The industry for inexpensive, high volume, fashion and lifestyle watches is in danger of becoming another sector destroyed by the disruptive power of Apple. But do watches made by the likes of Fossil Group and Movado Group have to go the same way as compact disks or might rumors of their demise been greatly exaggerated? Carol Besler runs a rule over the traditional sub-$500 watch market and finds little cause for optimism.
Rumors of the death, or at least deep malaise, of the fashion watch industry are not exaggerated.
Smartwatches are the culprit, and the principal suspects are Apple, Samsung and Fitbit. As of last year, these three companies now make up three of the top five watch brands in the world, by volume. Apple Watch alone shipped 30.7 million units of wearables in 2019, according to Strategy Analytics, compared to 21.1 million watches from the entire Swiss watch industry, according to the Federation of the Swiss Watch Industry (FH).
In the US market, the takeover became apparent in the fourth quarter of 2018, when smartwatches outsold traditional watches 55% to 45%. That equation reversed itself in the first quarter of 2019, but the year finished at 50/50 according to watch industry analyst Reginald Brack of NPD Group.
He says smartwatch sales in America were up 18% for the year, to over $5 billion in retail sales, which represents about half of the US wholesale market. “It’s a real bloodbath for traditional watches,” says Mr Brack. “The under $500 segment is down by 15%, particularly for women’s watches in that segment.”
Mr Brack says the fastest-growing segment of the watch industry in the US is the $10,000 to $25,000 category, which NPD says racked up a 23% increase in 2019.
FH statistics confirm that precious metal watches contributed significantly to the increase in overall exports last year. But the other end of the market, the sub-$500 category, is suffering. By value, Mr Brack says smartwatches, with an average sale price of $300, accounted for more than 50% of sales in the sub-$500 market in the US, and that represents a direct hit to the fashion watch market. In the quarter, alone, ending December 2019, Apple’s wearables category, the division in which the Apple Watch resides, brought in over $10 billion worldwide, a 27% year-on-year increase.
“The bottom line is that in the traditional market, everything under $1,000 shows a decrease and everything above $5,000 shows an increase,” says Brack. “The rich are getting richer.”
Globally, the wholesale value of traditional watches exported from Switzerland to the US in 2019 was just over $2.4 billion, representing an 8.6% increase over the previous year, but that growth is in the $3000-plus wholesale market. The FH confirms that watches priced over CHF 3,000 grew by 12.9%, while turnover of watches priced below that decreased by 5.2% for the year. The value of watches priced below CHF 200 wholesale decreased by 18% in terms of units and 13.5% by value.
The most detailed figures for a major market come from British retail analyst GfK, an organization similar to NPD, which tracks watch sales directly from electronic point of sale systems, so the values they place on sales are generated from retail, rather than wholesale, prices.
In Great Britain, the total value of watches priced at under £500 has fallen from £500 million in 2013 to £332 million in 2019. The figures exclude smartwatches and fitness trackers, which are counted separately. Over the same period, the value of watches priced at over £1000 doubled from £538 million in 2013 to £1.1 billion in 2019.
Who is taking the hit? Fossil Group, for one. Its stock price is at a fifteen year low, and although 2019 Q4 financials are not in yet, for the first three quarters of 2019, it reported a drop of 11% in sales in the US market and 9% worldwide, compared to the same period in 2018. Movado Group’s shares were down almost 63% from their 52-week high at the end of February; Fossil Group was down by more than 73%. By contrast, shares in the luxury groups, despite being battered since the start of the year because of the Coronavirus outbreak are trading down 27% for Swatch Group, 19% for Richemont and 12% for LVMH.
Sales in fiscal 2018 were down 15% at Fossil Group, and the company reported a net loss of $3.5 million. Chairman and CEO Kosta Kartsotis commented in the 2018 annual report: “As we begin 2019, our priorities continue to focus on capitalizing on the opportunity in connected, stabilizing traditional watch sales, and increasing efficiency across our company.” The Q3 2019 report predicted a drop in net sales for the year, falling between 5% and 10%.
Movado Group has taken less of a hit, with stock prices down from three years ago when Apple began to saturate the market, but this year, sales are up, although it does have sales from two acquisitions: Olivia Burton and MVMT for the first time. The group’s annual report shows a sales increase of 19.7% to $679.6-million in 2019, and a slight gross margin increase to 54.4% from 52.5% in the previous year. Surprisingly, the Group’s licensed brands, including Coach, Tommy Hilfiger, Hugo Boss and Lacoste, all in the $75 to $500 range, experienced double-digit growth for the year, and these brands represented 47.2% of the company’s net sales.
Not that chairman and CEO Efraim Grinberg doesn’t recognize the threat of smartwatches. In the “potential risks” section of its annual report, he says that Movado’s “ability to successfully design, produce, market and sell products competitive with smartwatches … depends, among other things, on its ability to obtain and maintain the necessary expertise in this area by enhancing its internal capabilities or by entering into and maintaining business relationships with third parties that have such expertise.”
He also commented on the perils of offering warranties on watches whose operating systems are out of Movado’s control. “The company does not currently provide longer warranties on its smartwatches than it does for its traditional watches. Consumers may expect that smartwatches … will for many years continue to function and be compatible with the operating systems with which they were intended to interface, including future updates. Since the company has no control over such operating system updates, it cannot assure such continued compatibility.”
The silver lining to the smartwatch cloud is that it might be creating a new generation of consumers checking the time on their wrists rather than on their phones. Consumers of smartwatches are likely, at some point, to upgrade to traditional watches, says Mr Brack. “More US adults are wearing watches today than four years ago, and that is a healthy trend for the entire industry,” he says.
A separate NPD consumer study last year showed that, while 20% of 18- to 34-year-olds said smartwatches are the type of wristwatch they wear most often, another 13% identified fine Swiss options as their primary watch.
“Smartwatches have become the entry point for new watch consumers looking to make their own personal statements, creating opportunity for many traditional watch brands across all price points,” says Mr Brack, who nevertheless reminds us that this transition may take some time. “Smartwatches are still in relative infancy,” he says. “The first Apple only hit the market in 2015, so it it’s only been five years. But much like cell phones, where the market gets saturated, people are slower to trade in because there’s not enough value added with the latest hardware upgrades. Once the consumer gets past the need to monitor whatever it is they need to monitor, they will be ready for something different – for when they go out for dinner, or to the office, or diving. Something that allows them to express their individuality.”
The concurrent growth of the luxury watch market supports this. “I think that trend toward individuality is part of why the luxury segment is going strong, with no signs of slowing down,” says Brack. “Unit sales of traditional watches are going down, but the average MSRP is going up. Just in the last three months of 2019 alone, the over-$5,000 segment rose by 15%. The higher end is doing well, and the independent channel, where higher-end watches are sold, is doing well, so there are good things to come,” says Mr Brack.
So far this year, the trend growth in the high price points for traditional watches continues, but the drop in the sub-$500 market is also sustained. Globally, across all segments, Swiss exports are up 9.4% for the month of January, showing a 15.2% spike in the US market compared to January 2019.
However, sales continued to decline in the under-CHF200 segment (wholesale value), which shows a 13% drop. And although Hong Kong posted a 25% drop in exports, the rest of Asia was strong, with a 6.9% increase in China, a 14.9% increase in Japan and an uptick of 41.1% in South Korea.