MARKET FOCUS - U.S. watch Market faces a new challenge while catering to shifting demands

December 2016


Interview with Julie Petit, WeiserMazars

Julie Petit, WeiserMazars
Julie Petit, WeiserMazars

Following the slowdown in China starting in 2014, many Swiss watchmakers have viewed the U.S. market as a ‘compensating’ eldorado. Has it really been the case?

The U.S. accounted for approximately 28 percent of total watch industry sales worldwide in 2015, which amounted to $11 billion in sales. Swiss-made watches, largely belonging to category of luxury watches, represented about 20 percent of U.S. watch industry sales in 2015. Strong economic performance in the U.S. is expected to drive the watch industry upward in the coming years, and the high-value watch industry is expected to grow. This trend is very favourable for Swiss luxury watchmakers exporting to the U.S. As the economy improves the sales trends of the luxury watch industry in the U.S. appear to be better than in other regions of the world. However, U.S. and Chinese consumers are different and U.S. growth may not necessarily compensate for the downtrend in sales in China. Swiss watchmakers are also facing other challenges in the U.S. such as growing interest in smartwatches, fluctuating currency exchange rates, and rising use of digital media.

The first two months of 2016 saw a decline of exports of 5.4 percent on a yearly basis. How healthy is the U.S. watch market today?

The U.S. watch market is facing hurdles of technological advancement and lifestyle changes in its buyers. Time display has become a ubiquitous feature in electronic devices, from coffee machines to cell phones. This has created the perception that owning a traditional watch is redundant, which was further solidified by the rise of smartphones.

Sales of traditional watches are suffering also because of the lack of additional functionalities other than telling time. Currently, more people in the U.S. own a mobile phone than a watch, and smartwatches are gaining market share, in part because of their ability to provide useful features like thermometers, GPS, altimeters, and mass storage. Not many Swiss manufacturers have adopted this new technology. TAG Heuer has started to launch smartwatches. While sales are still low, TAG Heuer’s watches have been well received in the U.S. watch market and may become a trend.

MARKET FOCUS - U.S. watch Market faces a new challenge while catering to shifting demands

Who are the biggest players in the U.S. watch market today, by price range (local vs. foreign brands)?

The U.S. watch industry offers a wide range of choices for its consumers, from high-end Swiss luxury watches costing hundreds of thousands of U.S. dollars, to cheaper watches from Hong Kong priced as low as $4. Most manufacturers focus on a specific segment of the market, distinguished by the price point of their products. Rolex, Omega, Cartier, Breitling, and Patek Philippe are examples of luxury- market players while Longines, TAG Heuer, Rado, Tudor, Michael Kors are middle-range-market players. Imports from China mostly comprise the lower-market segment.

Although many key players in the industry will not reveal the number of watches they sell, Apple, Rolex, TAG Heuer and Omega are the most popular watch brands in the U.S. Brands rounding out the top ten include Swatch, Michael Kors, Tissot, Breitling, Patek Philippe, and Hublot. According to 2015 surveys on the biggest players in the U.S., Rolex was the most preferred brand among upper-income teens, i.e. household income more than $107,000. Michael Kors, Casio and Fossil ranked second, third, and fourth respectively among this group. Apple ranked fifth with five percent of upper- income teens preferring the product.

Relatively new brands like Shinola want to revive the American watch industry tradition. Are they succeeding in their endeavour?

After the economic slump the slogan “Made in America” caught on with politicians, manufacturers and consumers alike. Brands like Shinola capitalised on this trend and established themselves as American manufacturers of bicycles, watches, and leather goods. Shinola  was founded in 2011. Its annual sales amount to about $100 million and Shinola watches sell for between $475 and $1,125. Shinola’s popularity surged after President Obama purchased one of their watches for himself, declaring the company a symbol of American manufacturing bringing jobs back to the country. President Obama even gifted a Shinola watch to former British Prime Minister David Cameron with the seal of the President on it.

 Shinola’s watches are assembled, crafted and designed in its factory in Detroit, Michigan by around 500 employees. The company failed to meet the standards set by the Federal Trade Commission (FTC) to be called “Made in America”. Shinola is partially owned by the Swiss manufacturer Ronda and procures some of its components from Switzerland. Nevertheless, Shinola is viewed as one of the trendiest watchmakers in America among millennials. Its endeavour has been extremely successful and is taken as an example by other U.S. brands both in and outside the watch market.

The American watch giant Fossil is increasingly going digital, to the point that their entire production might consist of smartwatches in five years’ time. We feel that the appeal of connected watches is bigger in the U.S. than in Europe and could directly bite into the market of quartz watches. Is this directly related to the decrease of Swiss watch exports to the U.S.? How successful are smartwatches in the U.S.? Do traditional watchmakers have to worry?

The introduction of smart wearables has raised a heated debate in the industry as to whether smartwatches will nullify the traditional watch market. Approximately one in 20 Americans owns a smartwatch. This segment is expected to grow and may cannibalise sales of traditional watches within the next five years. But it has not been the case in 2016, even if the decline in the export of Swiss watches seems to be related to the increase in sales of smartwatches in the U.S. Smartwatches challenge the under $1,500 traditional watch category for the most part. Depending on the number of apps and features available, most entry-level smartwatches are currently priced at $120-200, while middle range watches are priced at $300-500. Apple’s most anticipated smartwatch was launched at an entry price of $350. While it was considered expensive by some, the price made adoption of the technology feasible for a broader audience of consumers.

The popularity of smartwatches does give rise to more discussions among other watch manufacturers. In 2015 Fossil reported a decline in watch sales of 8 percent. To reverse this trend, the company acquired wearable technology maker Misfit for $260 million and launched its first smart device. In addition to spending on in-store promotional activities, Fossil  also announced it has been working on innovative designs and plans to launch 100 smart products in eight of its brand lines by the end of 2016.

In 2015, Montblanc launched the e-Strap device. It is a smartwatch combining mechanical timepiece and digital functionalities. The e-Strap watch meets the highest standards of traditional Swiss fine watchmaking while including an activity tracker and the ability to control a smartphone. The e-Strap, which is sold for around $4,000, can take pictures, receive phone notifications or search for the phone (or the watch) within a range of up 30 metres.

Can you assess the reality of the success (or failure) of the Apple Watch?

The Apple Watch is marketed as a lifestyle trend. The Apple Watch represented a 5-to-6 billion dollar revenue stream in the U.S. for its first year on the market, based on the known average selling price of around $450 per unit. Seventy-seven percent of Americans who bought the Apple Watch liked the product and found it useful. However, the Apple Watch cannot be viewed as a success when compared it to the launch of the iPhone or other first-generation Apple products. The media were very excited by the launch of the Apple Watch but sales in the U.S. have not been as high as expected. One of the main deterrents causing potential customers to forgo the watch appears to be the price. However, it seems that people are interested in the Apple Watch, and it is viewed as an aspirational, advanced-technology product. Global adoption may still be further down the road.

Online sales seem to already be part of daily life in America, contrary to Europe. How big is this phenomenon related to watches, compared to traditional brick-and- mortar retail?

Online sales are indeed part of daily life in America. The online watch market can be viewed as risky for both buyers and sellers of luxury watches though, as buyers may unwittingly purchase fake products and sellers face risks to their reputation. Most well-known European companies like Cartier, Bulgari, and Baume & Mercier do have an online presence in the U.S. Traditional watch companies follow different strategies. For instance, Omega considers watch buying to be an emotional decision and as such prefers to have physical bricks-and-mortar stores host its transactions. This is reflected in Omega’s more than 300 mono-brand stores worldwide. Conversely, other watchmakers like Fossil follow a different path, viewing e-commerce as an important component to success in the long run. Fossil increased its online focus and reduced its physical presence from 296 stores to 281 stores in 2015. The trend of online sales is stronger for smartwatches than for traditional watches. Companies like Apple have options for both a traditional shop space and an online presence. Apple believes empowering customers and making the buying experience convenient for them are the keys to success in an age where technology changes how businesses are operated.

How important is the vintage watch market as well as the second-hand watch market in the U.S.?

Conventional auction houses like Sotheby’s, Christie’s, and Antiquorum still dominate the vintage auction market. They are mainly used for high value items, including vintage watches, most of which are sold at high price points, deterring potential buyers. The vintage watch market is a business on its own and represents a small market. Further, to a millennial, vintage has a history, making vintage watches appealing. On the other end, the advent of websites like eBay and Craigslist that encourage people to sell their unwanted possessions has increased interest in pre-owned watches for both buyers and sellers. This has encouraged many new start-ups to create online shops connecting sellers with potential buyers. The recent increase in online marketplaces for pre-owned watches indicates that the number of second-hand watches for sale has increased. Some of these sites even encourage their buyers to buy new watches from the manufacturer’s shop as they later have the potential to become mint condition, pre-owned watches – complete with original box and papers.

What are the main elements that drive the U.S. luxury watch market today: purchasing power, buying mood, or geopolitical events?

Purchasing power is a commanding element driving the U.S. market for traditional luxury watches. As young people get older and increase their disposable income, they tend to invest in traditional watches as a symbol of power and money. Owning a Rolex or a Patek Philippe is considered a status symbol. Further, a traditional timepiece has a longer life-span than most smartwatches, making them popular among older generations.

Fashion trends also drive the U.S. watch market as watches are seen as pieces of jewellery. About 30 percent of Americans wear a watch as a fashion accessory, and close to a third of women buy watches to complement their wardrobe. The disposability and affordability of many brands make them a popular fashion choice. This product segment denotes an increasing demand for lower cost watches and accessories. Making a stylish statement also drives the smartwatch market. The decision to purchase a smartwatch appears to be a function of popular culture and lifestyle trends. The allure of smartwatches is stronger in younger buyers, which is not surprising knowing that the younger generation has grown up with mobile and smartphone technology.

Finally, as the economy improves in the U.S., consumers are becoming more comfortable spending on non-essential items such as watches. The economic situation is definitely an influential driver to take into account for the watch market.

Source: Europa Star 5/16 Winter 2016 Magazine Issue