The Struggling Industry of Swiss Watchmakers: Can You Increase Sales and Exclusivity at the Same Time?
Hello and welcome to the 47th issue of moderated, a newsletter created to dive into insights and phenomenons of the Fashion Industry. It also has a curation and summary of the most talked about last week’s events of the industry, offering further readings for more details.
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In this week’s moderated, I analysed the current struggling scenario of the Swiss watch industry.
But before jumping into the main article, check the last week’s recap of the Fashion Industry.
Last Week’s Recap
The Fashion Labels That Joined the 100 Most ‘Reputable’ Companies Rank
RepTrak released its 2021 ranking of brands with the best reputation. The report has a complex method involving 68,000 respondents in the world’s 15 largest economies. The responses were used to interpret the perceptions about the brands (their products and services, innovation, citizenship, performance, governance, leadership, and workplace). All corporations considered in this rank must have annual sales above US$2 billion and be known by at least 20% of respondents in each country. The rank had brands from all types of industry, with Lego as the number one. The fashion industry was right in second place with Rolex. Other fashion and beauty labels that made it into the list were Adidas, Levi’s, Nike, Chanel, Natura, and others. Check the full list with fashion labels highlighted below:
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Changes in Leadership at Tod’s and Salvatore Ferragamo
Tod’s announced that the Italian influencer Chiara Ferragni will be joining the company’s board. The decision is part of a strategy to win over young customers and drive growth. The shares of the Milan-based luxury brand jumped as much as 12.1% after the announcement.
Salvatore Ferragamo, however, will have a different type of change. The Florentine Luxury House confirmed the rumours that its creative director Paul Andrew will be leaving the label in May. The designer had been at the brand since 2019 but decided to pursue other opportunities. While no announcements of a substitute for Andrew were made, the brand stated that the current creative team will oversee its fashion direction.
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Tracking the Fashion’s Recovery from the Pandemic Around the Globe
In February, South Korea’s department stores had a 34% year-on-year increase in sales. The highest growth in 25 years. The country hadn’t seen such a spike in sales since 1996. These results were mainly attributed to the Lunar New Year Holiday, the opening of Seoul’s largest department store, and the warm weather.
Argentina apparel sales increased 15.9% year-over-year this March. This represented a partial recovery for the sector that is still 31% lower than pre-pandemic levels. The spike in sales in the country was attributed to online shopping and children returning to school (the school year in Argentina is from March to December).
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Gucci Collaborated With Balenciaga for New Collection
According to Italian market reports, Gucci will release a new collection made in collaboration with Balenciaga called Aria. The unprecedented collaboration between the two Kering-owned brands is set to be revealed through a series of short films on April 15.
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After Being Cancelled in 2020, the Met Gala Will Return in September
Last year, one of the most prestigious fashion events in the world, the Met Gala, was cancelled due to the rise of the pandemic. The event that usually happens in May didn’t seem like it would resume this year. However, the Costume Institute at the Metropolitan Museum of Art announced that its major exhibition will open on September 18. This year's theme: American fashion. As part of the exhibition opening, the Met Gala will return in a smaller version on September 13, which will coincide with a hopefully in-person New York Fashion Week. This new date is an exception and the museum plans to return to its May schedule in 2022.
To know more about the upcoming exhibition, check this Vogue article.
The Struggling Industry of Swiss Watchmakers: Can You Increase Sales and Exclusivity at the Same Time?
I am selling a few stuff online and when going through my accessories I found two watches. One from Michael Kors and the other from Tommy Hilfiger. I haven't worn any of them for at least 4 years. Not even sure why I brought them with me to Europe. Anyways, I started to wonder how the watch industry is doing nowadays. I honestly haven't even considered buying a watch since 2015, but I was never a watch person. Still, I had the impression people were buying fewer watches and turn out I was right. Not only that, but I found out that the Swiss watch industry is crumbling since Covid-19 started and they have a complex issue in their hands.
The prestigious industry of watchmakers in Switzerland hasn’t been doing great for a few years now. From the Second World War, to the quartz watch revolution to the rise of more technological watches such as the Apple watch, the Swiss watchmakers had proven themselves quite resilient. But not even this insistent optimism survived the Covid-19 pandemic. The unprepared timepieces labels from Switzerland did not have a good online presence. They were not ready for the paralysation of tourism. And even before the pandemic, they were not keeping up with the changes already happening in retail.
Most Swiss timepieces labels have very conservative thinking, attached to heritage. This can be an issue in the very challenging scenario they have to adapt to. They have to find a very tricky balance: increase exclusivity and sales. This paradox strategy was attainable for many luxury brands, but most have more than only one type of product. They introduce more affordable prices with some products while keeping more exclusive high-ticket pieces. Is it possible for Swiss watchmakers that only sell watches to achieve this paradox balance? This is what we are talking about this week.
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The Swiss Watch Industry
Over the past four decades, Switzerland exported more than 1 billion watches. The “Made in Switzerland” precision manufacturing of watches made the Swiss timepieces industry famous all around the globe. Thus, many Swiss watch labels have very expensive pieces with extremely high quality.
Various Swiss watch brands built house names recognized worldwide such as Rolex, Omega, Patek Philippe, Cartier, Tissot, Tag Hauer, and others. In total, there are 350 watch brands in Switzerland, but the top 5 brands account for 50% of Swiss watch sales.
Most of the best-performing players in the watch market are also private companies. This explains in part the more traditional business approaches they have. Switzerland is responsible for only 2% of the world’s production of watches, but the country owns 50% of the global watch industry in terms of value.
The comparison of sales, production, and average price makes it clear that the Swiss watch industry is mostly focused on middle-range to high-end pieces. In other words, with the exception of a few French and German brands, Switzerland almost owns the luxury watch industry.
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The Current Challenges of Swiss Watch Labels
Swiss watchmakers are facing some major challenges for a while, which were intensified by the Covid-19 pandemic. To understand how they can get out of an industry crisis, it is first interesting to understand how they got into it in the first place.
For starters, the demand for watches decreased worldwide even before the pandemic. While some countries still have a stronger culture of wearing watches, the overall sales of traditional watches decreased around the globe in the last decade. Data from 2017 from the Federation of the Swiss Watch Industry shows how the demand decreased, with a few exceptions.
In 2019, the situation was getting even more challenging. Swiss watchmakers were exporting almost 10 million fewer products than they did in 2016. Then the pandemic came and the country exported just 14 million watches in 2020, a drop of 22% year-over-year. Such tenebrous figures bring Switzerland’s watch sales back to figures from 1940. Overall, it is estimated that the entire Swiss watch industry shrunk by one-third in 2020.
Just like the whole fashion industry, China is the main market for Swiss watches. During the 2000s, the country was the saviour of the Swiss watch industry. For over a decade, the exports of watches from Switzerland to China multiplied by a factor of 100. If shopping tourism is included, it is estimated that from every two “Swiss Made” luxury watches sold, one is bought by a Chinese customer. But this scenario changed due to a few factors explained by Swiss Info:
“China’s economic slowdown, the anti-corruption campaign instigated by Xi Jinping — watches are greatly appreciated gifts amongst the regime’s officials — and the political crisis in Hong Kong have put an end to the honeymoon period between Swiss watchmakers and China.”
Then we have the rise of smartwatches, such as the Apple watch, that implicated in more structural changes in the timepieces industry. This new type of approach to timepieces drastically changed the industry. The impact of smartwatches was so big that Apple alone sold more watches than the entire Swiss watch industry in 2019 and 2020. And keep in mind Apple only started selling watches 5 years ago.
A few Swiss watch brands tapped into the smartwatch category, but most of them don’t see this new class of watches as the same type of product they sell. And indeed, some are not. High luxury watches will be compared to jewellery before being compared to smartwatches. Many Swiss watchmakers sell timepieces that can be treasured through generations and carry a lifelong value. Some brands have pieces that cost up to €800,000 – or even more. On one side, this positioning gives them advantages, but it also creates resistance to change. Not that every watch brand should have a smartwatch, but most of them don’t even have a direct to consumer e-commerce.
Yes, this is the next issue. A report from the online marketing consultancy Digital Luxury Group revealed that, in 2019, only 40 per cent of luxury watch brands were offering direct-to-consumer e-commerce. This means that when the pandemic came in 2020 and retail was closed around the globe, most watch labels couldn’t sell their products. Since then, these numbers improved a bit with brands running to create a presence online, but it was too late. An overstock issue that had been mounting since 2017 finally became too big to be pushed.
Most Swiss timepieces brands drastically decreased production in 2020, in an attempt to reduce stock. However, sales dropped so much that the measures taken were not enough. The entry-level segment of watches, which had been facing a decrease in demand since 2012, suffered the most with the pandemic.
Luxury labels got affected, but sold better during the pandemic and dealt better with the stock issue. An example is Hermès Watch, which produces its products in Switzerland. The company managed to grow 2% in 2020, the best result in comparison with its counterparts. On the other side, Swatch Group AG’s namesake label had a 40% dip in sales in 2020. The brand sells products at US$50 or less, analysts estimates. Thus, the lower-priced brands clearly suffered more.
According to Hermès Watch CEO, Laurent Dordet, this explosion in stock happened because brands start to push too many different products into the market. As Dordet explained to Business of Fashion:
“This remains a key illness of that business, at least with some brands. It may be less now, but as long as you have commercial people incentivized by key performance indicators, you will have overstock on the market.”
Hermès Watch managed to avoid the overstock crisis lived by most of the industry by limiting the distribution via third parties, such as multi-label and department stores. This allowed the company to have better control over sales, thus better control over production and restocking. Laurent Dordet explained this strategy to BOF:
“For us, there is absolutely no overproduction of watches, no waste at the end of the year. The advantage is that it’s more profitable and you have less inventory.”
In addition, the second-hand market of watches started to surge in 2020. New consumers started to have an interest in vintage timepieces, while others preyed on the price of pre-loved watches. This last phenomenon increased the competition in the watch market and worsened the stock issue the industry is facing.
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The Paradox Solution
The most obvious solution to the underperformance and stock issues the Swiss watch industry is facing is that these brands need to increase sales. Of course, Swiss timepiece’s labels need to drive more sales for their products so they have better results and rotate stock. However, many specialists believe that the thing that brought the Swiss watch industry to this situation in the first place was the loss of the exclusivity sensation of buying a “Made in Switzerland” timepiece.
The problem is that the fashion industry's pressure of constantly pushing new products and trends spread to the watch industry. On top of that, listed brands suffer the pressure from investors to keep growing and increasing their stock value. That might explain why non-listed brands such as Rolex and Hermès are performing better than others since Covid-19 started. They had more freedom to hold production and keep their inventory under control, while listed labels had to try to keep the numbers going up.
The thing is that there is a huge paradox in increasing sales and exclusivity at the same time. For a product to be more exclusive, it usually has to be rarer, so there is fewer of it. But the most natural way to increase sales is to sell more products. Then, doing both at the same time can be quite challenging. All luxury brands eventually faced this issue. The solution most found was to increase the sales of entry-level products, such as make-up, sunglasses, perfumes, and even t-shirts. Then, at the same time, other products such as bags, clothes, shows and etc. kept rising in price. This way they offered accessible products so more consumers could be part of the brand while only a few could afford the main collection. The brand sells a lot, but it is still exclusive.
Let’s take a look, for example, at Gucci. Their GG belt became a best seller. Even though the belt is not cheap, it is one of the most affordable pieces the brand offers and many people bought into it. Meanwhile, the price tag of Gucci handbags rose 9% in 2020 alone, and much more over the last 5 years.
So Swiss watchmakers can just do that right? Not really. Most timepieces brands from Switzerland don’t sell other products besides watches. Selling a cheaper watch will not only create cannibalism in the company (when two products from the same brand steal sales from each other) but also may affect the luxury positioning of the brand.
To give an example of that happening, think about Marc Jacobs and the now gone more affordable Marc by Marc Jacobs. Both brands offered apparel and guess what, eventually one had to die. They were competing with each other and the more accessible Marc by Marc Jacobs was very damaging for the luxury image of the main brand Marc Jacobs. So much the brand is still recovering and trying to get back to the place it once had in the fashion industry.
A solution can be increasing prices. The most natural way to increase sales is to sell more stuff, but you can also sell the same amount of stuff for a higher price. But doing that requires having a very strong and prestigious brand that can justify the increase in price. It’s a long process of building up the brand, having very loyal clients and keep offering great products. Many Swiss watch brands can already do it, some have the potential to get there, but some, unfortunately, have a lot of work to be able to justify such a change. That is actually why very high-end luxury watch brands are doing a bit better than the medium range and entry-level ones.
The watch industry is changing as a whole and one thing is for sure, Swiss watchmakers will have to be more open to change. The second-hand market is rising and some timepieces brands are already exploring its opportunities. Some others are tapping into the smartwatch industry, even though it is an extremely different type of product. However, some of these Swiss brands will have to find another solution to keep surviving in an extremely polarizing market that belongs to a few. Especially when even some of these few are having a hard time. Or, there is the possibility that the watch industry’s future is to be a smaller market than it was in the last decades. If that is the case, not all 350 Swiss watch brands will be able to participate in it. As for my watches, I am keeping them for now, even though I don't really wear them anymore.
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