Montres).


The situation regarding the supplies of movements and regulating organs, which was extremely tense last year, seems to have stabilised a little at the start of 2014. Several factors have contributed to this. Among them, the “final” agreement signed between the Swatch Group and the Swiss Competition Commission (COMCO) in October 2013, which obliges ETA to ensure continuity in deliveries to third parties until 2019, with a gradual reduction against the 2009-2011 average that is fixed at 75 per cent for 2014/2015, 65 per cent for 2016/2017 and 55 per cent for 2018/2019. As for regulating organs, there is no question of a reduction in deliveries for the moment and this subject will have to be renegotiated.

But the situation has also calmed down a little because in parallel with this agreement a number of initiatives that were launched at the first signs of the Swatch Group’s intentions are now reaching maturity. The likes of Sellita, Soprod, Dubois-Dépraz, La Joux-Perret, Technotime and others are gradually gaining strength and producing new and ever-more reliable movements (the majority of which are ETA-compatible, meaning that their size allows them to replace some of the most common ETA “tractors”). Other initiatives are also coming to light, but bringing a movement into mass production and strictly containing costs requires considerable investment (100 million Swiss francs is the general estimate). But we hope that these initiatives will continue to gain ground in parallel with the planned reduction in ETA deliveries.

Another reason for the relaxation is that the vertical integration of in-house movement production seen at several big brands is also reaching maturity, as is the case at TAG Heuer, which can now produce tens of thousands (up to 100,000) of its own chronograph movements autonomously.

Even if the planned restriction in movement supply is manageable, it is above all the regularity of deliveries that is important.

But on the other hand, as a number of independent brands have pointed out to us, even if the planned restriction in movement supply is manageable, it is above all the regularity of deliveries that is important. And on this point, it is quite clear that ETA has a strong and effective means of pressure.
We must also not forget that some specific mechanical movements, such as the ETA 2671, a small self-winding ladies’ movement that is 17.20mm in diameter, has no equivalent on the market. (We can therefore predict, without too much risk of error, that there will be a reduction in the number of small self-winding watches for ladies available on the market this year!).


After the vertical integration in production, which we have seen over the past ten years, we saw a second vertical integration in distribution, which is still under way, then a third vertical integration that we could call “vertical integration of communication”.

Although the Swiss watchmaking industry still consists of a dense network of suppliers and sub-contractors that is indispensable to it (you only need to have a look around the small workshops in the Jura region to see all the components being produced for the most vertically integrated and most famous brands), these very brands are gradually taking full control of their own production.

In parallel with this vertical integration of production, distribution has also been gradually vertically integrated. It started with brands setting up their own subsidiaries around the world, which impacted on the “old” intermediary professions that are (or were) agent and distributor, then continued with the increasingly frenetic openings of monobrand stores, this time indirectly impacting on multi-brand retailers, and is now directly affecting retailers, for example with the take-over by the Swatch Group (them again) of the network of Rivoli Dubai, which operates no less than 360 stores in the Middle East and employs 1,500 people!
This symbolically important take-over also has its strategic significance, when you consider the importance of the hyper-commercialised hubs of the Middle East for the Chinese customers passing through. The consequences of this take-over – but this is just one example of a strong trend shared by other groups – were quickly felt by the “small” brands who were politely brushed aside.

Access to the market is therefore becoming increasingly difficult for the “small” independent brands. In this context, the general trend is for these brands to focus on regions where they have a strong position, to the detriment of a truly international presence.

The current model of own-brand stores, a trend that has affected almost all watch brands, seems to be reaching its limits.

Having said this, the current model of own-brand stores, a trend that has affected almost all watch brands, seems to be reaching its limits and in recent months we have seen several closures, in particular in China (Omega and Cartier have been mentioned). In view of this it is hard to resist quoting the financial analyst Philippe Béchade’s description of one of his recent trips to China: “There are a lot more of these malls and luxury shops (Louis Vuitton, Cartier, Gucci, Ferragamo, Zegna, Tiffany, Rolex, Blancpain, Omega…) than I expected, even in medium-sized cities (with a population of between two and four million). On the other hand, they are a lot less frequented than I thought they would be given the astonishing sales figures of LVMH and Hermès in Asia.
More worryingly, there were often much fewer Chinese at Cartier or Chanel than there are in Paris in the stores on the Champs Elysées or Avenue Montaigne. When I say ‘fewer’, in reality it is a lot fewer! I covered thousands of square metres of shopping space – in at least six different cities during my trip – without seeing anybody. Everywhere, there are more sales staff than there are customers.”


Or “salesmen” to be precise. As Stéphane Linder, the new CEO of TAG Heuer told us recently (see our interview in this issue, “A precisely calculated move up range”), whose network of monobrand boutiques now totals 170: “Let’s be clear: watchmakers are not – yet – retailers. This is a profession in itself. We do not want stores that are just images with products floating in them. We have to bring something more: watchmaking culture. But how do we do this?”
Retailer is definitely a profession in itself, one that requires not just highly specific knowledge but a robust address book and a serious local network of loyal customers.
This is undoubtedly one of the great obstacles that the watchmaking industry has to overcome in the short and medium term: training salespeople and watch repairers is an area that requires a lot of work, starting with the so-called “emerging” markets, where the culture of watchmaking is still rudimentary.

“Are there silicon components in this watch? But sir, everything in this watch is in silicon”!!!

(But it is not just in the “emerging” markets. A recent anecdote told to us by a totally trustworthy source, involves the manageress of the Geneva store of a very high-end Swiss brand who, in answer to the question “Are there silicon components in this watch?” replied, “But sir, everything in this watch is in silicon”!!!)

On the very problematic subject of training we must welcome in passing the initiatives launched by the Fondation de la Haute Horlogerie, which has implemented a whole range of tools to help with this very necessary improvement in watchmaking culture.


The third type of vertical integration is that of communication. The appearance of new communications channels that allow watch brands to connect directly with their virtual customers (Facebook, Twitter and the like) has made people believe that “intermediaries” could be cast into oblivion in this field, too.
This movement, accompanied by an explosion in the number of websites, blogs and forums, has transformed the media landscape and its conventions, calling a number of existing business models into question.

At Europa Star, we are well placed to note these radical transformations in the media landscape. They pose a certain number of problems, since, in the current deluge of advertising disguised as information it has become difficult for the “ordinary” consumer to tell the difference between what is true and what is false, the “sponsored” opinion from the independent analysis, the expert from the amateur, the paid prescriber from the genuine enthusiast.

But recourse to all imaginable channels (some of which are quickly forgotten: who still remembers SecondLife and the “virtual islands” that were bought up there by the big watchmaking brands…?) not only creates this media chaos but also impinges on the legitimacy of all external communication in general. Increasingly, the potential customer is no longer interested in dialogue with the brand directly, in whom he or she generally only has limited trust, and prefers instead to converse with like-minded people and to exchange experiences.

Marie-Claude Sicard, an expert in brand analysis and strategy and a professor at the Celsa (Paris IV-Sorbonne), explains this very well: “The real ‘conversation’ is the one that consumers have among themselves, about brands, either face-to-face or on the web. All the studies confirm this. For those on the web, 87 per cent of the opinions of their equals represent a ‘quite’ or ‘very’ useful source of information on products or services offered by companies, whereas the confidence in the discourse of brands, as we know, deteriorates as they are lost in the media ocean. (…) All of these people are aware of the thorny issue of the reliability of opinions posted on the web, which needs to be solved, but in cases of doubt, they prefer the more natural language, which is closer to real life. But real life is complex, contradictory, plural and disordered. Prisoners of the sacrosanct dogma of coherence, among other things, brands cannot express themselves in this way. Today they are paying the price,” because, from now on “customers decide themselves the time, the place and the price of what they buy and the image they have of it. And now that they have it, they will not give up this freedom, especially because it allows them, for the same price, to avoid the most common pitfall in the purchasing process: the human dimension.”

From now on “customers decide themselves the time, the place and the price of what they buy and the image they have of it.”

This “dimension” is all the more important given that watchmaking has made this its biggest selling point. What else is the industry selling today, when we can see the time everywhere, other than a “dream” or desire? In other words, “luxury”. (In this regard, read our interview with François Thiébaud, CEO of Tissot, in this issue.)

This brings us back to the importance of the welcome, the training for sales staff, who should be the first ambassador for a brand, to the relevance of advice given, to customer service (read more on this in our Service, Please! column in this issue, which provides an edifying list of good and not so good experiences from retailers all over the world).

Of the three types of vertical integration, those of distribution and communication therefore have their “natural” limits. We will never be able to do entirely without the expertise and external validation of these “go-betweens” and builders of loyalty that are the retailers, not to mention us specialist journalists. Avoiding one or the other may seem worthwhile in the short term but could be damaging over the medium and long term.


One of the most talked-about subjects of the year has without doubt been that of smartwatches. Are they are good thing or bad thing for the watchmaking industry?
For the most apocalyptic minds, connected watches could create a tidal wave similar to that of quartz watches and by neglecting this phenomenon Swiss watchmakers will repeat the catastrophe that occurred when Switzerland completely lost its footing in face of an invasion of quartz watches from Japan. The most optimistic, on the other hand, just see them as a fad that will only affect them marginally, or not at all. Between the two, pragmatists say that they will produce “luxury smartwatches” if need be.
It is difficult to put oneself in the position of an oracle and settle this debate, especially since the connected watches that are already on the market are disappointing from an aesthetic point of view and are riddled with deficiencies (in particular regarding their power reserve), some of which will no doubt be gradually solved. But their major problem is their indisputable obsolescence, which is part and parcel of the high-tech industry. As Stéphane Linder, CEO of TAG Heuer, explains, “The luxury sector, where we operate, is completely at odds with the idea of obsolescence because we are selling a status symbol, a dream. Maybe if and when the technology has stabilised we will have to come back to the issue and consider a luxury smartwatch. Having said that, it’s a phenomenon that you can neither neglect nor mock.” (Read our interview ”A precisely calculated move up range” in this issue).

In the best of worlds, the connected watch could gradually become a segment of the watchmaking industry in its own right. But if this was the case, we should already anticipate the arrival of new and very powerful actors (the likes of Apple and Samsung) who will try to take a share in the global watch market. And we should not rule out a move up range by them to counteract the Swiss response.

A good-old mechanical watch should (theoretically) never become obsolete.

But are we all nerds? The recent anecdote about an American journalist who was showing off his GoogleGlasses in a bar in San Francisco and was beaten up made us smile... (but we sympathise with him). “Connected”, okay, but “over-connected”, no thanks! We sometimes feel that the wind is changing and that, given that we might find the NSA or other commercially aggressive entities practically grafted on to our wrist… a good-old mechanical watch will still be welcome. And what’s more it should (theoretically) never become obsolete.
So the issue remains open.


We are ritually asked the question of “trends”. So, what are the trends? The watchmaking spectrum we see today is a real bazaar that contains anything and everything. But we have a vague impression that the tide is turning and that many of the sumptuous objects it deposited on the beach have sunk into the sand. In other words, after the great crisis of 2008 – 2009, the one-upmanship quickly started again, as if everything had been forgotten and people were starting afresh. At the time everyone saw China as the Promised Land but the country soon put a damper on the most pressing of expectations.

Already in January the SIHH left people with mixed feelings. After the great wave of tourbillons the new watchmaking continent was called “Métiers d’Art” (artistic crafts). Some of these crafts had barely been re-established before they were being piled on top of each other, with engine turning being sculpted before adding grand feu enamel and a few feathers or some straw… We exaggerate, but only just.
In face of these sometimes vain fireworks we felt that there was a precautionary return to the more basic, solid, durable and… affordable. But this is, of course, less newsworthy. In some ways there is the show on the one hand and the products derived from the show on the other. Those that are sold during the intermission but which bring in most of the revenue. This is where the pragmatic issues of value for money, robustness and non-obsolescence count… while nevertheless maintaining a certain level of prestige.

Isn’t that a definition of Rolex?
The silent giant, which allows impeccable optimisations of its timepieces to trickle out over the years and whose unwavering path is not affected by the trials and tribulations of the world.
The horizon of the Swiss watchmaking industry?


With its recent referendum, Switzerland has seriously shot itself in the foot. While its prosperity – and the prosperity of the Swiss watchmaking industry in particular – depends mainly on its openness to the world, this small country has decided to barricade itself inside its small territory.

Without the elsewhere, the Swiss watchmaking industry would never have existed.

Without the tens of thousands of employees in the watchmaking industry who come from France, Germany and even further away, the Swiss “factory” would simply cease to function and the research and development departments, deprived of engineers with an international background, would be drained. Not to mention the “top floors”: how many of our media-friendly CEOs come from France and elsewhere? Even the charismatic and “so Swiss” Jean-Claude Biver is from Luxembourg.

We can only hope that BaselWorld, by opening up to the watch brands from around the world, will offer a scathing contradiction of the country’s sad attempt to close in on itself. Without the elsewhere, the Swiss watchmaking industry would never have existed.

Source: Europa Star April - May 2014 Magazine Issue