The Swiss watch exports have achieved a significant growth last year…. But there are few winners

The Federation of the Swiss watch industry (FH) has recently published the export figures for the month of December and hence the verdict for a year with contrasting signs.

By Olivier R. Müller

One positive takeaway is the fact that we finished the year with an increase of 6,3% in value, despite the month of December seeing a decrease of 2,8% YoY. The positive trend seen of the first half of 2018 – with an increase of 10,1% - couldn’t be maintained for the whole year…. At least in value, because the evolution of the quantities was negative with a loss of volume of 2,3%, which might seem reasonable, but put in number of pieces is quite impressive with 560’000 watches less sold. And more worryingly it reflects an ongoing and negative long term tendency, with 4,3 million watches less sold last year than in 2013 ! 


© Federation of the Swiss watch industry FH

What are the market trends?

The industry is more and more dependent on Asian markets

Hong Kong and mainland China experienced an impressive market turnaround partly due to the fact that a big chunk of the Chinese clients has been transferred from abroad to the domestic market (representing 22% of the total exports of the Swiss watch industry). The downside is that certain European markets have experienced a significant downturn after having been plebiscited by Chinese and Asian customers overall. Spain being the worst example at -11% and the UK at -4,4% which is experiencing the negative impact of the Brexit on the clients’ moods. France is an exception to this negative tendency, but this is due to booming sales to tourists.

The dependence on the Asian markets for the Swiss watch exports is an ongoing and growing trend. We estimate that overall 70% of the Swiss watches sales are absorbed by Asian clients on their respective domestic markets and their duty-free spending abroad, for example in Japan (+9,1%).

 © Federation of the Swiss watch industry FH

The Swiss watch industry is dominant in the high-end, but is neglecting the entry and mid-level market segments

The sales figures are clearly showing that we are losing significant volumes on the quartz watches with a decrease of 11 million units less sold per year! Those are 11 million units less quartz movements, but also the same quantity of dials, hands and watch cases which are not produced and assembled anymore! And for those thinking that this only  impacts the entry level of the market, they should think again, because quartz is also used for watches in the mid-level segment which can be luxury products on markets with a lower spending power than in Switzerland. We’re neglecting the entry and mid-level and are concentrating on the premium and luxury market segments, which is an invitation for our competitors to occupy the field.

On the other hand, we can try to be reassured by looking at the figures on mechanical movements (manual or automatic winding) and noting that their volume has tripled since 2000. The industry has maintained those volumes in the last 6 years with 7,5 million units a year.

The takeaway on this: the balance between the volume losses on quartz and the gains on the mechanical watches is negative and represents a loss of 6 million units since the year 2000! And the less watches less are produced and assembled in the Swiss factories.

Last year the average retail price of a Swiss watch was CHF 2’100** compared with CHF 780 in 2000 (+147% at constant value). The Swiss watches market is shifting upwards and abandons the entry and mid-market segments with a few exceptions linked to the Swatch Group (Swatch, Certina, Mido, Hamilton). An aggravating factor is the booming of smartwatches of which 71 million units were sold last year***. This amounts to 21,7m Apple watches sold which is almost as much as the whole Swiss watch industry.

But, at the end of the day is it a problem to concentrate on the high-end?

A legitimate question could be whether it’s sustainable for a whole industry to remain in an ultra-niche positioning? As a reminder: 1bn watches are being sold every year worldwide. The Swiss watch industry controls 2,5% in units, but 54% in value of this market.

The issue is not about understanding whether a niche market segment can be profitable, the R&D volumes needed to justify the investments. A factory can’t be profitable if the work load is permanently not matching the production capacities.

The graphs hereunder reflect this equation with an inversed pyramid of sales volumes in quantities and values:

  • 9% of all the exported Swiss watches account for 74% of the total value!


% of the volume per export price range


% of the volume per export price range
(* the price ranges indicated are export prices. © FHS, 01.2019)

Who is winning the game?

Looking at the figures we can easily estimate that in a market which is not growing to say the least and over a period of 5 years even decreasing by 3%, certain brands continue to overperform the market. Some of them achieving 2 digits growth rates in 2018. The brands gaining massively market shares are consistently the same ones: Rolex, Omega, Longines, Audemars Piguet, Patek Philippe, Richard Mille and a few others.

In each market segment, the leaders are getting stronger and not leaving much for the others to survive. In a report recently published by Morgan Stanley it was estimated that the 4 biggest watch groups (Swatch Group, Rolex, Richemont and LVMH) are sharing 75% of the market between them and that if we add a few independent brands, which are achieving at least CHF 200m of sales (Patek Philippe, Audemars Piguet, Chopard and Breitling) we can estimate that 90% of the Swiss made watches are controlled by very few players. And I forecast that this market share has grown in 2018 or in other words less than 10% of the whole market are divided on approx. 300 brands!


© Morgan Stanley x LuxeConsult Sàrl , 15.04.2018, "Swiss watches: Positive feedback loupe – Key takeaways from our deep dive into market shares"****

Another glimmer of hope is represented by the independent watch brands and artisan watchmakers such as FP Journe or Kari Voutilainen. But they represent at best 0,5% of the whole Swiss made production volume…. They stand for a tradition, but they’re certainly not the drivers for the production volumes.

 

*remarks : for the purpose of simplifying the understanding all the figures are based on the export statistics published by the Federation of the Swiss watch industry (FH). For instance, the sales to locals in Switzerland are less than 20% of the whole market the rest being mainly duty-free sales to tourists.

We also estimate that the overall export figures are overestimated by ca. CHF 1bn due to after sales returns and inventories buy-backs from the export markets by the brands. Therefore if we add the Swiss market sales and deduct the importations for the explained reasons we estimate that they compensate each other.

** this figure is based on the watch exports statistics and we estimate that the ratio between the export price and the retail price is 2,5 x.

***estimate by IDC https://www.idc.com/getdoc.jsp?containerId=prUS44276818

**** LuxeConsult Sàrl collaborates with Morgan Stanley’s Europe research department on listed companies active with Swiss made watches. We do not participate in any valuation of listed or private companies or in their share prices valuation.