Grabbing market share will be the key battle of Baselworld this year.
The Federation of the Swiss Watch Industry predicts Swiss watch exports will remain stable in 2015 after eking out 1.9 percent growth last year. Therefore, brands must win a bigger slice of the pie in order to post growth.
To do this, they will have to vanquish hurdles including sharp currency fluctuations, a recent slowdown in U.S. sales growth, political turmoil in Ukraine and Hong Kong, and the potential impact of lower oil prices on Middle Eastern demand.
Leading watchmakers including Swatch Group and Patek Philippe have adjusted prices ahead of the show in reaction to the decision by the Swiss National Bank in January to de-peg the Swiss franc from the euro, causing the currency to appreciate sharply not only against the euro, but also against the dollar and the yen.
Others, like Ulysse Nardin, have shortened their staff’s working hours as volatile demand for luxury timepieces forces them to scale back production.
Tough market conditions notwithstanding, executives — mindful of gaining a mental edge on their competitors — projected confidence heading into the show, which runs today through March 26.
“The current economic situation is challenging for every player in the luxury business,” Fawaz Gruosi, founder and creative director of Swiss jewelry and watch brand de Grisogono, acknowledged. “Forecasts are difficult to make, and markets are fluctuating and very unstable.”
He added, “Luckily, our segment is less impacted, as hard luxury products seem to hold on well.”
Swiss watch exports rose 3.7 percent in January after two months of losses, though analysts said this partly reflected a surge in orders from retailers before major watch players push through price hikes in select markets, in particular the euro zone. Figures for February are due to be published today.
“I think the mood is still fairly positive. In some markets there is clearly so much disruption that it hurts sales, but we see, for example, already in February, that it is pretty much rebounding, if we look at the global level,” said Peter Stas, cofounder and chief executive officer of Frédérique Constant.
Benefiting from its positioning in the accessible luxury segment, the brand outperformed the market last year, posting sales growth of 16 percent. In the wake of the Swiss bank’s decision, it raised prices in the euro zone by 8 percent and lowered them by 5 percent in Switzerland and between 3 and 7 percent in Asia.
“I see less competition and I see continuous development in growth for our company,” Stas predicted.
Frédérique Constant also appears well-poised to ward off the threat of the Apple Watch, set to go on sale in April. The Geneva-based firm and its sister brand Alpina will arrive in Basel with more than 10 models of their horological smartwatches for women and men.
Described as “the bridge between Silicon Valley and Switzerland,” they feature traditional watch faces rather than digital screens, and are the fruit of a venture with California-based Fullpower Technologies, which aims to bring its MotionX activity tracking technology to the Swiss watch industry.
The fair’s organizers predict business as usual. The number of exhibitors is set to remain stable at 1,500, with 150,000 visitors and 4,000 journalists expected to attend.
“[Exhibitors] have high expectations in terms of buyers coming and the media impact of Baselworld all around the world. They are convinced that it will give a positive impact to the world market in watches and jewelry,” said Baselworld director Sylvie Ritter.
Swatch Group ceo Nick Hayek Jr. stoked market buzz by announcing that the world’s biggest watchmaker plans to bring a smartwatch with functions including communication, mobile payments at stores and applications that work with Windows and Android.
The group, whose brands range from high-end Blancpain timepieces to plastic Swatch watches, has raised prices for some of its brands between 5 and 7 percent in select markets to compensate for the unfavorable currency situation, which Hayek likened to a “tsunami.”
Patek Philippe said even before the SNB’s surprise move, that currency fluctuations created sharp distortions in the prices of its watches in different markets. In early January, a complicated watch such as its Ref. 5960 annual calendar chronograph in platinum cost 33 percent more in Hong Kong than it did in Switzerland.
“The significant price differences in the magnitude of plus-20 to plus-25 percent in Asia and the U.S. compared to Switzerland and the euro zone, attributable mostly to foreign exchange trends, destabilizes local markets by enticing customers to buy their watches abroad and could lead to the development of a gray market,” it said in a statement.
Patek Philippe therefore cut prices by 5 percent in Switzerland, 3 percent in Asia and 7 percent in North and South America, as well as Hong Kong. It simultaneously hiked prices by 7 percent in Europe and 5 percent in Japan, beginning Feb. 10 and effective until the end of June.
“Within this new and difficult context, it is my objective to make sure that our customers in the individual markets can expect fair prices, excluding VAT and other taxes, and that our dealers can operate within a sound financial framework,” explained Thierry Stern, ceo of Patek Philippe.
Aldo Magada, ceo of Zenith, agreed it was vital to reassure retailers and consumers in order to restore a measure of serenity to the market.
“I can’t do much about the economic environment, so my strategy is simple: It is to ensure that Zenith products are quite homogenous in terms of price,” he said. “I have to avoid creating imbalances that could trigger an avalanche on one side or the other.”
Magada noted that even if the euro stabilizes at around 1.08 Swiss francs, versus the low of 0.97 francs hit in January and the previously maintained cap of 1.20 francs, it is also losing ground against the dollar, which has repercussions for territories as far afield as Dubai, Hong Kong and China.
Magada is among a slew of executives in new roles at Basel. Among the other ceo’s appointed in the last 12 months are Jean-Frédéric Dufour at Rolex; Jean-Claude Biver at Tag Heuer; Antonio Calce at Sowind Group, parent to Girard-Perregaux and JeanRichard; Stéphane Linder at Gucci Watches and Jewelry, and Laurent Dordet at La Montre Hermès.
Efraim Grinberg, chairman and ceo of Movado Group Inc., noted that it recently hired former Apple executive Jo An Lawson as general manager of wearable devices. “But we are moving in that area cautiously, because we want to make sure that we can introduce beautiful products,” he said.
The group also has a new president, Ricardo Quintero, in charge of accelerating its global expansion.
“I think there are always opportunities. You have an improving economy in the U.S., and I understand that there are challenges in other parts of the world,” Grinberg noted, “but you also have declining oil prices, which ultimately benefits consumers all over the world.”
Movado Group, which produces watches under brand names including Movado, Ebel, Coach, Tommy Hilfiger, Hugo Boss and Scuderia Ferrari, raised its prices on March 1 for the first time in six years. But Grinberg expects markets to have partially digested the Swiss franc shock by the time the fair kicks off.
“Currencies will begin to settle to their natural balance, and I think that will create a better air of calmness in the industry,” he said.
Mario Ortelli, senior analyst at Bernstein Research, said Swiss players could hedge themselves against the strength of the Swiss franc by buying companies that record their sales in other currencies, especially euros.
“Keeping cash in Swiss francs nowadays is a cost, because you have a negative rate on your bank account,” he said. His top picks for acquisitions were Audemars Piguet, Chopard and Patek Philippe.
“We believe that Richemont will focus its attention on high-end brands, and Swatch Group on midtier brands. In the case of Swatch, any acquisition they make could potentially run into antitrust issues because of their dominant market position in movement production,” he added.
The central bank decision has fueled fears that the export-dependent Swiss economy will slide into recession. The KOF Swiss Economic Institute, a leading economic think thank, expects Swiss gross domestic product to fall by 0.5 percent in 2015 and remain stagnant next year.
“Investments in equipment will become increasingly restrained as the exchange rate adjustment has made Switzerland even less attractive as a manufacturing location, having already been hampered by doubts over progress in the bilateral approach,” it said in a recent report.
Nonetheless, several major players are sticking with plans to ramp up their output from Switzerland.
Movado Group is launching Hugo Boss Swiss Made timepieces, though the sudden currency swing means they will be priced around 8 percent higher than initially planned at 399 euros to 699 euros, or around $450 to $800 at current exchange.
Fossil Group is moving ahead with long-term plans to increase its capacities to assemble mechanical movements and manufacture cases in Switzerland as the firm expands its selection of Swiss-made products for brands such as Emporio Armani, Burberry and Fossil.
“Our diversified manufacturing base and global distribution puts us in a strong position to limit impact from currency fluctuations,” said Martin Frey, managing director of Fossil Group Europe. “We react more to market-driven changes than currency-driven changes. Investing in vertical manufacturing in Switzerland continues to be a big opportunity for us and our strategy will not change based on recent policy changes.”
The group expects to produce close to 200,000 movements in 2015, up from 110,000 in 2014. Its Basel launches will include limited-edition Diesel timepieces featuring Swiss movements, and it is working on a ladies’ mechanical movement to be marketed next year.
Meanwhile, Tudor — the sister brand of Rolex — will unveil its first manufactured movement as it enters the next phase of the brand’s global relaunch, initiated in 2007. The Tudor MT5621 caliber will initially equip its North Flag model, which boasts a power reserve of around 70 hours.
“Manufacturing an in-house movement allows for more industrial independence,” said Philippe Peverelli, director of Tudor Montres. “The introduction of this new caliber is the first step of a major industrial strategy aimed at equipping more and more Tudor watches with Tudor’s own movements.”
Indeed, innovation will be key to capturing increasingly discerning consumers, especially in China, the number-three market for Swiss watch exports in 2014. Exports to China fell 3.1 percent last year and were down more than 15 percent from 2012 levels, according to the Federation of the Swiss Watch Industry.
The drop in demand has been largely blamed on a government anticorruption campaign, but Franklin Yao, managing partner and cofounder of Shanghai-based consultancy SmithStreet, believes the shifts in the Chinese market run deeper.
“I wish that I could say that 2014 will be like a bad dream that you wake up from and in 2015, everything will go back to the way that it was, but that’s not going to be the case,” he said.
Yao sees two main factors at play: Very wealthy consumers in China are starting to spend in a more rational way, while a credit crunch is limiting access to capital for rich entrepreneurs.
On the upside, a generation of upper middle-class consumers is emerging and they are spending more than they were before.
“They might be two or three years out from being completely immersed in spending on luxury as part of their lifestyle,” he predicted. Capturing these consumers will require a more sophisticated approach to retail and marketing.
“I think the fundamental issue for brands in China is that they have been really set up to serve the VIP customer, and they haven’t been set up to serve this emerging customer. Maybe in some ways, they don’t really understand these [emerging] customers, or don’t know how to influence and touch them, teach them or introduce themselves to them in the right way. I think that is the challenge and the opportunity that everybody is going through right now in China,” Yao said.
In a recent report, Bernstein Research forecast that the rise of these sophisticated consumers and an improvement in the political situation in Hong Kong will contribute toward ending the destocking cycle in Mainland China in the second half of the year.
With the effect of the clampdown on Chinese gifting finally stripped from comparable data, Bernstein forecasts the global luxury watch market could post growth of 3 percent in 2015, though it sees a two-speed recovery, with midpriced watches recovering more quickly than those at the high end.
“We argue that the rising tide of demand will not float all boats, and the most ‘desirable’ brands with evergreen products or compelling new launches will emerge as clear winners,” it said.
“In a market where over-exposed brands are in decline, and where customer sophistication is rising internationally, the need to innovate is higher than ever,” Bernstein added.
Louis Vuitton, which launched its first watch in 2002, is banking on creative design as its advantage in a competitive playing field. It’s launching a more accessible version of its Escale Worldtime men’s watch, unveiled last year, featuring a simplified movement and a printed dial, in lieu of the original hand-painted version.
The timepiece will retail for 5,200 euros ($5,900), compared with $67,600 for the high-end version.
“We think it’s a strong idea. I also think it’s different from everything already out on the market,” said Hamdi Chatti, vice president of fine jewelry and watches at Louis Vuitton.
“I think a lot of customers will continue to buy beautiful watches, but they will gravitate either toward very classic timepieces or something very original and new. We don’t have 150 years of watchmaking history, though we do have a 160-year brand history. Therefore, our credo is to innovate,” he concluded.