Is the Worst Over for the Swiss Watch Industry?
Beating the Odds
For the luxury watch industry, 2020 was supposed to be a rainbow year, packed with hope and faith. The new decade started on a great note with Swiss watch exports in January up by 9.4 percent in value year-on-year. The United States was topping the charts with a growth of 15 percent and it looked like, with the help of other significant markets like China, Japan and Singapore, the industry would soon return to its glory days.
In February, just when luxury brands had started adapting to the downturn following political protests in its largest market Hong Kong, the COVID-19 pandemic broke out. By mid-March, the world had completely changed. Swiss watch brands started shutting down their factories and stores across the world. The two biggest trade shows —Watches & Wonders and Baselworld — were cancelled and over the next two months the industry slipped into its biggest economic crisis since World War II.
The Federation of the Swiss Watch Industry (FH) reported an unprecedented collapse in exports. It said the last time Switzerland’s annual watch exports fell below 20 million units was in 1945, when it exported 18.8 million pieces. “The performance of the main markets fell by more than half compared with 2019, across the board,” FH noted in a report in May 2020. The organisation issues monthly data on the global watch exports, however, these numbers are a measure of only wholesale orders and not actual sales at stores.
Determined to get back on its feet, the industry showcased exemplary resilience with a slew of brilliantly executed digital exhibitions and unexpected sales online. The momentum towards recovery caught speed with a strong community of watch enthusiasts who brought their tribe online to propel discussions around collecting. Digital media also played a crucial role in encouraging people to research and buy watches online all through last year. A combination of physical and digital events provided a fillip to sales at auction houses, which managed to keep their cash registers ringing despite the pandemic.
By the end of 2020, most Swiss watch executives were hopeful of getting their heads above water, thanks to China that reported the highest month-on-month growth for Swiss watch exports in November. According to Matthias A. Schuler, senior advisor to the Boston Consulting Group (BCG), in 2020 China recorded a spectacular year-on-year growth of 50percent. “As long as traveling and tourism remains restricted, it is likely that China will continue to grow more than 25 percent this year,” says Schuler.
While most markets are pointing towards a gradual recovery in 2021, it is the Far East that looks most promising for the consistent growth of Swiss watch exports in the coming months. “China is the first country that has come out of the crisis but Chinese citizens could not travel abroad last year. Consequently, they bought Swiss watches in their domestic market. 2021 will undoubtedly be a better year for Swiss watchmakers than the previous one. We are expecting an upward trend but the evolution remains quite uncertain due to the pandemic,” says FH president Jean-Daniel Pasche.
It has been just over a year the world awoke to the enormity of the pandemic and how it affected life the world over. For Swiss watchmakers, 2020 was one of the worst years on record as export numbers plummeted to 2010 levels. As per the latest FH report, the decline in exports in the world’s top 10 markets is gradually slowing down. Hong Kong, the Swiss powerhouse for exports till 2019, has now been replaced by China in the top spot. Currently the world’s largest market for Swiss watches, China has once again taken the lead in exports in January 2021 with a 58.2 percent growth. US was the second-best market in terms of total export value though it still posted a negative 11 percent growth. Although Hong Kong is holding its place amongst the top three markets globally, its performance has further deteriorated to a negative 8.5 percent growth. “Strict measures to combat the pandemic had a sharply negative impact on watch exports to Japan (-20.9 percent) and the United Kingdom (-20.2 percent). Singapore, on the other hand, (-1.6 percent) showed almost no change,” noted the FH. “Europe remained more heavily affected than other regions, with exports plummeting by 26.9 percent in January,” says FH.
As per BCG’s research analysis, the overall market for Swiss watches dropped by negative 21 percent by value. “If you look at the industry’s response to recent crises (2008 and 2016), you will notice a strong rebound within the next year or so. However, this time, it might be still a bit mitigated due to the ongoing restrictions. A growth of +15 percent can be foreseen for 2021,” says Schuler.
Since 1885 only twice has the Swiss watch industry recorded back-to-back drop in exports for three consecutive years. The first was during the financial panic of 1907 that led to the creation of the US Federal Reserve and the other was the Great Depression in 1930. During the 2009 financial crisis when exports dropped a hair-raising 22.3 percent, China emerged as the savior for the Swiss, pushing exports by a miraculous 23 percent. “We were operating in a different environment then where boutiques were still open, international travel retail continued and China was a booming market,” says Jules Boudrand, director, Financial Advisory, Deloitte SA. In 2021, China is expected to remain strong, including the shift in sales to mainland China as long as international travel retail is down. Globally, the pace of recovery will largely depend on the length and extent of the new lockdowns and the pace at which the global vaccination campaign advances. The growth of the industry should continue to rely on leading brands (independent or part of groups) and be driven mainly by high-end mechanical watches,” says Boudrand.
All Eyes on China
It’s been eight years since the Chinese government introduced a massive anti-corruption campaign and banned the gifting of luxury watches within bureaucratic circles. The corporate gifting trend in China is picking up steam again with the government trying to boost consumer spending within the country rather than overseas. Instead of flocking to Hong Kong, Singapore or Tokyo, the rich and famous have been making all their luxury purchases at Hainan Island — the new Mecca for luxury spenders in China. Last July, as the government tripled the annual allowance for duty-free purchases in Hainan to 100,000 yuan (about US$15,500) per person, luxury watch brands scrambled to open pop-ups and cover up the lost business during the pandemic. By January 2021 duty-free sales at Hainan had touched 180 million yuan, almost three times up from 2020.
“In July 2020, the duty free shopping limit significantly increased from approximately US$400 to US$14,000 per year, which included the purchase of an unlimited number of watches provided the total annual limit was not exceeded. This led Chinese consumers to shift a substantial portion of their buying power within the domestic market and away from Hong Kong, the US and Europe,” says Boudrand.
Besides the relaxation of duties in Hainan, China’s vibrant digital space also helped in boosting revenues for watch brands that had opened stores at the Tmall Luxury Pavilion, an online marketplace owned by the Alibaba Group. “China turned out to be the number one market for Zenith last year. Thanks to its appetite for luxury goods, it contributed to 30 percent of our sales, which was incredible. Last year we doubled our turnover in China between October and December,” says Julien Tornare, CEO, Zenith.
Despite the encouraging anecdotal reports of China’s role in rescuing the Swiss watch industry from the downturn in recent years, the sentiment about 2021 among financial analysts remains cautious.
“Hong Kong lost its top position to China as the largest market for luxury watches after more than a decade. Global luxury groups are investing heavily in developing their presence in China either physically or via e-commerce. All of the travel retail purchases have now been repatriated to mainland China and it should therefore remain a strong market for Swiss luxury watches but it is difficult to say if such high growth rates are sustainable,” says Boudrand.
China is hot again but that’s not good news for brands that relied heavily on Chinese travellers buying outside the country. Until last year, H. Moser & Cie would sell more than half of its watches in Switzerland to Chinese. The company’s sales in China, however, accounted for less than one percent of its global sales. “The travel restrictions had a significant impact on sales in Switzerland but we managed to reduce the drop by selling more watches to local clients. This year, we are increasing our digital presence in China. We have already opened a boutique in Beijing and will soon have stores in Shanghai, Hainan and Chengdu. We are also planning to participate in the upcoming edition of Watches and Wonders in Shanghai this April,” says Edouard Meylan, CEO, H. Moser & Cie.
Tornare, on the other hand, has decided to be a bit subdued about this Chinese boom. “I will not over invest in China and ignore the other markets. We have a very good reputation in Japan, they love the El Primero and I would like to build on that. In America, the Chronomaster Sport has been a huge hit. I want to rely on the local clientele in each country and keep it all very well balanced,” he says.
Hong Kong Hurting
According to a Geneva School of Business Administration Study, in 2015 Hong Kong had at least 60 authorised dealers for Rolex and at least 52 for Omega. This tiny city along with mainland China had propelled Swiss watch sales to the record highs of 2011 and 2012 but over the last two years Hong Kong’s raging political turmoil has turned it into the worst nightmare for Swiss watch brands. While some brands had already trimmed their retail networks in Hong Kong last year, it is unlikely that the market will pick up any momentum this year.
According to BCG’s analysis, Hong Kong was the worst performing market in 2020, at -37 percent as compared to 2019. It showed some hints of improvement in October last year with a four percent month-on-month growth but it’s decline remains a cause of concern for all stakeholders there. “The political turmoil will continue to burden HK and it is unlikely that it will come back to the highs of 2019,” says Schuler.
America to the Rescue?
The US market started showing signs of recovery in July 2020. That was the first month export numbers touched 2019 levels, making brands hopeful of a new beginning in US. According to financial analysts, US has been one of the main growth drivers for the luxury watch industry and now that the elections are over, return to pre-pandemic growth looks quite achievable. “The recovery of the market will depend on the extent of the current lockdowns and the outcome of the vaccination campaign but it should remain a strong export market,” says Boudrand.
An Omni-Channel Approach
Rising above the gloom of the coronavirus pandemic, the luxury watch industry has been stepping up communication and marketing strategies to woo an audience that has never seemed so dull and distant before. Right from digital exhibitions to virtual boutique tours and augmented reality apps promising immersive product experiences, the brands have tried it all. However, for an industry that relies heavily on selling million-dollar watches desired for their tangibility, e-commerce is not enough to keep the business ticking.
Encouraged by the success of Watches & Wonders’ first digital edition in April 2020, a group of brands decided to attempt a show that brought the virtual and the physical together in the form of Geneva Watch Days in September 2020. We might not see the large-scale watch fairs coming back anytime soon but to suit the new world order, most luxury watch brands are now sincerely aligning their digital strategies with some physical presence across the globe.
“As outlined in our latest Swiss Watch Industry Study, over 60 percent of watch brands are prioritising their omni-channel strategy and looking to enhance the in-store experience with experiential brand experiences, a mobile-driven workforce and mobile apps. It is difficult to predict how successful e-commerce will be in the future but physical stores should continue to play a key part of a brand’s strategy,” says Boudrand.
The Rise of the Indies
Thanks to the accelerated digitalization of the luxury watch space in the last year, small and independent brands are getting more opportunities to compete directly with large brands/groups in an environment that does not require extensive marketing budgets to reach out to consumers. “Independent brands are often present in the very high-end price segment. They have low volumes, so it is difficult to compare them with brands that are part of a larger luxury group with higher volumes and the same price segment. We believe that leading independent brands, top brands that are part of a group and smaller, distinct independent brands will continue to contribute to the industry’s growth in the coming years,” says Boudrand.