One after the other, two studies have recently been published that attempt to analyse the Swiss watchmaking industry. Credit Suisse has published its research, entitled “Swiss Watch Industry – Prospects and Challenges”, while consultants Deloitte present a report with a similar title “Challenges and opportunities of the sector”.

The two studies differ in their analytical approach. While Credit Suisse bases its analysis on the facts and figures available, Deloitte’s is based on a series of interviews with senior executives in the sector and the results of an online survey. It is worth noting that of the 53 executives questioned by Deloitte, only 17 work at a watch brand, the others being employed by component manufacturers (28) or “a company involved in the value chain”, without further precision.

But irrespective of the methodologies used, there are some clear overlaps in their observations, with some divergence nevertheless. Here, we highlight some of the notable conclusions, beyond the generalities that our readers are already familiar with.

 VERTICAL INTEGRATION AND THE CHALLENGES OF SUPPLY

The most striking phenomenon of the past ten years is without doubt the move towards vertical integration that is radically transforming the Swiss watchmaking landscape. This vertical integration has accelerated sharply since the first announcement, made ten years ago by Nicolas Hayek, of the Swatch Group’s intention to progressively reduce its movement sales to third parties and takes place on two fronts, both within the big groups and through acquisitions of all kinds of suppliers.

Vertical integration in the watch industry since 2000

Majority shareholdings in suppliers (selection); colours correspond to the buyers
Source: Factiva, Federation of the Swiss watchmaking industry, Companies, Credit Suisse
*Acquired by Bulgari, which was itself acquired by LVMH in 2011

Credit Suisse publishes a revealing, yet partial, table that summarises ten years of acquisitions. Today, the effects of this tightening up of the independent industrial fabric are clearly being felt. And this mainly in the strategic area of movements and components, which account for the majority of acquisitions.
As a result, some 50 per cent of the executives questioned by Deloitte consider that ETA movements are difficult to obtain, even though 65 per cent judge them to be “superior in reliability and quality”, only 3 per cent considering the alternatives “better” and 32 per cent seeing no difference. There are also supply problems for dials.
For Credit Suisse, the dial is “essential for the recognisability factor. Thus it is understandable that watch manufacturers target these companies in the vertical integration process.”

The most striking phenomenon of the past ten years is without doubt the move towards vertical integration that is radically transforming the Swiss watchmaking landscape.

Another component for which demand surprisingly outstrips supply is the watch hand. The executives questioned by Deloitte ranked problems with the supply of hands in third place after balance springs and movements.

For 45 per cent of the survey respondents, the 60 per cent increase in the threshold required by the new Swiss Made legislation will further aggravate these supply problems. “Despite the current drop in sales volumes [editor’s note: 100,000 fewer units in September 2013, for 1.9 billion Swiss francs more revenue] the current 15 per cent reduction of Swatch Group deliveries compared with 2010 figures is already causing supply bottlenecks,” Deloitte notes. And there are “only limited alternatives to Swatch Group”, according to Credit Suisse. Developing one’s own movement internally is a “costly and time-consuming” alternative, says the report, “and thus not an option for smaller manufacturers”. The other option, buying from other manufacturers (essentially Sellita, Soprod, La Joux-Perret), brings the problem of the quantities available and the prices that are generally higher than those of ETA. “In order to operate independently of ETA, companies need not only the appropriate financial means but also ongoing development, which requires time,” Credit Suisse concludes. And among the independent brands, who has a strong enough backbone?
Especially since “the main reason that less expensive Swiss watch brands import components from abroad is that the production costs associated with these components are lower.” Now, given the new Swiss Made regulations, they “will be obliged to replace most of their foreign suppliers with domestic ones in order to continue to qualify for” this decisive label. It’s a tough calculation!

 VERTICAL INTEGRATION IN DISTRIBUTION

What is more, notes Credit Suisse, “vertical integration is also an active force in distribution”. Following the example of production over the past few years, vertical integration of distribution has also been stepped up considerably. This structural transformation of distribution has gone through various stages: from cooperation agreements with local distributors, which broke the traditional chain of manufacturer – wholesaler – retailer, to direct retail with the opening of flagship stores.

But as with production, vertically integrating distribution also has its costs. The level of investment is high and it is something that “only companies that have the necessary financial options can aspire to” the report soberingly summarises. Just as independent brands (apart from a few well-known giants) are having to rethink their supply chains, they also have to change their distribution strategies.

Vertical integration in distribution

How do you assess the impact of the strengthening in vertical integration in distribution by big brands / big groups (monobrand and large multibrand stores dedicated to a group) on small independent brands / distributors / retailers? Source: Deloitte

Because although “in theory, vertical integration of distribution could free up space for independent retailers”, Deloitte notes, “the footfall generated by top-notch brands and the financial clout of the big groups often impose requirements on shelf space and minimum stock levels” that are prohibitive.
In answer to the question “How do you assess the effect of the strengthening in vertical integration of distribution by big brands/groups on smaller brands/distributors/independent retailers?”, the executives surveyed by Deloitte were hardly positive.

“Mono-brand boutiques are the admission card to the emerging markets.” Credit Suisse

Opening of mono-brand boutiques

Do you plan to open new mono-brand stores in the next 12 months? (Responses from brands only). Source: Deloitte

But around half of them nevertheless want to follow this very example. And efforts here are clearly directed towards Asia. More than 33 per cent of mono-brand stores are in China, including Hong Kong and Taiwan, followed by the Gulf states, mainly Dubai, then the major capitals of Europe.
But above all, “Mono-brand boutiques are the admission card to the emerging markets,” according to Credit Suisse, which gives the example of Ulan Bator, the capital of Mongolia, where Hublot and Omega, among others, have already set up their own stores.
The Swiss bank considers this as an indicator of economic confidence, since “if such a country expands rapidly and develops into an international hotspot, the first retailers on the ground will have an invaluable advantage.” One way for independent brands to improve their competitiveness, according to Credit Suisse, is to “join with other brands in cooperative distribution groups”. But as the bank notes, “this option is not often observed”.
To the extent that we are familiar with the jealous character of watchmakers, this remark does not surprise us. (PM)

 THE OFTEN-NEGLECTED SWISS MARKET

While statistics abound for Swiss watch exports, thanks to the regular updates provided by the Swiss Watch Industry Federation (FHS), it is much more difficult to get an accurate idea of the state of the watch market in Switzerland.

The FHS estimates that the Swiss market absorbs five per cent of timepieces produced in the country and federal VAT receipts suggest that watch and jewellery retailers generated turnover of 2.8 billion Swiss francs in 2011. But this figure includes jewellery sales and does not take into account watch sales in department stores and souvenir shops. Taking these data into account, as well as the retail sales statistics from Switzerland’s Federal Statistical Office (SFSO), the Credit Suisse report settles for an estimated market value for the watch industry of two billion Swiss francs at final retail prices.

Retail sales by category (Nominal sales, 8-month average, year-on-year change in %)

Source: Swiss Federal Statistical Office, Credit Suisse

As the above chart shows, regardless of the absolute figures watch and jewellery sales have consistently outperformed all other retail sectors – and therefore total average retail sales as a whole – over the past couple of years. This is undoubtedly due to the huge significance of tourist sales in the Swiss market.

Estimates of the share of sales to tourists range from anywhere between one-half to two-thirds, according to the Credit Suisse report. This assumption is backed up by VAT statistics indicating that half of all watch and jewellery sales in 2011 were for export (although this figure does not take into account sales to tourists who do not reclaim the Swiss VAT on their purchases).

Often neglected, perhaps because they are now increasingly considered as a dying breed, are the distributors based in Switzerland. They may be supplied directly by a brand or by a Swiss retailer. In either case, the volumes that they trade are not included in Swiss watch exports and are instead hidden away in the murky waters of Switzerland’s retail statistics, where watches and clocks are grouped together unhelpfully with “electronic products”.

 THE ROLE OF THE CHINESE TOURIST

The biggest driver of tourist sales are visitors from China, who accounted for 815,000 overnight stays in Switzerland in 2012, making the country the fourth most popular luxury tourist destination for the Chinese, currently behind France, the USA and Singapore. Overnight stays by guests from China increased by 21 per cent in 2012 and those from Gulf states by 24 per cent – impressive figures when seen against the backdrop of an overall decline in overnight stays in Switzerland of two per cent in the same year. Chinese tourists visiting Switzerland do so largely (80 per cent) as part of organised packaged tours, which offer Swiss retailers and Chinese tour operators a lucrative business in the form of commissions in exchange for guaranteed custom. The vast majority (81.5 per cent) of these groups stay in Geneva, Zurich, Interlaken and Lucerne, with the latter taking the lion’s share, accounting for one-third of overnight stays by Chinese tourists over the past three years.

Sales forecasts to tourists in Europe

What is your forecast for sales to Asian, South American or Russian tourists in the next 12 months? Source: Deloitte

As the purchasing power of the Chinese tourist, as well as his or her level of English, increases, they are expected to travel more on an individual basis. This may affect the commission business, but the overall number of visits are expected to increase (the Deloitte report cites the Swiss Tourist office predicting a quadrupling of the number of visitors by 2020) and thus have no negative impact on the Swiss retail market. The negative effects on watch sales of China’s recent anti-corruption propaganda are also debatable. [See the article by Woody Hu and Jean-Luc Adam in this issue.]

But the importance of the domestic market takes on even greater significance when viewed against the results of the Deloitte survey. Of the senior executives surveyed, almost half expect a stagnation of, or even a reduction in, exports to China over the next twelve months. Yet a full two-thirds of the same respondents expect sales to Asian, South American and Russian tourists in Europe to increase over the same period.

The intricacies of the Swiss watch market and the lack of any firm and coherent statistics about it are likely to remain. But so is its prime importance as a hub not just for watch manufacturing, but for watch sales as well. (PON)

Source: Europa Star December - January 2013/14 Magazine Issue

 CREDIT SUISSE REPORT

Credit Suisse report (English)

 DELOITTE STUDY

Deloitte report (only available in French)