An unfinished mega-resort halfway up a Swiss mountain isn’t the usual venue for Nick Hayek. But that is where the Swatch Group chief executive officer took himself late last month to unveil a deal with a century-old retreat being revitalized by 500 million Swiss francs, or $503 million, of Qatari money.
Such energetic marketing may feature increasingly for Hayek. His company, whose products range from ubiquitous Swatches through the Tissot and Longines brands to upmarket Blancpain and Breguet, is facing times even chillier than the weather in the Swiss Alps. Swatch manufactures in one of the world’s highest-cost countries and has been hit by the overvalued Swiss franc. After years of steadily rising foreign sales, the group is facing tougher trading conditions amid weakness in many foreign markets, led by China.
The group’s net revenues fell last year by 3 percent to 8.45 billion Swiss francs, or $8.51 billion, while net income slumped 21 percent to 1.12 billion Swiss francs, or $1.13 billion. That prompted broker downgrades on fears that profit margins were being sacrificed to preserve market share. Swatch shares have fallen by about 50 percent over the past two-and-a-half years.
“The Swiss franc is not just strong, it’s hugely overvalued,” Hayek told WWD. “Of course, that’s creating a margin problem. We don’t want to lose market share outside Switzerland, so we have to accept lower margins. Despite lower margins, we still reported more than 18.8 percent operating margin for watches and jewelry last year. There are many years in the past when we reported lower levels than where we are now. Of course, the analysts aren’t happy. But we won’t lay off people or reduce marketing just to please the stock market.”
His remarks summed up the group’s dilemma: The fact that maintaining the Swiss identity of its watches is essential to meet strict local content rules and to underpin its core marketing message of Swiss quality.
“Above all, we will never sacrifice our Swiss production base. We are an industrial company with almost everything in Switzerland: We have more than 150 factories here and some 90 percent of our product comes from here. We’ll continue to invest in our [research and development] and production here for all segments, not just for the luxury,” he stressed.
Swatch has turned to innovation, greater control of its retailing and cautious diversification to address the tougher conditions. A broad product push has seen new lower and midrange timepieces with additional “smart” features in response to potential competition from the Apple Watch and smartwatches from brands such as Tag Heuer, part of LVMH Moët Hennessy Louis Vuitton.
The core Swatch brand’s Touch Zero One — first in a family of new “smart” products — has been followed by Swatch Bellamy, offering contactless payment. Tissot, another top-selling group brand already strong in electronics through its Touch Collection, has similarly added “smart” innovations. Further upmarket, prestige Omega has introduced new chronometers — the most accurate form of timepieces — to sharpen its edge against rivals Rolex and Breitling.
To get closer to customers, the group has been expanding its wholly owned store network. “The move to more own-retail is positive, because when things turn down, independent retailers stop ordering. If you control your own retail, things aren’t quite so volatile,” said Jon Cox, watch analyst at Kepler Cheuvreux in Zurich. Direct retail exposure represents almost 30 percent of Swatch’s revenues, double the level of five years ago, according to market estimates.
Meanwhile, diversification has included a five-year deal signed last month with Italian eyewear group Safilo on a new range of branded products. Separately, Swatch has been trying to talk up the technology potential of its electronics subsidiaries, notably for batteries.
Whether it is all enough to overcome investor unease about growth and margins remains to be seen. Analysts’ skepticism has focused on the company’s prediction that revenues should grow by 5 percent this year in local currency terms.
“I assume the industry will grow by 3 percent in local currencies and Swatch Group will win market share, so I could see it register 4 percent growth,” Cox estimated. “The margin has been under pressure for the past couple of years. The question is whether it will ever come back to where it was. At the lower price end especially, they’re competing with a lot of non-Swiss brands that aren’t suffering the same currency headwinds.”
Hayek remains upbeat. “Consumption worldwide is good, with a few exceptions. But retailers are so quickly scared to buy because they’re worried about overstocking amid concerns about volatile stock markets and geopolitical issues. It’s always the same pattern in more challenging times,” he said.
Sales in January and February were resilient, the ceo said. “There’s been a certain slowdown in Europe, largely because of visa issues for Chinese tourists. But Asia in January and February showed very strong growth rates, and mainland China was also good. It’s Hong Kong that’s a mess, and is likely to remain difficult for the next 12 to 24 months,” he admitted.
In January, exports of Swiss timepieces fell 7.9 percent to 1.52 billion Swiss francs, or $1.51 billion at average exchange for the period, according to the most recent data from the Federation of the Swiss Watch Industry. The decline was led by Hong Kong, the number-one market for Swiss timepieces, where sales plummeted 33.1 percent, the 12th consecutive month of steep declines.
“Hong Kong is the whole issue in a nutshell,” Cox agreed.
The pain has been mitigated somewhat by the fact that Chinese tourists are traveling further afield. Swatch group sales in Japan and many other Asian countries were strong in January and February, while mainland China also performed well, said Hayek.
He preferred to put Swatch’s current challenges in the context of the state of the industry overall. “The Swiss watch industry is in good shape. We have a certain downturn now, but it has to be seen in context: in 2009, wristwatch exports amounted to 21.7 million pieces by volume and about 13 billion Swiss francs [$13.1 billion] by value. Last year, they had risen to 28.1 million units and 21.5 billion Swiss francs [$21.7 billion] in value,” Hayek pointed out.
“So this isn’t a crisis, it’s just an adjustment. The figures can’t always go on rising, especially with such a terribly strong Swiss franc.”