By  on April 18, 2011

BASEL, Switzerland — Sitting in a secluded corner of the Swatch Group restaurant, part of its sprawling pavilion in the main hall of the Baselworld trade show, Nick Hayek is excitedly waving what appears to be a small ethnic carpet.

The chief executive officer of the world’s largest watchmaker has just met a reporter recently back from Afghanistan and is wondering about the best use for the gift he has received, since he can’t quite decide whether it is a chair cover or a rug.

Hayek explains that Tissot, one of the brands belonging to Swatch Group, donated some watches as prizes for the inaugural edition of the Afghan Ski Challenge, a skiing competition organized by Zurich newspaper NZZ to promote tourism in the province of Bamyan.

“Crazy,” he exclaims, raising his bushy eyebrows.

Hayek can afford to be generous. Swatch Group enjoyed a banner year in 2010, posting sales of 6.44 billion Swiss francs, or $6.19 billion, up 18.8 percent in organic terms versus 2009 and up 8 percent compared with 2008, its previous record year.

His next target for the Biel-based company, whose 19 brands run the gamut from luxury Breguet timepieces to affordable plastic Swatch watches, is hitting the 10-billion Swiss franc mark within three years.

He plans to achieve this through organic growth, though the group’s healthy cash pile means acquisitions are not a problem. The main issue, it would appear, is keeping up with the runaway demand that is stretching the production capacities of his brands.

Hayek has been ceo since 2003 and runs the company alongside his sister, Nayla, who was appointed chairman last June following the death of their father, Nicolas Hayek.

He shares many of the patriarch’s characteristics, including his love of cigars, his habit of wearing several watches and his determination to wean other brands from their dependence on ETA, the Swatch Group subsidiary that supplies watch movements to most of the industry, in the interests of promoting research and development.

Hayek sat down with WWD to discuss future expansion, the competition and which jewelry brands put a sparkle in his eye.

WWD: Swatch Group faces chronic supply shortages this year due to high demand. What is the situation and what are you doing about it?
Nick Hayek:
It shows how dynamic the watch market is for Swatch Group. Consumption in 2010 increased everywhere. There are some exceptions of course: Greece, you can forget about it, and Japan was always difficult. But the U.S. picked up, Europe picked up, so the normal, traditional watch markets started to grow in the double digits. Added to this are emerging markets, which started to grow even further than previously, meaning sales were up 30 to 50 percent. We have also started opening more of our own stores, and for this you need bigger assortments, so this has led us to the situation today, where we cannot satisfy everyone at the same time. This does not concern just movements. Our problems are on the little details: crowns, cases, dials, hands and so-called appliqués.

WWD: Does that mean that you are looking to acquire more components suppliers to increase capacity?
N.H.:
No, not necessarily. Swatch Group is the most verticalized company in the Swiss watch industry. We have been adding capacity with additional people, machines and new, innovative production methods, but at a certain point, you need to build extra factories, and this takes some time. The bottleneck is that you have to increase production by 30 to 40 percent, and that is not something you can do from one day to the next in an industry. You have to maintain a high level of quality, and that’s the kind of challenge we face. Here, we do not accept any compromise.

WWD: And when you say you have to increase production by 30 to 40 percent, is that just to meet existing demand or are you also factoring in the next few years?
N.H.:
This is to satisfy existing demand and to be able to have enough stock, but it depends on the brands and the segments. You don’t have the same shortage everywhere. For the Swatch brand, we are in the process of building two additional automatic production lines because the demand is so high. We are adding some capacity in dials, especially for the high end, for Omega, for Breguet and Blancpain, where we have problems. We are experiencing shortages in hands in particular for Blancpain and Omega.

WWD: How much are you looking to invest this year?
N.H.:
We invest between 150 million and 250 million Swiss francs annually in our production facilities in the form of new machines, new production lines, the renovation of old machines and buildings, and expanding production. What we are doing now, on top of that, is buying additional land. When I say the real investment that Swatch Group is making is probably more in the region of 400 million to 450 million Swiss francs, you have to bear in mind that that is spread over two to three years.

WWD: You have also stated your intention of reducing the supply of movements and assortments to your competitors. I know it’s been a company intention for a while, but first you need the approval of the Swiss competition authority, the cartel commission.
N.H.:
We owe this first of all to the consumer. If you buy a very expensive watch and then you find out that inside, it has a standard movement made by ETA — a very high-quality movement, but of which many non-Swatch Group brands say that they produced it themselves — we call this cheating the consumer. The second reason is that it’s an unhealthy situation. We need competition that invests also in research and development, and in the production, because otherwise the industry is dying. It’s in the interest of the Swiss industrial landscape to have many of the competitors invest. Some of them do. Rolex has an industrial approach. This is also true of Richemont. And then you have others who spend a lot of money just on marketing, they buy big companies for billions, they claim they’re the biggest watchmakers, but they make zero investment to really build up the base of their products. They produce neither the movements, nor the dials, hands or cases. They just create billboards.

WWD: Are you referring to LVMH Moët Hennessy Louis Vuitton brands?
N.H.:
I have not talked about LVMH brands.

WWD: You have not mentioned them by name. I’m reading between the lines, since the group recently purchased Bulgari for $6 billion and several LVMH brands have announced the launch of their own movements in the last year.
N.H.:
You mean the brightly announced movement for which Tag Heuer got a license from Seiko? OK.

WWD: And the Unico movement from Hublot. Are you not impressed with that?
N.H.:
Look, it’s not that I’m not impressed. I think everybody has to take his responsibility. It is not up to me to tell these brands how to run their business, but we need to be transparent in the interest of the consumer. If the cartel commission forces us to deliver assortments on the grounds that 95 percent of the industry is dependent on us, that means most of the other brands are using our parts, otherwise we would have the right to stop. I refuse to lie about that. Why should you pay added value for a watch if it contains just a standard movement purchased from a competitor who sells the same movement in a watch that costs five times less? This is not right. We have to change this, and we have the backing of the big, important groups in Switzerland as well as of the smaller independent Swiss brands. Swatch Group should not be treated like a supermarket where anybody can come in, and we are forced to serve them.

WWD: Some people are saying that to implement such a change could take up to a decade. What is a realistic time frame as far as you’re concerned?
N.H.:
We try to do it tomorrow.

WWD: But you know it’s not going to happen tomorrow.
N.H.:
I think we have solid arguments. First of all, look how many people are now claiming that they have their own movements.

WWD: So you’re turning the tables on them.
N.H.:
Wait a minute! What you have to understand is that our patents on standard movements and assortments no longer exist. All you need today is to buy machines and train people, and you can produce your own movements and assortments. The only reason why most brands don’t do it is cost and risk. The cartel commission is beginning to understand this. And that’s why we are positive that the cartel commission will give us an indication fairly soon that we can start to implement our plans.

WWD: Talking of price increases, in terms of the finished product, are your brands holding off on raising prices or will there be some price increases this year to compensate for the strength of the Swiss franc?
N.H.:
Price increases are a very sensitive issue and we are very careful before we do it, because we come from the lower-priced segment with Swatch. We don’t like to pass on immediately to the consumer any increases in the cost of gold or in exchange rates. It’s our job to find ways to keep prices attractive despite those factors.

WWD: But in terms of the strengthening Swiss franc, I think it’s fair to say that raising prices is not a knee-jerk reaction, because it does look like a long-term trend.
N.H.:
I hope not. We recently saw the dollar rate against the Swiss franc fluctuate by 4 cents in four days. That’s extreme, and as long as the exchange rate is this volatile, we will be very careful. We have authorized some price increases, between 4 and 7 percent depending on the brand and region, but I’m convinced that in the second part of the year, the euro will probably trade at around 1.35 to 1.37 against the Swiss franc, though with currencies, you never know, and the dollar will probably be at 0.95 to 0.96 against the Swiss franc, or heading toward 1 Swiss franc, I hope. We prefer to accept lower margins because of the currencies, and not lose market share and be loyal to the consumer. And this has paid off.

WWD: I heard some of your brands were showing a pared-down assortment at Baselworld just to make sure that they will be able to deliver everything they show to retailers. Is that a companywide policy?
N.H.:
No, that’s not true. Swatch Group has never showed a prototype that is crazy and can never be manufactured just to show off. That’s a marketing bluff. We might run into delays and complications, especially for the high-end luxury brands. The Breguet Double Tourbillon, for example, was so complicated, it took us two years to deliver. More recently, we have developed a fantastic curved plastic touch screen for Swatch. We realized that it is so innovative and new that we can still improve the way it works, so we will probably launch it in October, which represents a delay of six months. That can happen. But here in Basel, we allow our brands to show only products that are destined to be delivered this year or the following year. That has always been done that way.

WWD: Just to revisit the issue of acquisitions, does this mean you’re not in the market for any acquisitions whatsoever?
N.H.:
We registered sales of 6.4 billion Swiss francs in 2010, and we have the potential to make 10 billion, just with organic growth, within three years, provided the Swiss franc does not go down the drain. So this is the main objective of this company, to continue to grow our brands and take market share. Now, if there is a brand out there that is interesting for us, that we could buy, we will certainly do it. We are independent, we have enough cash so we could do it without the help of any bank, so we can be very quick. But I don’t see anything of great interest out there.

WWD: There is no obvious gap in your watch assortment.
N.H.:
No, but some brands would nevertheless certainly fit. But we are not spending our time hunting down takeover candidates. On the jewelry side, what could definitely be reinforced is the pure luxury business. But for sure we would not pay prices like the one paid for Bulgari. But there are not so many candidates out there.

WWD: Harry Winston?
N.H.:
This is a beautiful brand but only acting at the very top end. This is too limited for us. Tiffany would be a better fit, but forget about it. It’s quoted on the U.S. stock exchange where it is valued at I don’t know how many billions and we won’t embark on that kind of adventure.

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