The year 2002, which the entire world worried about, apparently ended on a better note than it began. The last three months registered good results, which helped, partially at least, the seemingly morose state of Swiss exports. However we really must take these ‘upbeat’ results with a grain of salt. The Swiss watch industry ended the year with officially zero growth (-0.1% in relation to 2001, with exports totaling 10.645 billion Swiss francs). In reality, it is difficult to precisely determine what the actual sales figures mean. We need to look at what does not appear in the numbers but what is quite real in practice, namely the export of stocks to foreign subsidiaries in order to increase volume arbitrarily by spreading the products around while waiting for sales. The general consensus is that these exports are placed a little bit everywhere and, having filled up the shelves, they are now overflowing. If we look at Swiss export figures for finished watches in January 2003, they seem to confirm this observation. Overall exports fell 5.8% in relation to January 2002 and watch cases alone fell 36.2%. Gold pieces also showed weakness (-13.6%) but platinum, although in much smaller quantities, actually increased 42.3%, while silver products were up 18.9%. This does not necessarily mean a return to ‘white’, however, since steel was down 5.4%. Although the economic situation is weary and the political situation seriously uncertain, they alone do not explain the stoppage in expansion efforts that were continuing during the last decade. Fundamentally, the Swiss, and global, watch industry has entered into a new phase of normalization, gradually putting the brakes on the years when all excess seemed possible. A certain ‘bubble’, namely that of ‘luxury’ is beginning to burst.

End of acquisitions
Last year also seemed to signal an end to the frenetic series of mergers and acquisitions that dominated the watch landscape in previous years. Are we back to normal or is it only because there is nothing much left to acquire? Or, is it a reflection of the general economic situation? When it comes to the concept of complete vertical-ization, the model has shown its limits, even its underlying dangers, as we have seen in the spec-R tacular meltdown of the AOL-Time Warner and Vivendi examples that tried to master both the ‘canals’ and the ‘liquid’ flowing through these canals (i.e. cables and programming). While the watch industry does not operate according to the same model, doubts are surfacing as to the universal validity of total integration, which means that the company controls everything: design + manufacture + marketing + distribution + retail sales.

Example of ‘fashion’ distribution
The model for the integration of distribution has thus reached its limits, limits that apply on several levels: presence in the field, networking the territory, transformations of lifestyles and buying habits. While the mono-brand boutique might be justified in very large cities, even if only for purposes of prestige and communication, how can it survive in smaller cities and towns? How can a brand motivate retailers if it also competes with them? (This question was asked during the launch of the haut de gamme chain, Tourbillon, opened a year ago by the Swatch Group.) We have already seen in France, for example in the fashion domain, a clear decision to return to multi-brand stores. “Between inaccessible luxury and large-scale distribution,” explains the CEO of Cacharel, “we are seeing terrain opening up.” In watchmaking, this means the appearance of mid-range and independent brands. Multi-brand retailers in the fashion, accessory and jewellery sector, for example, account for nearly 40,000 enterprises in a country such as France with its 60 million inhabitants. These retailers permit the terrain to be covered for the least cost. Distributing through them can perfectly co-exist with the prestige installation of a ‘flagship store’ in the large city or cities in the country. This canal has been somewhat neglected by the large brands, concerned about their image, but they are slow-ly rethinking their stra-tegy of distribution.

Independence and consumer habits
Since the independents have not had much choice during this time, they made an effort to increase their presence with traditional retailers, who themselves were burnt by the increasing constraints imposed by the large groups. The independents were often well-receiv-ed, not only because they proposed interesting alternatives, but also because, quite pragmatically, they were more inclined to let the retailer have larger margins. As Severin Wunderman, head of Corum, stated bluntly in the columns of Europa Star, he owes part of his success simply to “the larger margins given to retailers.” This aspect is even more decisive because not only have groups tried to cut margins, in some cases drastically, but also because they have tried to impose a strictly calibrated offer of products on the R retailer. While the sales statistics may benefit, it is not the case with consumers who find themselves confronted with a universally standardized offer. The person who wants something original and different has to leave the beaten path. The large shopping malls and wide avenues, whether in Hong Kong, Abu Dhabi, Stockholm, Dallas or Caracas, offer more or less the same merchandise with the same global message.

Prudence
At the same time, we notice a renewed dynamism among the independent brands, which are offering true alternatives as the only door open to them. Because of this, they are forcing the large groups to diversify and rethink their own collections. In 2002, we saw a gradual yet clear decline in overall creativity. While the final results will become obvious later, it is a safe bet to say that 2003 will also not be remembered as a year of great creativity. We get the real feeling that prudence and precaution are the words of the day. Given these uncertain times, the large groups seem to be putting major decisions on the back burner. They are remaining quiet, mostly content to offer variations in their collections or updating the look of their successful lines. This is a minimum risk strategy, justified by many factors: the general economic uncertainty, the need to bring their acquisitions to profitabil-ity, the time to digest the heavy investment in production planned during the previous years of euphoria. In the domain of production alone, we notice major industrial investments and the recent completion or near-completion of production facilities for Rolex, Patek Philippe, Piaget, Vacheron Constantin, Cartier, Roger Dubuis, Franck Muller, Panerai, Girard-Perregaux, Zenith, Bulgari, and the list goes on… We can begin to under-stand then that prudence means taking a pause in developing new lines.

From luxury to excellence
In previous years, a wind of folly blew hard over the sector. One word seemed to resonate in a quasi-magic manner everywhere you turned. “Luxury”. The light emanating from ‘luxury’ drew everyone in like moths attracted to a light bulb. Everyone rushed to make ”luxury”. We could still see it at the last Basel Fair. There was not one window display, however modest, that did not feature diamond-studded models. Everyone decided it was their destiny to move up-range. There are now so many at the top of the pyramid that it won’t be long until there is no more space left. Rather curiously, during this time of sparkling stones, stonesetters in Switzerland declared that they had no work. How strange is that? We need to distinguish between the façade, the splendour of the showcases, and the reality of the R sales. At the same time that brands were betting on luxury, consumers were suddenly becoming more careful in their choices. There is also the fact that the ubiquitous luxury craze contributed to de-legitimize those brands that were truly legitimate. A bit snobbish, these large brands began to look askance at the noisy newcomers that wanted a part of the luxury picnic. As a result, the opportune notion of ‘excellence’ was born.

‘Concierge marketing’
“Since anyone can cover a watch with stones and claim to be a luxury brand, we are offering something else, that we alone are able to provide, and that something is ‘excellence’,” say the large brands. But what exactly is this ‘excellence’? It applies to the product itself whose quality and details must be perfect. In addition, it applies to the product environment, marketing, promotion and very importantly to the notion of service. ‘Excellence’ depends above all on the idea of exceptional ‘service’. This is an expensive commodity. It requires the continuous training of those who are the spokespeople for the brand. It necessitates creating an irreproachable ‘after-sales’ service as well as a feeling of personalization and the concrete notion of an ‘exceptional’ product. In a way, it is what the marketing gurus have dubbed ‘concierge-market-ing’, examplified by the now famous ‘concierge’ button on the luxury cell phone ‘Vertu’ launched by Nokia, that offers users a ‘global concierge service’ around the world 24 hours a day. The product has thus become ‘secondary’, a sort of platform opening into a ‘reserved’ universe. Owning a luxury watch is one thing, belonging to a ‘circle of excellence’ is quite another.

Re-legitimized ‘values’
The race towards ‘lux-ury’, which will count a number of casualties along the way, empha-sizes the idea of ‘two-speed watchmaking’ discussed in the previous issue’s editorial column. Like the deep salary divide between managers and workers, watchmaking seems to be moving in two opposing directions. With its integrated or tightly controlled distribution, high luxury is on one side, with low-end mass distribution on the other. This year, the division has opened new opportunities for the mid-range brands. In 2002, they fin-ished the year in rather good stead. Emblematic is Tissot with its nearly 2 million watches sold per year. And, like Raymond Weil, the mid-range brands have learned the lessons of their larger counterparts. They have tightened up their offer, reviewed their service and emphasized the notion of the brand. This winning strategy has resulted in a very good price/image/quality ratio, to the extent R that the ‘boundaries’ have become blurred and the reference points confused. Again, what will make the difference between one brand and another with similar products is the famous ‘concierge button’. To give you an example, Hermès, which regularly posts better results than many others, perfectly understands and has integrated this attitude into its thinking. While this brand has more legitimacy than others, it has adopted a low profile in watches. It moves ahead slowly, step by step, not claiming or pretending to be a ‘manufacture’, maintaining its prices within a set range compatible with their true watchmaking value, but offering an image and services of primary quality.

Low profile
The infamous Enron episode demonstrated a number of failings. The consumer lost his innocence and was made to look stupid. He lost his confidence, even if he never really had it. He be-came mistrustful. We certainly cannot blame him for this. As in other sectors of the economy, watchmaking too is going to have to re-legitimize the brands and their products. The global reputation of a brand, its persistence on a quality level, the excellence and speed of its services will all become determining factors in the mix that will finally lead to the act of purchase. What will be lost in the bargain are the feelings of haughty superiority, media arrogance and displays of insolence. We only have to see the return of emphasis on the product itself in the ads to be convinced. The prize for ‘low profile’ goes, without a doubt, to Patek Philippe, which, very emblematically, is presenting this year an invisible tourbillon (except when seen from the back), hidden under a dial of very great sobriety. (Quite the opposite of Franck Muller who, always in the euphoria of the ‘bubble’, attempts to make the tourbillons as visible as possible.) Patek Philippe’s ‘Calvinist’ choice may be a sign of a general return to the strictest canons and virtues of traditional watchmaking.

State of the groups
“Having eaten a huge amount, the groups are now digesting their meals…” we could say. We under-stand that it is often during these intermediate phases that new strategic directions are drawn. Yes, the groups ate well during 2000 and 2001. They spent 2002 absorbing the weight of their acquisitions, restructuring their organizations and their distribution as a consequence, in addition to developing their production tool and refining their integration. They are managing more or less in the same way, which means they ‘have saved the furniture’ and avoided the worst. R

 the Swatch Group saw its total turnover reach a little over 4 billion Swiss francs, which represents a decrease of 2.9% after exchange rate losses of 166 million francs. However, in terms of volume, watches and movements increased 3%.

 the Richemont group, whose fiscal year ends at the end of March, is indicating a somewhat more noticeable decline with a decrease in watch sales of 3% over the first six months giving a 4% decrease in profits of 592 million Swiss francs.

 LVMH came out a little better with a 2002 turn-over up 4% at 12.7 billion euros. But watchmaking accounts for less than 5% of the total and saw results increase by only 1%.

The groups don’t publish their sales brand by brand, therefore one is reduced to conjecture based on various cross-checks. The different brands within any one group often have very different results. Among the strong drivers, however, we can mention Omega, Tissot and Rado for the Swatch Group, certainly TAG Heuer for LVMH, and Panerai and IWC for Richemont. Cartier, the flagship of Richemont, seems to be having tempor-ary difficulties, according to various rumours that pop up here and there. It is also true that, for the first time, I have heard rumours about Rolex… Rolex!! It is an empire, an enigma that never enters into analyses of the watch sector (the Rolex Foundation’s policy is to say strictly nothing), yet the heavyweight that accounts for nearly one-third of Swiss watch industry statistics. Ah, if only Rolex would comment on its results, we might be better able to draw a more accurate picture of the global watch trade. Another point we should mention in passing is that, in general, the division of sales by geographical region varies only slightly. Of course, we can read the highs and lows due to national particularities like a seismograph, but compensating factors operate regularly, so much so that the general equilibrium varies very little by region.

Questions of monopolies
One affair shook up the Swiss watch industry in 2002, one that opposed the giant ETA to several movement ‘finishers’. These companies assemble their own movements using ETA calibres as a base. Last year, ETA threatened to gradually re-duce the supplies of basic calibres until 2006, after which only finished movements would be avail-able. The decision by the Swatch Group would not only result in the loss of several hundred jobs but it would also limit the activities of dozens of independent brands that use the products of these ‘finishers’. In the end, COMCO, the organization responsible for overseeing competition in R Switzerland, came to a compromise that limits the number of finished movements to 15% that will be delivered instead of basic calibres. Regardless of the outcome, this controversy was interesting because it reveals one of the weaknesses of the Swiss watch industry. Nicholas Hayek had his answer ready. He has repeated over and over again that ETA has been the only enterprise to fully develop the watchmaking industrial tool, delivering its production to each and every competitor. He thus certainly sees no reason why people should accuse ETA of the lack of foresight of the others. Historically, this argument is undeniable. A large part of future development resides in the essential search for alternative industrial production tools, which Hayek himself hopes will happen. It is also vital for the long-term preservation of the Swiss watch industry if the sector does not want to be relegated solely to the very haut de gamme.

Re-industrialization
The effort to re-industrialize the sector, with the aid of ultra-modern technologies, will allow the expansion of the mid-range with its good quality and affordable products. The recent general decline in the average prices of watches, and especially of gold pieces, demonstrates that already the market is inexorably moving towards the centre. In time, new industrial investments will perhaps permit the creation of a ‘second Swatch’, in other words, an inexpensive Swiss watch, so demanded by the ex-President of the FH, François Habersaat. In the haut de gamme sector, on the other hand, we could not help but notice the large moves towards verticalization and improvement in production that seem to be taking place nearly ev-erywhere. Geneva-based Patek Philippe just inaugurated a very impres-sive facility that regroups the ensemble of its bracelet and case manufacturing activites under one roof, not far from the headquarters of the enterprise. The family-run brand’s investment of tens of millions of Swiss francs says a lot about its confidence in the future and its desire for independence. However, Patek is not alone is this type of venture. Whether at Richemont or LVMH, the desire to industrialize is so important that it explains, partly at least, the pause in creativity that we are currently witnessing. Even for the independent brands, we can make similar observations. After the first wave of the likes of Parmigiani, Chopard and Roger Dubuis among others, we are seeing new moves on the part of brands such as Ikepod, Daniel Roth & Gérald Genta, Harry Winston and others, which also want to directly master a greater part of their production.

Retailers weakened
As we said at the beginning of the article, many observers indicate that the key to the future is not simply with verticalization. It is primarily to be found in distribution. For every Philippe Stern, who appears unwavering on the subject having said that he “will never open his own boutiques” trusting only “retailers to do the real job of a retailer”, how many other brands have launched into the integration of their distribution? This strategy, while it may seem attrac-tive in a Power Point presentation at a sharehold-ers’ meeting, has created a lot of confusion and problems in the field. In a shrinking market-place where competition is increasingly ferocious and stocks are accumulating on the shelves, the retailer is put into a weakened position. It becomes even worse when the large groups impose not only forced groupings of products but also slashed margins. There has been a break in trust in the marketplace today. The shared goals of yesteryear between brand and retailer have turned into divergent conflicts of interest. By cutting out independent retailers, the groups and brands run the risk of serious disappointment, as we have seen in other domains, such as the example of Sephora with LVMH and perfume. Retailing is an uncertain and difficult business. When the retailer is bypassed, a whole fabric of client relationships and detailed knowledge of the terrain is often lost. Paradoxically, this situation is proving beneficial to the best and brightest among the independent brands. In the haut de gamme, they are the ones who are most successful. A brand like Girard-Perregaux perfectly understands how to maintain its retail network, counting on the quality, after-sales service and personnel training. They also never forget that the first contact with the brand is the salesperson.

Everything changes
This is why the entire situation is paradoxical and continually offers new perspectives in spite of the stagnation. Beneath the façade of immobility that characterized watchmaking in 2002, we still saw a lot of movement, transformations and cha-nges. The fragility of a product such as a watch, whose ‘value’ is determined by as many emotional as objective factors, allows for a continuous redistribution of the cards. It unceasingly attracts new players to the game. It offers adventure. Who, ten years ago in 1993, would have painted an accurate picture of the watchmaking landscape today? Besides the inexorable rise in power of the large groups, inscribed de facto in the reigning economical ideology, no one could have described the range of values and preferences that dominate today. And in 2003? Objectively, and whatever the analysts and other gurus say about a second, third or even fourth quarter recovery, the results are a lottery. God knows, no one knows.