For the Swiss watch industry, the new decade got off to a super start. Swiss watch exports rose 9.4% in value in January compared to January 2019. Sure, Hong Kong was still a worry, down 25% that month due to the ongoing political turmoil there. But Switzerland’s new number one market, the United States, was going great guns, up 15%. So were the other top markets, including China (+7%), Japan (+15%), and Singapore (+23%). Twelve of Switzerland’s top 15 markets were up in January, most by double-digit percentages.
Then the world as we knew it ended.
The coronavirus pandemic has been a breathtaking global calamity. What follows is a review of its impact on the watch industry.
The impact was immediate. The coronavirus struck first in China, the engine of Swiss watch growth over the past decade. China memorably rode to the rescue of the Swiss watch industry after the Great Recession of 2009. Now, overnight, the China market went from hero to victim as the government-ordered lockdown closed retail stores and shut down air travel.
In February, Swiss watch exports to China fell 51.5% in value. The long-time, rock-solid #3 market fell to #9 that month, with obvious repercussions for Swiss watch sales.
“Given our strong position in China, of course we are massively hit by the temporary closing of hundreds of stores,” Swatch Group CEO Nick Hayek told Switzerland’s SonntagsZeitung.
Bulgari CEO Jean-Christophe Babin told CNN, “The fact that we are relying on e-commerce only in China is hurting sales significantly.”
Exports to Hong Kong fell 42%, “its worst monthly decline in the last 20 years,” according to the Federation of the Swiss Watch Industry (FH).
We are massively hit by the temporary closing of hundreds of stores [in China].
Swatch Group CEO Nick Hayek in March
Globally, Swiss watch exports declined 9.2% in February. But they are a lagging indicator, a measure of wholesale orders placed by retailers, not actual store sales. “This does not fully reflect the actual situation,” the FH warned.
Meanwhile, as the COVID-19 virus spread around the globe, watch exhibitions planned for March and April were canceled in February. First, a Grand Seiko Summit in Japan and the Swatch Group “Time to Move” event in Switzerland, followed by Watches & Wonders Geneva on Feb. 27 and Baselworld the next day. The cancellations sent watch companies scrambling to come up with alternative plans to launch new products.
Lockdowns and Shutdowns
March brought a wave of lockdowns outside Asia. Between March 9 and 23, Italy, the U.S., Spain, France, Switzerland, Germany and the U.K. were shut, in that order. It was not widely reported in the U.S., but in the early stages of the pandemic, Switzerland had the highest rate of infection per capita of any country in Europe.
Swiss watch factories started closing in mid-March, including Rolex, Patek Philippe, Audemars Piguet, TAG Heuer, Hublot, and many more. Most watch companies put employees on short-time. Ludovic Voillat, of CPIH (Swiss Watch Industry Employers Convention), told the Swissinfo news organization, “Of 50,000 people working in companies subject to a labor agreement, 40,000 are currently partially employed. It is unprecedented in the history of Swiss watchmaking.”
Adding to the Swiss watch woes was the Swiss franc, which became a safe haven currency during the pandemic, causing another “frankenshock.” In March, the franc rose to a four-and-a-half-year high against the euro.
On March 26, FH President Jean-Daniel Pasche issued an extraordinary message to FH members. “Who would have thought it?” it began. “Who could have imagined, just a few months ago, at the end of 2019 when we found out something was ‘in the making’ in China, that Switzerland would be facing a wave of such magnitude today?
“Remember SARS in 2003, when we felt as if we had seen it all with Asian exhibitors being banned from opening their booths at Baselworld (Zurich venue)? Yet it was nothing compared to what is happening today and life indeed is proving stranger than fiction. What a lesson in humility when confronted with ‘natural’ events that are beyond our grasp!
“In the face of this human, social and economic tragedy, out first thoughts go out to the families of the victims, to people who are sick and to those who are alone or whose jobs are threatened.
“We are naturally also thinking of all the watchmaking and non-watchmaking companies that are deeply affected in terms of their operations or whose very existence is in jeopardy.”
‘A Severe Decline’
The pandemic hurt the entire global watch industry, of course. On the same day that Pasche released his message, Efraim Grinberg, chairman of the Paramus, NJ-based Movado Group, met with financial analysts. “The pandemic has created a severe decline in discretionary income,” he said. “As I speak to you today, all of our offices around the world with the exception of China and Hong Kong are closed. All of our retail stores in the U.S., Canada and the United Kingdom are closed. Most of our customers have closed their stores, as have many malls around the world.”
One week later, Grinberg announced that 850 employees, 80% of its North American workforce had been furloughed through the end of May at least. All remaining salaried employees took a salary cut of 15% to 25% during the furlough period; Grinberg himself is taking no salary for the duration of the furlough period.
On March 27, Seiko Holdings Co. in Tokyo issued a “Notice Concerning the Impact of COVID-19 Pandemic.” It outlined the steps it was taking to deal with the pandemic and warned, “In the global market including Japan, the status of sales of watches and clocks is expected to become severe due to a decline in demand mainly from Chinese tourists to Japan, as well as weak demand in countries where the disease is spreading.”
Unit Exports Down 43%
The FH export data for March was bad. Swiss watch exports fell 21.9% in value for the month. Of the 30 markets that account for 94% of all Swiss watch exports, 21 reported decreases. Hong Kong, which was Switzerland’s top market from 2009 to July 2019, fell from second to fourth place in the ranking with exports down another 41%. Italy, no longer a top 10 market as of 2020, saw exports fall 58% in value.
Bad as it was, the 22% drop in sell-in did not reflect “the real state of the watch market” at retail, the FH said. Take Hong Kong. “Although very poor, the -41.3% result was still very far from the actual fall in sell-out.”
Somehow Switzerland’s top two markets, the U.S. and China, bucked the trend. The value of exports to the U.S. rose 20.9% in March. “Watches priced at over 3,000 francs [ex-factory] grew strongly there, probably anticipating future shipping difficulties,” the FH said. China rebounded into second place from ninth the previous month on a 10.5% jump in export value, anticipating a reopening of the market, the FH speculated.
The FH warned that in terms of value “a deterioration is expected in April,” reflecting the lockdowns in the U.S. and Europe.
The real shock in the March export data was the unit figure: an astonishingly low total of 902,000 pieces, down 43% from March 2019. The FH called it “unprecedented.” Swiss watch exports in units fell steadily in the last decade from a high of just under 30 million in 2011 (29.8 million) to just over 20 million (20.6 million) last year. This year, they will drop significantly below 20 million. Oliver Müller, founder of Switzerland’s LuxeConsult and a former Swiss watch executive, predicts they will fall below 16 million, the lowest level since 1945.
Grim Quarterly Reports
Financial results for the first calendar quarter from some of the watch industry’s few public companies provided an initial damage assessment. At the giant Richemont Group, total sales for the period dropped 18%. Richemont said the pandemic wiped out €800 million ($ 882 million) in sales in the 10 weeks from mid-January through the end of March.
Sales in LVMH’s Watches & Jewelry division fell 26% in the quarter ended March 31.
Watch sales at Japan’s Casio declined 27% in value and 26% in volume during the period. “Until January, Timepiece Business sales rose overall, led by G-Shock China sales,” Casio said in a review of its fiscal year ended March 31. “But fourth quarter sales were down ¥11.6 billion ($ 106.5 million) year on year because of COVID-19 from February onward.”
At the Watches of Switzerland Group, the British-based retailer with 127 stores in the United Kingdom and the United States, sales of luxury watches were up for the fiscal year ended April 26, but fell 26.1% in the final quarter.
As for what the results of the current quarter ending June 30 will be, or for the rest of the year, virtually no publicly traded watch company will hazard a guess. There is simply too much uncertainty. Breitling CEO Georges Kern told the Financial Times, “We haven’t done a budget because it doesn’t make sense.” Richemont Group Chairman Johann Rupert wrote on May 15, “there is very limited visibility as to what the year ahead holds…. There will be headwinds in the months ahead.”
A Cruel April
Those headwinds are expected to be stiffest in the current quarter, reflecting the full force of the American, European, and Japanese lockdowns (Japan’s came in April). How stiff? Tsunami-stiff, based on the shocking Swiss watch export data for April released by the FH on Tuesday. Exports fell 81% in value and 79% in units versus April 2019, “a direct result of the standstill in production, distribution, and sales,” the FH said.
Every single Swiss watch market was down by double-digits; all but two were down by more than 50%. China moved to #1 in the export ranking, down a mere 16%. Hong Kong, down 83% moved up to #2. The USA, which had held the top spot every month since last August, fell to #3, down 86%. Italy (-95.8%) fell to #16; the U.K. (-96.4%) fell to #15.
The total number of watches shipped in April was 338,000. The FH had called March’s measly figure of 903,000 pieces “unprecedented.” It had no words to describe the April number.
Financial analysts who follow the watch and luxury goods industries painted a grim picture for 2020, even before the release of the April data.
René Weber of Bank Ventobel expects Swiss watch exports for the April to June period to drop 40% in value versus 2019.
Patrik Schwendimann of the Cantonal Bank of Zurich forecasts a 30% drop in sales for Swatch Group for the first half of 2020.
For 2020 as a whole, Ventobel’s Weber predicts that exports will drop 25% in value, making it the worst single year on record. That surpasses the 22% fall in 2009 (the current worst year) and the -15.2% in 1975, the worst single-year drop of the quartz crisis.
Some experts expect the number of Swiss watches exported in 2020 to be the lowest since 1945.
Frank Müller, founder of The Bridge To Luxury consultancy in Dresden, and a former luxury-watch CEO, foresees a 30% to 40% drop in the value of Swiss watch exports for the full year.
Dire as they are, those predictions are in line with professional forecasts for the larger luxury goods industry, like Bernstein & Co. (-30% for 2020) and the Boston Consulting Group (-25% to 35%). All agree 2020 will be worse than the recession of 2008-2009.
A Heavy Toll
The steep downturn will take a toll on the Swiss watch industry. Oliver Müller of LuxeConsult expects 30 to 60 brands to go out of business. CPIH’s Voillat says that of the 40,000 workers now on short time, more than 4,000 will lose their jobs, similar to the number of jobs lost during the Great Recession.
Meanwhile, the Swiss government predicted in April that its economy will fall into recession this year and contract by 6.7%. Watches are Switzerland’s third-largest export (after pharmaceuticals and machine tools) and account for 10% of the country’s total exports.
Watch industry optimists take hope in the fact that China has come out of lockdown, and Europe and the U.S. are beginning to open up again. They hope for a rebound in the second half of 2020, or certainly in 2021, based on a boost from pent-up demand, economic recovery in China, and a surge in e-commerce watch sales during the lockdowns. (Watch brands and retailers that have embraced e-commerce certainly have experienced a welcome boost in sales during the pandemic. However, with e-commerce sales estimated at 2% to 5% of total Swiss watch sales industry-wide, e-commerce remains a Swiss-watch sideshow.)
How bad the COVID-19 downturn gets and how long it lasts no one knows, of course. There are countless questions. Will COVID-19 return, prompting new lockdowns? Can China come to the industry’s rescue again? When will the all-important Chinese tourists travel again? When will anybody travel again? Will the recovery be a quick V-shape as it was in 2010 for the Swiss watch industry? Or U-shaped, taking a little longer? Or a prolonged L-shape? How many brick-and-mortar stores will close? Will notions of luxury change? Will the “feel-good factor” disappear during the COVID crisis? Et cetera, et cetera.
What we know is that the Swiss watch industry has survived crises for more than 400 years, and it will survive this one. The COVID-19 crisis will end at some point. When it does, as the FH’s Pasche put it in the final line of his letter, “The Swiss watch industry will be there to answer the call when people are once again able to experience positive emotions.”