LONDON, United Kingdom — With the luxury watch market under pressure from a decline in sales to Russian, Middle Eastern and Chinese customers, who are suffering from the combined effects of low oil prices and an economic slowdown in some markets, luxury watch brands are championing steel models to appeal to more price-sensitive middle class consumers in both Western markets and Asia.
But this shift to more affordable steel models will weigh on industry growth and retail space productivity at the premium end of the luxury watch industry, which has relied heavily on precious metal models to bolster its profits, according to new research by Exane BNP Paribas.
In Richemont’s brand portfolio, steel-focused, lower priced watch brands are among the best performers. However, the conglomerate’s Piaget and Vacheron Constantin brands — both of which depend on precious metals models for more than 90 percent of sales — posted the weakest performances, according to data from Exane BNP Paribas.
The shift could also present a problem for Swatch Group, the world’s largest watchmaker. Precious metal models make up more than two-thirds of models at four of Swatch Group’s six largest premium and luxury brands, including Breguet, Harry Winston and Jacquet Droz.
The combination of high dependence on precious metal models and high prices puts luxury watch brands in an uncomfortable position, said Exane BNP Paribas. Precious metal models make up a third of the value of Swiss watch exports, while the market for watch models of around $11,000 is more reliant on affordable steel models.
“A shift to steel is bound to depress market growth and retail space productivity,” said Exane BNP Paribas’ report. “This is bad news for the Swiss-made watch industry, but it is very bad news for large watch retail chains, already suffering from high inventory levels.”
“Lower space productivity causes retailers to suffer from operating deleverage, return on invested capital compression and shareholder value destruction,” continued the report. “We can assume that steel watches have the same gross margin percentage as precious metal watches — and we would probably be erring on the side of caution, as steel watches may be more profitable.”
The Federation of the Swiss Watch Industry (FHS), an independent body that represents 500 industry members, reported that the value of exports fell by 16.1 percent to 1.6 billion Swiss francs in June — the lowest level ever recorded in the first half of a year — continuing the downward trend seen last year.
The changes in the luxury watch market appear to be more structural than cyclical, said Exane BNP Paribas, which cites a shift in appetite from Chinese consumers, who are becoming less conspicuous in their luxury purchases, and products with long replacement cycles as converging factors that will keep the high-end watch market subdued.
With this in mind, luxury watch conglomerates like Richemont — which boasts a brand portfolio including Cartier and a strong jewellery offering — are more likely to outperform firms more dependent on precious metal watch models like Swatch Group. Earlier this year, Cartier presented a larger-than-usual number of affordable watches, including its new Drive model — a steel-cased men’s watch priced at just over €5,000.
“Swatch looks like a prisoner of its own high upstream integration, given the low flexibility,” said Exane BNP Parbas. “And smart watches are on the horizon, potentially threatening its entry price point business.”