By  on March 24, 2011

PARIS — The watch sector may be out of the doldrums, but on the eve of Baselworld 2011, one thing is clear: Uncertainty is the “new normal.”

Despite a roaring start to the year for exports of Swiss timepieces, talk at the annual watch and jewelry fair that starts today and runs through March 31 is likely to turn to gloomier subjects: the earthquake, tsunami and nuclear crisis in Japan; political turmoil in the Middle East, and a record high Swiss franc, to name just a few.

“It’s hard to view the economic outlook in a positive light when you see what is going on,” said Jean-Claude Biver, chief executive officer of luxury watch brand Hublot. “You can be optimistic, but you have to remain vigilant. It’s like being on the edge of the ocean and seeing a black cloud and thunder on the horizon. It doesn’t necessarily mean it’s going to rain, but you might want to think about taking in the beach umbrella.”

Jean-Daniel Pasche, president of the Federation of the Swiss Watch Industry, or FHS, said the ongoing crisis was likely to further weaken an already struggling Japanese market, but he added the outlook elsewhere was overwhelmingly favorable.

“We have said previously that 2011 could be a new record year and we maintain this view,” he said.

The latest FHS data supports a bullish outlook: Swiss watch exports rose 17.8 percent in February after a 16.9 percent increase in January, despite tougher comparatives. This comes after Swatch Group, the world’s largest watchmaker, posted a record net profit in 2010 and said it aimed to achieve sales of 10 billion Swiss francs, or $11.07 billion at current exchange, in the medium term, up from 6.44 billion Swiss francs, or $6.19 billion at average exchange, in 2010.

Baselworld director Sylvie Ritter was also upbeat, noting that a number of smaller watch brands had returned to the fair, signaling a definitive return to normal after the sector’s worst crisis in 30 years.

“Baselworld always reflects the mood of the market and we are feeling serenity both on the part of exhibitors and of buyers,” she said. “If there is no major incident that throws the brakes on global consumption, I think we are on track for a record year.”

Adding extra sizzle to this year’s edition, LVMH Moët Hennessy Louis Vuitton’s recent $6 billion deal to buy Rome-based jeweler Bulgari has stoked speculation of another round of M&A activity in the luxury sector.

However, with watch behemoths like Rolex, Chopard and Patek Philippe tied up in the hands of family shareholders or foundations, investors are likely to circle around smaller players, analysts said, citing Maurice Lacroix, Harry Winston and Franck Muller as possible targets.

René Weber at Bank Vontobel noted the number of potential acquisitions was much more limited than in the fashion field.

“The real small ones are not of interest to the big players,” Weber said. “If Swatch Group or Richemont would like to get something, then we’re talking about at least 50 million Swiss francs [$55.6 million] in sales, otherwise it doesn’t make sense, especially for Swatch. They really cover all the price points, therefore they don’t need an additional brand.”

Despite the positive sales momentum globally, industry observers expect the situation in Japan and the Middle East to weigh on sentiment, even though their market share is modest. The two regions are strategically important, since political turmoil in Arab countries drives up the cost of oil, thereby stoking already high production costs, while a prolonged crisis in Japan threatens to disrupt the supply of components.

Japan accounted for just 4.6 percent of Swiss watch exports in 2010, down from 11 percent in 2005, according to Weber. This compared with its overall share of 11 percent of the global luxury goods market last year.

Likewise, the Middle East represents around 10 percent of the Swiss watch market, but most of this is concentrated in the United Arab Emirates and Saudi Arabia, which have been relatively spared by political turmoil, while troubled Tunisia, Egypt and Libya are minor markets for luxury goods, he said.

Jon Cox, analyst at Kepler Capital Markets, said despite the uncertainty, he was maintaining his forecast for Swiss watch exports to grow by around 10 percent in 2011.

“Obviously, the question is how long this Japan situation goes on for and what will happen in Japan. If that gets a lot worse, then actually you might find the industry is not growing this year, and that is a major risk,” he warned.

According to retailers, the crisis is already having an impact as the tumble in global stock markets following the Japan earthquake undermines the buying intentions of affluent consumers.

Laurent Picciotto, owner of Paris-based fine watch retailer Chronopassion, said he saw an immediate drop in the presence of foreigners — who represent 75 to 80 percent of his customers — in the aftermath of the March 11 quake, compounding what he qualified as a “relatively catastrophic” month of February.

“We have had a pretty difficult start to the year and the catastrophe that is unfolding in Japan is probably having more immediate and lasting effects than we can imagine. Right now, we are really monitoring the situation day by day, hour by hour,” he said.

Ruediger Albers, U.S. president of watch and jewelry chain Wempe, was more circumspect.

“It’s too early to tell, but I think everybody is a little bit more cautious than just a few weeks ago,” he said.

Nicolas Beau, international director of watches at Chanel, said that while timepieces were usually among the first luxury goods to benefit from an economic recovery, they were also more vulnerable to any slowdown.

“If you don’t have the latest handbag, you’re doomed, you’re no longer with it,” Beau said, referring to chic shoppers. “If you don’t have the latest watch, it’s not such a big deal.”

Philippe Pascal, president of LVMH’s watches and jewelry division, said: “We have seen and registered growth on every single market, including markets which were under strong pressure, such as Japan or the U.S. Today, with the exception of the Middle East, which is a little bit shaky because of what’s happening, the rest of the world has more or less given us a green signal.”

Pascal said the steady improvement in sales last year was initially fueled by retailers rebuilding their inventories, but that consumer confidence has been continuously building steam.

“What we are seeing on our brands is that month after month, the sellout performance is improving for every brand and in every market,” he said.

For example, Tag Heuer’s Carrera Mikrograph, a limited edition of 150 which the company describes as the first-ever integrated wrist mechanical chronograph with a central hand displaying 1/100th of a second, is sold out in preorders, despite a price tag of $50,000.

Luc Perramond, ceo of La Montre Hermès, also reported growth across all regions, though Greater China clearly remains a key motor for the industry.

Hermès plans to reinforce its core female offering this year with a new Heure H collection, featuring redesigned dials and interchangeable bracelets, and the latest addition to its Arceau line, the Grande Lune, which is designed to appeal to the growing number of women interested in mechanical movements.

Nonetheless, Perramond cautioned that any significant dip in stock markets could jeopardize growth prospects for this year.

“When Wall Street drops, luxury spending falls, so we are not protected from a new slowdown,” he said. “I remain rather cautious, even if the year did get off to a good start, even if there is this huge Chinese engine driving growth. We must be vigilant and I don’t think business will continue to grow at the same rate as in 2010.”

Gary Cohen, the newly appointed ceo of Timex Group, echoed the sentiment.

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