NEW YORK, United States — For a watchmaker, Swatch Group AG has pretty terrible timing. The Swiss company said on Wednesday that its sales in the first half of 2019 were held back by cracking down on so-called “grey market” dealers, who sell stock at a discount.
Analysts at RBC estimate that this punitive action cost Swatch “triple-digit millions” in lost sales during the period, contributing to a worse-than-expected 3.7 percent decline in first-half revenue. Tackling the grey market is the right thing to do because the practice dents a watchmakers’ full-price sales and devalues its top-end brands (which in Swatch’s case include Omega and Longines). But what took it so long?
Its big Swiss rival Cie Financiere Richemont SA, which owns Cartier, has been buying back its stock for the past few years rather than letting dealers sell it for knockdown prices. While it’s largely at the end of this process, it still aims to keep supply in line with demand, or ideally below it, to boost desirability.
Swatch has taken a different approach. It is suspending deliveries to dealers rather than buying back inventory. Even so, it is a welcome attempt to clean up the market and should be beneficial in the longer term.
The only problem is that the crackdown comes at an already delicate moment for the group. Swatch is heavily exposed to China and Hong Kong, with 22 percent of its revenue coming from the mainland and 11 percent from Hong Kong, according to analysts at Bryan Garnier. Yet sales in Hong Kong fell by a double-digit percentage in the first half because of the protests and political turbulence in the city, Swatch said. This echoes Chow Tai Fook Jewellery Group Ltd., whose same-store sales slipped 11 percent in Kong Kong and Macau in the three months to June 30.
With such a big exposure Swatch is clearly at risk from any prolonged problems in Hong Kong, and from any broader Chinese slowdown related to the US price war.
At the same time, shoppers are starting to favour Apple-style smartwatches, which is bad news for Swatch’s brands at the more affordable end of the market. And while the company has eased some big bottlenecks in the production of its Omega and Longines brands, they haven’t been eliminated. Inventories rose 2.6 percent to 7.1 billion Swiss francs ($7.2 billion) as the company culled those grey market deliveries.
Despite the setbacks, Swatch shares rose by 5 percent because of a positive surprise on operating profit and relief that it was tackling the grey market problem. The company also expects a strong recovery in the second half (though this will depend on whether trade tensions hold back Chinese demand).
The shares have fallen 36 percent over the past year, leaving it at a discount to Richemont on a price-to-earnings basis. This is justified by Swatch’s greater exposure to cheaper timepieces, as well as Richemont’s superior online operations. Swatch may well be able to navigate the challenges ahead, but don’t set your watch by it.
By Andrea Felsted; Editor: James Boxell
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