The Swiss watch industry’s perfect storm

Swiss watchmakers sailed into a perfect storm this year. The industry, which generates more than $20 billion in exports, was buffeted from all sides — largely by circumstances largely beyond its control, but it’s increasingly clear that the decline will continue unless the industry changes the way it designs and markets its products.
In January through June, the exports of Swiss watches dropped 11.9 percent in unit terms and 10.7 percent in value terms compared to the same period last year.
The decline has been accelerating every month. In June, sales were falling in every region, every price category, every type of watch.
It’s as if market forces have conspired against the industry. The strong Swiss franc has been putting downward pressure on sales since January, 2015. The anti-corruption campaign in China made bureaucrats more cautious about accepting Swiss watches as gifts. A taste shift may be under way among well-traveled, affluent Chinese, anyway: Instead of lining up in front of Hong Kong luxury boutiques, they are, like their Western peers, more interested in paying for experiences than for brands and bling. Asian watch and jewelry retailers have been awash in inventory — according to data compiled by Bloomberg Intelligence, unsold goods are now worth upward of 60 percent of the major retailers’ market capitalization.
Besides, the renminbi has been weakening, so Chinese travelers have been buying less wherever they go.
European sales have been hit by a slowdown in tourism growth following the recent high-profile terror attacks. France, one of the biggest markets for Swiss watches, in part thanks to the huge number of tourists, has actually seen declines in arrivals. Japan, too, has had a tourism problem, in part thanks to a strengthening yen.
Another adverse factor has been gold prices, which have rocketed 25 percent since the start of the year, hitting the sales of precious watches: They declined 31 percent year-on-year in June.
Throughout the West and Asia, smartwatch producers are nibbling off market share from the Swiss in the lower price segments. And smartphone is as good at telling time as a watch.
On Thursday, Swatch Group, the biggest Swiss watchmaker, reported disappointing half-year results — a year-on-year sales decrease of 11.3 percent, roughly in line with the market, and a 53.6 percent drop in operating profit. The company cited forex headwinds and “lower production utilization” as reasons for this, the latter a function of the inventory accumulation. Retailers and watchmakers are trying to fight it with discounts, but the glut is not going away.
Most of these adverse conditions have nothing to do with the industry itself. There’s nothing it can do to stop IS and its followers from terrorizing France, no way for it to influence gold prices or currency exchange rates. Companies such as Swatch and Richemont are waiting out the storm, looking for bits of good news in a sea of despair. Swatch says it has seen strong retail growth in Chine and the U.K. in July, though the month isn’t even over so no specific data can be reported.
But the Swiss industry can’t lay all the blame on external factors. The commodity, currency and tourism fluctuations are so much white noise that’s distracting the Swiss from their industry’s major problem: The aura of old-world luxury, on which its advertising culture is based, has an increasingly limited appeal in a tech-driven world where the younger generation is, for the first time since World War II, poorer than its parents.
The industry is trying to shore up its position by deeply traditional means. From January, 2017, 60 percent of a watch’s value will need to be produced in Switzerland for it to be considered Swiss-made. Does it, however, matter to millennials where a watch is made?
The marketing of Swiss watches is traditionally based on connoisseurship, on creating an artificial impression of rarity, on “convincing a brand’s customers that it is indifferent to their needs and wishes,” as Matt Sinclair of the Loughborough Design School put it in a recent paper: The designer and the artisan knows best. That’s a potential hook for millennials, who admire hand-made, artisanal objects. Yet Swiss watches aren’t sold to them in that way: The glossy advertising is too traditional, too focused on the shiny object on a celebrity’s wrist rather than on the people who make them and the old-school technology they use.
Shifting consumer values mean a shiny, prestigious object is easiest to sell when it’s high-tech. The Swiss watch industry’s early experiments with smartwatches have been rather successful. TAG Heuer’s connected smartwatch sells for $1,500 — far more than the average Apple watch — but demand for it exceeds the brand’s production capacity: French luxury conglomerate LVMH, which owns TAG Heuer, expected to deliver 60,000 of the watches in the first five months of 2016, while it saw demand for 80,000. Too few Swiss watchmakers have entered the smartwatch fray, though, and their efforts are limited in scale. In volume terms, the Swiss aren’t even trying to compete with Apple, which may unveil a new watch in September and which ships millions of the gadgets every quarter — even though Apple and other wearable makers directly compete with the Swiss industry’s cheapest offerings.
The Swiss have been too timid in building a new image — that of technologically advanced artisans; more production and marketing innovation could insure them from unfavorable market conditions like the ones they’re seeing this year.
—Bloomberg

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru