In March, with COVID-19 raging, René Weber, a financial analyst at Bank Vontobel in Zurich, predicted that Swiss watch exports for the year’s second quarter would fall 40% in value compared to the same period in 2019. It was an unusually pessimistic forecast, and Weber got blowback about it.
Weber, it turns out, was not nearly pessimistic enough. Data released last week by the Federation of the Swiss Watch Industry (FH) showed that exports dropped 62% between April and June.
New data from the FH and Switzerland’s two largest watch groups, the Swatch Group and the Richemont Group, make it painfully clear that six months into the global coronavirus pandemic, the Swiss watch industry is in uncharted territory. The word “unprecedented” comes up a lot in Swiss watch circles.
“The Swiss watch industry experienced an unprecedented crisis in the first half of the year,” the FH said in its statement announcing a 36% fall in Swiss watch export value to CHF6.87 billion ($ 7.21 billion) for the January through June period. Unit shipments fell 45% to just 5.5 million pieces.
Richemont cited “unprecedented levels of disruption” behind a 47% drop in group sales for the first quarter of its fiscal year ended in June.
And the Swatch Group marked an unprecedented milestone. For the first time since its founding in 1983, it reported a half-year loss. The red ink totaled CHF308 million ($ 323 million).
“The temporary halt in production and sales during the first half of the year had severe consequences [for] the Swiss watch industry, which will affect it for a long time,” the FH warned.
The new data is the best measure yet of the extent of the damage to the industry. Swiss watch exports were down for every global market but one in the first half. (That was tiny Oman, an anomaly with first-half exports up 75% this year and 137% over two years.) All of the other markets were down by double digits ranging from 15% (#2 China) to 57% (#30 India).
“The decline,” the FH notes, “reflects more the disruption and stark overall reduction in movements of goods than a real change in demand. Swiss watch exports began to fall sharply in March and then came to a halt in April and May.”
The Swatch Group reinforced that point in a summary of the impact of the pandemic on its sales and operations. The crisis began, it said, with a “severe weakening in China in the last week of January.
“Government COVID-19 measures imposed around the globe impacted the group with full force as of February. Complete lockdowns were introduced in most countries, which led to forced closing of up to 80% of all retail stores worldwide at times (group stores and third-party stores). Only e-commerce distribution was partly feasible. Production of watches, jewelry and components was reduced to a minimum, and short-time work was introduced for a significant number of employees.”
The Swatch Group responded to “the exceptional market situation” by closing 260 stores, resulting in the layoff of nearly 2,000 employees outside of Switzerland, 6.5% of its workforce. It said it cut costs in purchasing, production, marketing, and rents, but not R&D and training.
Richemont’s sales for the brutal April through June period quantified the bleak landscape of a world in lockdown. Group sales totaled €1.99 billion ($ 2.19 billion), down from €3.74 billion ($ 4.11 billion) a year ago. Sales to Japan were down 64% versus 2019. Sales to the Americas (North and South) were down 61%; to Europe, 59%; and to the Middle East and Africa 38%. Sales to the Asia-Pacific region fared better at -29%. (Richemont’s “trading statement” only included sales results; there was no information about profitability for the quarter.)
The Asia-Pacific declines were lower because China eased its lockdown in April. As of June, only two markets in the world – mainland China and South Korea – showed any real signs of recovery, according to Swatch and Richemont.
First In, First Out
China, Switzerland’s second-best market in 2020 after the U.S., was the first one hit by the coronavirus and the first to recover from it. Once China’s government ended its full lockdown, the Swatch Group saw an immediate surge in sales in its retail stores in there, it said. They had fallen more than 80% during the lockdown, but jumped 76% in May and 60% in June compared to 2019.
Richemont, too, reported very strong retail sales in China for the quarter, as well as triple-digit increases in online sales. Total group sales in China were up 47% versus the April through June 2019 period.
That sparked a spike in total Swiss watch exports to China in June. The FH reported that in June, “China saw a very sharp increase in demand for Swiss watches.” Exports jumped an astonishing 48% for the month. (In contrast, the other members of Switzerland’s Big Three markets – the U.S. and Hong Kong – dropped 57% and 55% for the month.)
South Korea, whose government imposed a limited lockdown, also experienced a surge of watch sales in May and June. Swatch Group combined wholesale and retail sales there jumped 22% in May and 34% in June.
Is China’s surge of watch sales in May and June a bellwether for other markets that emerge from coronavirus lockdowns?
A major factor behind the surge is that Chinese consumers, who drive the global travel retail business, can’t travel abroad this year and are buying luxury products at home instead. This boosts sales in China, but hurts sales in markets favored by Chinese tourists, like Japan and Europe.
The Swatch Group considers China and South Korea bellwethers of what will happen when markets emerge from coronavirus lockdowns. “Consumer demand for group products continues to be strong,” it says. The problem in the first half of the year is that “this demand could not be satisfied since the majority of distribution channels worldwide were forced to close.”
The China model makes the Swatch Group optimistic about the second half of 2020. “The group’s management is convinced that the sales and profit situation will improve quickly in the coming months, parallel to the easing of COVID-19 measures in the countries.” As Swatch Group brands deliver new products to markets with pent-up demand, it says, “this will lead to increased production capacity in the third and fourth quarter.” Despite its first-half loss of nearly a third of a billion dollars, the Swatch Group expects “a positive operating result for the full-year.”
A Long-term Process?
The FH, whose industry-wide purview is broader than the Swatch Group’s, is not so gung-ho about the second half of the year.
“The end of the first half marks not the end of a cycle,” the FH stated in its report on the first-half results, “but a period of transition between an unparalleled shock and a slow return to normal.”
While acknowledging that the markets are uncertain and that forecasts about the timing and strength of a recovery “are still crude,” the FH assessment is that post-COVID gains in China are not enough to revive the industry.
“At a time when all eyes are on China, which is showing the first signs of a return to normal, there are still numerous factors affecting the recovery process,” the FH said. “For the moment, other markets are showing no real signs of recovery. Hong Kong is practically at a standstill, suffering from both the consequences of the health crisis and its political situation.
“Overall, the return to normal will be a medium- or even long-term process.”
Federation of the Swiss Watch Industry
“The United States is still being hit hard by the pandemic and Europe is suffering from the drastic negative impact on the travel retail sector. According to those involved, international travel will take three years to return to normal, creating a long-term obstacle to sales of luxury goods, including watches.
“Similarly, the onshoring of consumption in China will accelerate, but will be spread over several years and will therefore not offset immediately the declines seen elsewhere.
“Overall, the return to normal will be a medium- or even long-term process,” the FH says. “Watch exports are likely to reflect a market contraction of around 30% overall in 2020.” That’s in value. Unit shipments will be worse, falling to levels not seen since the 1940s, as we reported last month.
Of course, there will be “marked differences between key players,” the FH notes.
It mentions no names, but big players, like the seven “billionaire brands” (i.e., watch brands with annual sales exceeding 1 billion Swiss francs) will weather the coronavirus storm, no matter how long it rages. (Those brands, ranked in order of estimated sales, are Rolex, Omega, Longines, Cartier, Patek Philippe, Tissot, and Audemars Piguet.)
At risk are smaller independent brands, who don’t have the backing of the big Swiss watch groups, like Swatch, Richemont, and LVMH. Vontobel’s Rene Weber, the not-pessimistic-enough pessimist, predicts there will be casualties. He told Switzerland’s Neue Zürcher Zeitung newspaper in June, “Of the approximately 600 [Swiss] watch brands, 50 to 100 will have difficulty surviving this crisis.”
For the record, Weber, like the FH, predicts a 30% drop in Swiss exports this year. Which would be unprecedented.
Lead image via Wikimedia Commons