GENEVA, Switzerland — The Swiss-made luxury watch market is facing challenges that are unlikely to be resolved any time soon. A historic focus on wholesale and the rise of e-commerce have made rampant discounting visible to all, damaging brand equity and direct, full-price sales. Additionally, entry-level products are in structural decline as Chinese consumers mature.
The market is polarised: brands with tight control on distribution and perceived product rarity are winning; brands in denial over demand levels and complacent about product innovation are suffering. Overall, watches will continue to grow at a slower pace than the wider luxury market. It is not surprising that "old world" distribution conduits like Baselworld are suffering, too.
The momentum in entry-level watches has shifted away from Swiss products. Smartwatches and fashion watches are increasingly dominating the price segment below CHF 500 ($500) at retail, or under CHF 200 (around $202) export value. Here, FHS (Federation of the Swiss Watch Industry) export volumes are revealing and far away from the peaks of 2011.
European luxury players are virtually absent from the smartwatches segment, or have a mere toe in the water, with non-Swiss outsiders like LVMH leading the pack. Meanwhile, fashion watches are largely the realm of accessible luxury brands, such as Michael Kors. European soft luxury players are (rightly) concerned of trivialising their brands with low price points.
Overall, watches will continue to grow at a slower pace than the wider luxury market.
Swatch Group is on the back foot. Its brands — including Swatch, Mido and lower-end Tissot range — are driving in reverse. Attempts to win back consumers in this segment, such as Swatch’s Sistem51, have failed. Tissot’s T-Touch is sliding. And the Swatch brand is believed to be loss-making or, at best, breaking even.
At the Swiss-made high-end, the gap between winners and losers is widening.
Rolex reigns supreme as the luxury mega-brand in watches, much like Louis Vuitton in soft luxury: a dominant position in the high-end (CHF 5,000 to CHF 20,000) with greater than one-third market share; high volumes and scale economies (we estimate one million pieces per year); high brand desirability, with long waiting lists for the entry-price versions; a strong second hand market; and a tight grip on distribution, with very limited discounts.
Meanwhile, Patek Philippe is the king at the top end (over CHF 20,000, around $20,000), even if a shift towards steel bracelets is opening up some space in this segment, with Audemars Piguet and Richard Mille being the main beneficiaries.
Richemont is still in transition after a complete reshuffling of top responsibilities in its specialty watchmaking division two years ago. Its new strategic direction appears correct: more innovation and more realistic pricing.
At the SIHH (Salon International de la Haute Horlogerie Genève) in January this year, there were plenty of new products from Richemont brands like Vacheron Constantin (with its breakthrough "Twin Beat” innovation), Jaeger Lecoultre (with continuing developments in its Polaris line) and Panerai (with a new Submersible).
Cartier was saluted for renewed energy and compelling aesthetics, although its main thrust remains in the CHF 3,000-5,000 (around $3,000-5,000) price range. (Over the past 20 years, Rolex and Cartier appear to have shifted positions when we examine their average price points).
Swatch is more at ease as a mid-price challenger. Omega (with sales of CHF 2.5 billion, around $2.5 billion) and Longines (with 1.8 CHF billion, around $1.8 billion) are the best performing Swatch Group brands. But both are focused on the mid-price segment: Longines as the dominant brand in the CHF 1,000-2,000 price range, and Omega with a strong position in the CHF 2,000-5,000 (around $2,000-5,000) price range. Both brands are proving popular and successful with middle-class Chinese consumers priced out of Rolex.
In the high-end though, Breguet and Jaquet Droz are noticeably off the radar screen. Blancpain is said to be recovering, but this comes only after a long downward slide. Harry Winston seems a big bet, which has so far just absorbed material invested capital and net working capital.
French and Italian challengers have started from a small base, but… Bulgari has made strides. Its Octo and Serpenti lines are establishing themselves as key product icons. The new Octo Finissimo Chronograph, in particular, has gained admiration in the industry. Under LVMH, Bulgari has been a shining example of a soft luxury group finding success in hard luxury.
Elsewhere, Kering is further behind in watches and jewellery with niche brands Girard Perregaux, Ulysse Nardin, Pomellato and Boucheron. Chanel and Hermès continue their direct step-by-step brand development in the watch category, with consistent execution and brand equity reinforcing forays. It will take time to grow but make for a profitable addition.
Then, there’s Tiffany. Bulgari offered a blueprint for what Tiffany should but has so far failed to do: establish one or two recognisable shapes that consumers will over time appreciate and desire. Presently, Tiffany is offering too many variations, making its watches seem gadget-like and irrelevant.
What’s more, watches distribution is in flux. Digital luxury has made price discovery immediate. Chrono24 — the dominant multi-brand platform selling both unworn and second-hand timepieces — allows anyone interested to know in seconds the “real” price of any watch. This is causing major watch brands to review their distribution policies.
It is obvious that most products traded on digital platforms come from multi-brand wholesale partners, which engage in discounting that makes it more difficult for brands to sell directly to the consumer online at full price. Lack of price discipline is also contributing to brand erosion. Brands are reacting very differently to this challenge:
- Audemars Piguet has chosen to move 100 percent to direct retail
- Rolex is sticking to 100 percent wholesale, but keeping the channel on a shorter leash (100 percent data sharing, lower margins, higher commitments)
- Richemont is reducing and concentrating its wholesale portfolio, while continuing to invest in direct retail and online distribution
- Swatch Group is making the most of other brands withdrawing to push even harder on its wholesale interfaces, with the goal of higher market share
More wholesale consolidation is inevitable. Small multi-brand independent retailers are in no position to keep up with increasing requirements imposed by brands and are progressively moving out of the market. A number of chains are emerging in previously fragmented geographic markets.
Players like Oriental Watch, Emperor Watches & Jewellery and Hengdeli were first in consolidating watch distribution in Hong Kong and the rest of China. Bucherer has grown to command a significant share of watches distribution in Switzerland and in selected European cities and has now broadened its reach to the USA with its recent Tourneau acquisition. Other chains maintain a regional significance: such as Gübelin and Les Ambassadeurs in Switzerland, Pisa in Italy, etcetera. Watches of Switzerland is in the front pack of consolidators, together with Bucherer and publicly traded Asian retail chains.
But watch retailing is bound to stay a very difficult business. Watches are likely to trail other luxury goods categories. Brands have overwhelming power and are moving to tighten their grip on distribution. Net working capital requirements are high, while margins are relatively thin.
Players may have to run in order to stand still.
Luca Solca is head of luxury goods research at Bernstein.