Back in April, Rolex’s rarely-quoted chief executive, Jean-Frédéric Dufour, told Swiss newspaper NZZ that 2024 will be a major challenge to watchmakers, but that the largest players will suffer least.
“While they may have seen a twenty percent increase in sales during the upswing, they may now experience a fifteen percent decline,” Mr Dufour suggests.
“For the big brands, the fluctuations are smaller, in the range of plus/minus two to three percent. Big brands never achieve twenty percent annual growth,” he adds.
He was right about this year being challenging, but a little more detail on how he defines the “big brands”, which will suffer least, would have been illuminating.
Swatch Group saw sales drop by 19.4%, year-on-year, in the first six months of 2024, a decline blamed predominately on a slump in demand for luxury goods in Hong Kong, Macau and mainland China.
That sort of decline would put Swatch Group brands in the basket of smaller brands that will suffer most, if Mr Dufour’s analysis is correct.
In reality, Mr Dufour was over-optimistic in April. Some very big brands are seeing high double-digit sales slumps.
It isn’t just Swatch Group that is suffering.
Over at Richemont, Specialist Watchmakers sales dropped by 13% in the quarter ended June 30.
Tracking sales of LVMH’s watch brands is difficult because they are lumped in with jewellery, including Tiffany & Co., but sales were down for Watches and Jewellery by 2% in the first quarter and we are likely to see that decline has accelerated when the group reports its Q2 results later today.
LVMH and Richemont have reshuffled their teams of watch brand CEOs in recent weeks.
Some of the changes were triggered by planned retirements, but others will most certainly have been down to brands under-performing their direct competitors.
Swatch Group has shown notable nerve in backing its senior team. With the exception of Peter Steiger’s retirement after 35 years of loyal service, brand CEOs have either been retained or, in some cases, promoted to the Extended Group Management Board.
Despite the pain that a drop in sales of almost 20% bestows, Swatch Group is also boldly seeing through the current downturn to the sunlit uplands beyond.
In its most recent financial report, the group says its expects the Chinese market, including Hong Kong and Macau, to remain challenging until the end of the year, but the region’s potential remains intact.
It is forecasting continuing and growing strength in Japan and the United States and aims to improve margins by investing in its own stores around the world, which will reduce the contribution of wholesale to retail partners to under 55%.
Swatch Group has embarked on a cost-cutting programme but, just as it did during the peak months of the pandemic, will not be making any of its highly valued and hard-to-replace watchmakers redundant.
“The strategy of maintaining all production capacities and not laying off qualified staff will enable the Group to recover more quickly and benefit more significantly from the next upswing. In a period of a strong decline in sales, the high degree of verticalisation within the Swatch Group leads to reduced margins in the short term. But as soon as the upswing sets in, the Group will start to benefit more strongly,” the company argues.
When will that upswing arrive? That is hard to predict, but Swatch Group’s over-reliance on Chinese customers makes it more dependent that most on a return to growth on the mainland and its satellites.
The ongoing real estate crisis in China — an in-country version of the 2009 global financial crisis triggered by bad mortgages and other risky lending — has a long way to run.
This not only affects spending on luxury goods at home, it is also stopping Chinese customers from travelling abroad and spending in global hot spots like London, Paris, Milan and Geneva.
According to the Economist Intelligence Unit, Chinese households made 101 million cross-border trips in 2023, equivalent to 60% of its 2019 levels.
Of those, more than 70% of the trips were to Hong Kong, Macau and Taiwan, suggesting that the number of trips elsewhere in 2023 reached 2.4 million, only two-thirds of its 2019 levels. Forecasts for Chinese tourism in 2024 are no better.
Swatch Group is likely to take time to recover its peak sales performance of CHF 7.9 billion in 2023. Its turnover dropped by 10.7% to CHF 3.4 billion for the first half of 2024, suggesting it will lose around CHF 1 billion in sales this year.
That is not an existential crisis, and Swatch Group is right to maintain its investment in skills so that it is ready for a turnaround that may already be underway in Europe and America.
It also has a couple of aces up its sleeve. Swatch’s MoonSwatch sales have created millions more potential customers for its more premium timepieces, and Rado has quietly established itself as one of the strongest brands in India; viewed by many as the next big growth market for Swiss watches.
It is impossible for huge verticalised groups like Swatch to duck, weave and hustle like smaller independents can in a downturn, but its scale and financial firepower gives it the ability to ride out a recession and prepare for the next upturn.