Luxury watch industry’s recovery glimpsed despite economic gloom

The news for the watch industry is bad. “The headwinds are very strong — especially for watches,” warns Richard Lepeu, chief executive of Richemont, the Swiss luxury goods group whose brands include Cartier and Montblanc. The group’s sales in April 2016 were 15 per cent lower than the year before, in constant currencies.

Statistics on foreign sales of Swiss watches show trouble across the industry: in the first quarter of 2016, exports were 8.9 per cent lower than in the previous year, according to the Federation of the Swiss Watch Industry. The trouble has been blamed on a range of factors, from China’s economic slowdown to a strong Swiss franc.

The industry’s hope is that this year will bring an improvement, particularly in the US. “The global environment is tough mainly because of the significance of Hong Kong as a market. There is an overhang of inventories, but I think the more affordable watches are already selling better,” says Scilla Huang Sun, a luxury sector specialist at GAM Investment Management in Zurich.

Even as Hong Kong has suffered, sales in Japan have been lifted by a weaker yen, which has lost 12 per cent of its value against the dollar since its 2015 low. The US this year could also offer grounds for optimism, sector experts reckon. Last year, a stronger dollar led to European purchases displacing US sales, but those effects may start to weaken.

“We can see that the American continent is showing great potential and positive growth,” says François Thiébaud, president of Tissot, the Swiss watch brand.

A recovery in the US would strengthen the case for those who expect traditional luxury timepieces to ride out the challenge from smartwatches. Mr Thiébaud argues that, contrary to the watch industry’s gloomy view, the arrival of the Apple Watch has not changed US attitudes. “A traditional watch is not just about giving time, but it is also about conveying emotions related to a gift or a certain time in life,” he says. “There is nothing emotional about an electronic device.”

Nobody is rushing to predict a rebound, however. “The global economy is going to be very slow this year. It may take a couple of years for the industry to pick up,” says May Ling Tham, an analyst at Euromonitor International. In April, the International Monetary Fund warned the global economic recovery had “weakened further amid increasing financial turbulence”. It expected the global economy to grow by a modest 3.2 per cent in 2016 — roughly the same as last year but less than it had expected as recently as January.

In emerging markets — previously bright spots for luxury brands — “prospects across countries remain uneven and generally weaker than over the past two decades”, the IMF’s World Economic Outlook reported.

Watch and jewellery industry revenues are likely to follow such trends closely. “The health of luxury watch sales largely depends on GDP growth prospects and consumer sentiment,” says Thomas Chauvet, luxury sector analyst at Citigroup.

There is an overhang of inventories, but more affordable watches are already selling better

But it is not a simple correlation. Watch sales have been buffeted by currency movements. The slide in Swiss watch exports has been exacerbated by the strength of the franc (1.20 to the euro before it was unpegged in January 2015, now 1.10), which has increased manufacturing and employment costs in Switzerland. A strong dollar and weak euro have offered “greater price arbitrage opportunities for tourists and facilitated the emergence of well-organised parallel markets, particularly in Europe”, notes Mr Chauvet.

Sales to the Chinese, meanwhile, are still being hit by the crackdown on offering gifts to authorities as part of the country’s anti-corruption drive.

The industry’s difficulties remain particularly acute in Hong Kong, where the effects have been worsened by excessive stock levels in an overcrowded market. Swiss watch exports to Hong Kong were almost a third lower in the first quarter of 2016 than a year earlier.

Richemont revealed recently it was helping dealers in Hong Kong with excessive inventories by buying back products — and either reallocating them to other markets or dismantling and recycling them.

In a report published in April, Euromonitor forecast that in the next five years the US would cede the title of the world’s biggest spender on watches to China. “The transfer of power from west to east had seemed on course to happen earlier, but was derailed by the Chinese government’s crackdown on ostentation and extravagant gifts, and by a depreciation of the Chinese currency since 2015,” the report noted.