Watchmakers’ price cuts are a sign of the times

As record-breaking years go, 2013 was a somewhat downbeat one for Switzerland’s watchmakers. Although exports hit an all-time high, at SFr21.8bn ($24.8bn), they were just 1.9 per cent above the level achieved in 2012.

For an industry used to double-digit growth, the slowdown was something of a shock.

So it is no surprise that as members of the industry gather in Switzerland at the annual Baselworld trade fair, which opens in the city on the French-German border on Thursday, there is more than a little caution in the air.

“I think it will be a difficult year,” says Michele Sofisti, who doubles as head of Gucci’s watches division and chief executive of Sowind Group, the Swiss haute horlogerie company that owns the Girard Perregaux and JeanRichard brands.

“Of course, things can improve; it depends on the world economy. But I’m not sure when the turnround will come. I think there is quite a lot of inventory out there.”

Analysts agree. “Market expectations for Baselworld will be prudent this year,” says Thomas Chauvet, luxury goods analyst at Citigroup. “The mood is unlikely to be bullish after a disappointing 2013 performance for the Swiss watch industry.”

A sign of this caution is that a number of brands are considering cutting prices in 2014 – a noteworthy change of direction in an industry that has seemed able to raise them almost at will in recent years.

“There has been a change,” comments Jean-Frédéric Dufour, chief executive of Zenith, one of LVMH’s stable of brands.

“Lots of watchmakers are pulling prices down a bit to make sure they are competitive. This trend was already there [at SIHH] in Geneva, and I can imagine that Baselworld will confirm it.”

Mr Sofisti takes a similar line. “I think this will be a year in which everyone pays very close attention to price, to ensure that customers are getting very good quality for their money. The years when you could put any price on a product are over,” he says.

Even watchmakers that are not overtly cutting prices are reviewing the balance in their collections between more and less expensive watches.

“We are changing our mix,” concedes Stéphane Linder, who took over as chief executive at TAG Heuer, another LVMH brand, last summer.

“For example, if we have a collection of watches with prices ranging from €1,000 up to €6,000, we might now have more watches close to the lower end than we had in the past.”

This mood of caution is also likely to be reflected in the types of timepieces that shimmer behind Basel’s plate glass cases, reckons Jon Cox, head of Swiss equities at Kepler Cheuvreux, a Europe-wide financial services company.

“In terms of new collections, I expect the there to be fewer glitzy and showy watches, reflecting the zeitgeist,” he says.

Mr Linder agrees. “I think there will be a return to simplicity, and a focus on timeless and classical watches.

“The industry goes in waves and, for the past five to six years, there has been a focus on extreme products, over-design, oversize. I think there will now be a shift back to more simple and understated watches,” he says.

“In these lukewarm [economic] situations, people are less keen to show off. They want a watch that they can wear on any occasion.”

Despite the caution on display among executives, however, most analysts are still predicting the industry will grow at between 6 and 8 per cent this year, more or less in line with its long-run average.

As ever, though, much depends on China.

Last year, exports to the country – which following a decade of roaring growth is now the third largest market for Swiss watches – fell 12.5 per cent, according to the Federation of the Swiss Watch Industry.

This was partly the result of a slight economic slowdown. But by far the biggest cause was a crackdown by the Chinese leadership on the practice of giving luxury gifts, such as watches, to win political or economic favours.

Combined with a 5.6 per cent decline in Hong Kong, the largest market for Swiss watches, the Chinese drop was the main reason for the slowdown in overall Swiss watch exports. So even a tailing off of this decline would be enough to give the industry’s figures a healthier glow in 2014.

Some improvement seems likely. But how quickly it will come is open to question. “There has been so much conflicting information,” says Mr Cox.

“One issue is the crackdown on gifting; another is the crackdown on undeclared watches at the Hong Kong-China border. But clearly, over the medium term, with the middle class continuing to expand, growth will come back.”

Mr Dufour is also confident of China’s long-term attractiveness.

In the short term, however, he says Chinese customers have switched away from expensive gold watches towards more modestly priced steel ones, now that they are buying for themselves rather than to impress people with whom they have political or business relationships.

“The bad news is that they are buying less; the good news is that they still love watches,” he says.

The changing dynamics among Chinese consumers are also likely to play a big role in how fast the European market grows this year. This is because sales in the region have been buoyed in recent years by the shopping sprees of Asian tourists.

In other parts of the world, the outlook is sunnier, with the US, in particular, catching the attention of both executives and analysts.

“I think the US should be quite strong this year,” says René Weber, an analyst at Bank Vontobel in Zurich. “[The US market] is still below the peak it reached in 2008, whereas in all the other markets we are ahead of 2008 levels.”

Beyond the vagaries of different geographical markets, two issues are likely to figure in conversations around the stands in Basel’s exhibition centre.

One is the advent of smartwatches. Last year, Samsung launched its Galaxy Gear, and other tech groups – including Apple – are developing models.

Some analysts have suggested that smartwatches could pose a threat to more traditional watchmakers. However, for the moment, watch executives are relatively relaxed about the phenomenon, although they are following developments with interest.

“I had my technicians buy some smartwatches to see what they were like, but the interface is not yet that good, and you need to have your phone nearby. And the idea of having to charge luxury watches kills the dream a bit,” says Mr Linder. “At the moment, it seems like a lot of hassle for little benefit.”

The second, more immediate, challenge is the Swiss competition commission’s decision last October to allow Swatch Group to cut back on the number of movements – the mechanical heart of a watch – that it supplies to its rivals.

Big groups have been able to invest in their own manufacturing facilities to cushion the impact of this change, but for some smaller brands 2014 could be the year in which they start to feel the pinch.

“There is a trend towards consolidation going on already in the industry, and it will accelerate,” says Mr Weber. “You need a lot of money to be independent, and some brands don’t have much money to spare.”