Swiss watchmaker biggies urge industry to slow down

Bloomberg

The people who make some of Switzerland’s most expensive watches have a word of advice for the rest of the industry: Slow down.
That might help avoid a repeat of the last two years, when watchmakers had to cut jobs and repurchase inventory after their rush into the Chinese market hit a wall.
As more than two dozen brands prepare to showcase their creations at Geneva’s watch fair next week, a handful of unlisted companies that avoided the worst of the debacle say there are ways to bypass the boom-and-bust cycle.
“You shouldn’t rush,” said Patek Philippe Chairman Thierry Stern, crossing his arms in a conference room at company headquarters near Geneva. “It’s more important to preserve rarity. Most brands had to rush, because they had to achieve figures, shareholders were pushing them. For us it’s not the same.”
Switzerland has churned out more than 1 billion watches over the past four decades, and the industry is eager for signs that the worst downturn in demand since the 1980s may be ending. Richemont, which makes timepieces under a dozen brands including Cartier, said sales of watches at its own stores rose over the Christmas season. Total revenue at the watch unit dropped amid weak orders from other retailers. Shares in Richemont and Swatch Group AG surged on optimism the worst was over. Still, Patek, Audemars Piguet and Richard Mille executives say they have an advantage over publicly traded Swiss watchmakers because they don’t have shareholders hounding them to increase production, which would undercut the scarcity of their luxury items.
All three brands have had sales growth for at least half a decade and haven’t resorted to job cuts. Richemont, by contrast, eliminated about 200 positions last year. Swatch’s revenue is expected to drop 8 percent in 2016, according to data compiled by Bloomberg. Richard Mille, which hired 25 people last year, recorded sales growth of 22 percent, even as the market shrank. Its watches sell for an average of 180,000 Swiss francs ($178,500). “We do whatever we want, we don’t have to please shareholders,” Audemars Piguet Chief Executive Officer Francois-Henry Bennahmias said in his office in Le Brassus, an hour’s snowy drive from Geneva. “Many watchmakers are opening more doors instead of shrinking distribution, which is what they should be doing. We’ve also always made a point not to increase production like crazy, which has helped us a lot.”
Richemont declined to comment. A Swatch spokesman said the company doesn’t act under pressure from shareholders and analysts, and that its own stores were performing best, especially in challenging times.
The Swiss watch industry isn’t new to trauma. It survived the quartz crisis, in which competition from battery-powered watches in the 1970s and 1980s led some 60,000 jobs to disappear. Swatch’s namesake mass-market plastic watch kept factories running, helping the industry survive.
By 2010, a main driver for Swiss watchmakers was booming demand in China and Hong Kong. That led brands owned by Swatch and Richemont to increase production, push prices higher and open more stores in the region. Then, a campaign against extravagant spending and corruption in China crimped demand for watches there. More recently, terrorist attacks have cut the numbers of free-spending Chinese tourists coming to Europe.
Still, Swiss watch exports to mainland China have rebounded in recent months, and Hong Kong neared a return to growth in November. A recovery could mean that the listed groups would have advantage on their side again.

FIXED COST
“Large players suffer from a greater fixed cost base and a greater store network, while smaller companies can be more nimble,” said John Guy, an analyst at MainFirst Bank in London. “On the other hand, those large players that pushed into China during the boom will be in the best position to reap the benefits if the market environment starts to improve.”
To Zuzanna Pusz, an analyst at Berenberg, being listed doesn’t necessarily create more pressure on management, especially as both Swatch and Richemont are run by families. Swatch’s biggest shareholders are CEO Nick Hayek and Chairwoman Nayla Hayek, while Richemont Chairman Johann Rupert has control of his company’s voting shares.
“They’ve historically been more focused on creating value in the long term and less so on just pleasing shareholders in the short-term,” Pusz said. “The reality is we don’t really know how well or badly the unlisted companies are doing, since we don’t have the same transparency. I doubt Patek and the rest are growing double-digit now.”
Last year the industry exported more than 20 million watches, bringing the grand total to 2.7 billion Swiss timepieces since 1885, when records began.
“The Swiss watch industry has produced too many watches,” said Richard Mille, CEO of the namesake brand, which produced 3,550 pieces last year. “Many groups today are paying for the fact that they were pushed by shareholders for volume, volume, volume.”