Watch and Jewellery industry

The veteran chairman and controlling shareholder of Richemont, was in a defensive mood when unveiling the Swiss luxury goods group’s annual results in May. “Please do not expect us to make predictions on margins, sales,” he told journalists bluntly. His comment captured the uncertainty gripping the watch and jewellery industry. Last year was difficult for many brands; Mr Rupert described it as “horrible”. Luxury goods were in retreat in 2016. Global sales of Swiss watches fell steeply as a result of heavy overstocking in the large Hong Kong market; at the same time changing tourist flows, weak economic growth and terrorism worries hit European and US markets; and the effects of China’s clampdown on “gifting” continued to work through. At least some of those factors have now faded. Sales in mainland China have become a bright spot: Swiss watch exports there in the first four months of 2017 were 21.6 per cent higher than the same period a year earlier, according to the Federation of the Swiss Watch Industry (FHS). Optimism is growing among industry executives and analysts that the worst of the downturn is over, although jewellery is outperforming watches, where excessive inventory remains significant. Share prices of luxury groups have moved sharply higher this year, reflecting the improvements. China drove strong sales growth in the first three months at Hermès. LVMH, the world’s biggest luxury goods group, also reported a strong first quarter. Investor optimism was boosted when the FHS reported that total exports — admittedly a volatile barometer — were 7.5 per cent higher in March than 2016, following 20 months of falls. Baselworld visitors were down 4 per cent, exhibitors 13 per cent But hopes of a revival were then set back when April’s figures showed another fall in Swiss watch exports, which were 5.7 per cent lower than a year earlier. (Analysts reckoned sales would have risen if differences in the number of working days had been taken into account.) The more recent data were “disappointing and will raise concerns over the timing of any tangible restocking cycle”, warns Thomas Chauvet, analyst at Citigroup. As a result, it remains unclear how powerful the sector-wide recovery will prove — or whether the upheaval caused by sluggish global economic growth, geopolitical risks and technological change spell a further period of restructuring and consolidation for the sector. Luxury executives remain cautious. At this year’s Baselworld watch trade fair, where luxury brands generate as much as half of their annual sales, the number of visitors was down 4 per cent at 106,000 on 2016, organisers said, and exhibitors fell 13 per cent. In response to this decline and problems in the sector, the organisers will shorten Baselworld from eight days to six next year and cut exhibitor fees, a source of complaint. “People are buying watches but the question was always going to be how long it would be before the inventory cycle worked through,” says Scilla Huang Sun, luxury sector specialist at GAM Investment Management in Zurich. “Things are improving — it may just be a bit slower than people expected.” Large groups with significant watch activities, such as Richemont and Swatch, bore much of the downturn, as privately owned groups and Japanese watch companies gained market share at their expense, according to research by Swiss bank Vontobel. Rolex, an independent group, took over from Richemont last year as the number two (after Swatch) in traditional watches by worldwide market share by value, according to the bank’s research. The good news for luxury watchmakers is that smartwatches, led by Apple, have not emerged as the threat some feared For high-end independent brands, family ownership is a part of their cachet, notes René Weber, luxury analyst at Vontobel. Remaining independent has become harder, however. In April, private equity group CVC Capital Partners announced it would take control of luxury Swiss watchmaker Breitling, which has been owned by just two families in its 133-year old history. CVC will buy an 80 per cent stake in the company for an undisclosed amount. Larger groups not only have the financial power needed during prolonged periods of structural change, they are also arguably better at reacting to technology-led developments. Jewellers and watchmakers are having to adjust to fast-altering markets, stepping up efforts to rethink distribution channels and respond to consumer demands. Swatch, the company behind brands such as Omega and Tissot as well as its eponymous mass-market watches, revealed recently that it was developing an operating system to rival Apple’s iOS and Google’s Android. This would enable the creation of its own range of miniaturised watch-tech products. But the good news for traditional luxury watchmakers is that smartwatches, led by the Apple Watch, have not emerged as the threat some feared. There was a 51.6 per cent fall in smartwatches shipped in the third quarter of 2016 compared with 2015, according to IDC market intelligence. IDC did also predict, however, that the industry would sell 76.6m smartwatches in 2020, up from 21.5m last year.