BASEL, Switzerland — Explosive demand from China is set to fuel strong growth in the watch sector in 2011, but will leave the market increasingly polarized between large groups with the critical mass to expand and smaller independent players with less financial firepower.
That was the message from this year’s edition of the Baselworld fair, the watch industry’s most important annual gathering, which ran from March 24 to 31.
Swatch Group, the world’s largest watchmaker, said momentum remained strong in the first three months of the year after a record 2010, a sentiment echoed by brands including Chopard, Hublot, TechnoMarine, Tag Heuer and Frédérique Constant.
“So far, the first part of the year has been terrific,” reported Cindy Livingston, president and chief executive officer of Sequel, which holds the licenses for Guess and Gc Watches.
“In the Middle East, we have our issues, as everybody in the world does right now, but we’re getting very big growth in Asia with what’s happening with the Chinese consumer, so that is counteracting the tension in the Middle East,” she added.
The top end of the market was equally buoyant.
Hublot ceo Jean-Claude Biver said he expected to close the fair with sales of 100 million Swiss francs, or $109 million, up from 85 million Swiss francs, or $80 million, in 2010. All dollar figures are calculated at average exchange rates for the periods concerned.
The brand sold hundreds of six-figure timepieces, in addition to a one-of-a-kind $3 million watch and two priced at $1 million.
“The fact that we are selling so many expensive pieces is a clear sign of recovery, because the average price is generally the first thing to fall in a crisis or recession, and it is also the first thing to rise when the market picks up,” Biver noted.
James Seuss, ceo of U.S. watch retailer Tourneau, said his budgets were up following a double-digit sales increase in 2010.
“I do think it will be a good year for watch sales, and we want to make sure that we have inventory there to meet that demand,” he said. “There is a lot of demand coming from China, so certainly availability from some of the brands may be an issue later on in the year.”
Seuss said standout novelties included the new Rolex Explorer II, Patek Philippe’s 5270 Perpetual Calendar Chronograph, Breguet’s Classique Hora Mundi and the Zenith Elite Class Moonphase Grande Date.
Many executives saw the industry heading for record sales in 2011, though a number were concerned about the potential consequences of political turmoil in the Middle East and the earthquake and tsunami in Japan.
“Japan is a big market for us and we will suffer from that,” said Mounir Moufarrige, ceo of U-Boat. “I’m very cautious. I wasn’t expecting last year to be what it was, and I’m not expecting to replicate last year’s performance.”
Fawaz Gruosi, ceo of de Grisogono, said spreading unrest in Arab countries would further push up the cost of raw materials such as oil, gold and diamonds. “Since 9/11, the economic, financial and psychological stability of the world has changed enormously,” he noted.
A major hurdle facing many brands is a bottleneck in the supply chain, as makers of movements, cases, bracelets, hands, dials and other components struggle to catch up with the market’s stronger-than-expected rebound from its worst crisis in three decades.
“It’s a nice problem to have, but it’s definitely the biggest challenge in the coming years,” said Marc Hayek, ceo of Blancpain, Breguet and Jaquet Droz, three of the prestige brands within Swatch Group.
For many watchmakers, it means not only investing in extra staff and new production facilities but taking control of key suppliers in an effort to become more self-reliant.
Breguet plans to complete an additional facility in L’Orient — part of a total planned investment of 66 million Swiss francs, or $71.6 million — by the end of 2012. In addition, it has integrated luxury and prestige watchcase maker Manufacture Favre et Perret SA, also owned by Swatch Group, in order to increase efficiencies, and plans to hire between 50 and 70 extra staff this year, which would bring its total workforce up to 1,000.
“It’s something that is not easy because we want no shortcuts in any way, and to stay 100 percent faithful to the quality and to the way we make the watches,” said Hayek. “A lot of craftsmen are really artists. It’s years of experience to get to a certain level, and that’s a problem.”
For companies outside Swatch Group, the supply issue has become especially urgent, since Swatch ceo Nick Hayek regularly threatens to stop providing the market with components, though his group’s dominant position means such a move has to be approved by competition authorities, a lengthy process with no clear deadline.
Philippe Mougenot, president of Chanel’s watch and jewelry division, said the company would double production capacity and staff at its headquarters in La Chaux-de-Fonds, in Switzerland, by 2015.
Hublot revealed that it had bought Profusion, its supplier of carbon fiber parts and components, while Corum has acquired the technical know-how of Les Artisans Horlogers, a firm that specializes in the development of complicated movements, after Les Artisans filed for bankruptcy in January.
Co-founder Laurent Besse and four of his staff will join Corum’s existing R&D lab and help it develop its own movements for the Admiral’s Cup line, as part of a planned expansion that includes building new facilities by 2013, said Antonio Calce, Corum’s president and ceo.
“We hear what is happening at Swatch Group, and we see brands snapping up suppliers because they need extra capacity, so we also have to integrate skills in order to secure the business,” he explained.
Corum already produces its signature Golden Bridge movement, launched in 1980, and Calce says that type of proprietary innovation is key to future growth as consumers become increasingly well informed about the components that go into mechanical watches.
But such expansion comes at a price.
“Obviously, we’re going to need investment,” he said. “It is not impossible that we will agree to open our capital to another investor, but with the aim of remaining an independent brand.”
Other privately owned firms excluded the prospect of selling all or part of their holding, in the wake of luxury group LVMH Moët Hennessy Louis Vuitton’s recent $6 billion purchase of Italian jeweler Bulgari.
Thierry Stern, chairman of Patek Philippe SA, said that even though he was struggling to make enough movements to equip his annual production of 45,000 timepieces, joining forces with a bigger player was out of the question.
“They do not have the know-how to produce those kinds of pieces. So for me, what is important by staying independent is also that I can do what I believe is right for my brand and what I believe is right for my customer,” he said.
“And I can choose to focus more on service and less maybe on marketing. This is not possible when you are inside a group where you have shareholders. They don’t give a damn about after-sales service,” he added.
Karl-Friedrich Scheufele, co-president of Chopard, said the brand was pursuing vertical integration on the watch side in order to guarantee its independence. “The desire is clearly to stay the way we are,” he said.
Chopard this year celebrates the 15th anniversary of its manufacturing arm, which produces some 4,500 to 5,000 movements annually for high-end LUC timepieces. It also unveiled the Imperiale Full Set, its first watch to host a movement from its Fleurier Ebauches workshops.
Chopard expects Fleurier to produce 20,000 movements by 2014 versus 3,000 in 2011, Scheufele said. The company produces some 80,000 timepieces annually.
“Introducing a new caliber movement is one thing, being able to produce 1,000 pieces in a year with perfect quality is another thing and 10,000 is yet another completely different ball game. So I think we are pretty much ahead of the pack,” he said.
Harry Winston is also investing heavily in its watch division. The fine jeweler, which has won kudos in haute horlogerie for its Opus series, is taking dial production and case making in-house and plans to launch its own movement within three years, according to ceo Frédéric de Narp.
“I would not be surprised to see soon Harry Winston doing 50 percent of its entire activity with watches. Right now, it’s a quarter,” de Narp said. “We feel very strongly that we can develop the brand without being part of a luxury group. This is what we are proving.”
Even brands belonging to large groups are growing their in-house expertise.
Omega, part of Swatch Group, is betting on the continued development of its Co-Axial escapement technology. This year, the brand introduced the first in its family of in-house movements to incorporate a chronograph function in the Speedmaster and Seamaster collections.
“As of 2012, every mechanical Omega watch will be Co-Axial,” said Omega ceo Stephen Urquhart. “We’re talking here about 400,000 to 500,000 movements a year. This is not like some little niche production.”
Jean-Christophe Babin, ceo of Tag Heuer at LVMH, said it is looking to rapidly increase production of its in-house Calibre 1887, which will become available in the U.S. in May, to 100,000 units. While group brands set their strategy independently, he said the arrival of Bulgari into the fold could yield some interesting synergies.
“If we can manufacture some movements or cases for Bulgari, or if we can become better at retailing thanks to Bulgari’s experience — we will have 140 [Tag Heuer] stores by yearend compared to their 300 — in short, if there are best practices, clearly it would be marvelous to integrate this kind of experience,” he said.
Indeed, retail has become an important battlefront for brands, which are increasingly investing in brick-and-mortar in order to showcase the full range of their assortment and tell the history of the company.
Omega, for instance, plans to add 30 to 35 units this year to its existing network of 100 directly operated stores, including 15 in the U.S. alone.
“Where we have a good partner, we will continue with them,” said Urquhart. “But I think a lot of the old style of selling watches, it’s really gone with the wind.”
Swarovski is also making a big U.S. push as part of an effort to reposition the brand from a producer of ornamental objects to a fashion-driven watch and jewelry brand. It is on the lookout for flagship locations similar to a recently opened unit on Michigan Avenue in Chicago.
“We do have a store on Fifth Avenue in New York which is commercially very, very successful, but it’s a small location,” said Robert Buchbauer, a member of the executive board at Swarovski. “If something of the right size pops up close to this one, or somewhere else in a prominent spot on Fifth Avenue, we would make a very quick decision and go there.”
Raymond Weil, which took over its U.S. distribution in 2009, said the biggest challenge there was helping the brand evolve with the times.
“The U.S. market has changed tremendously over the last year,” said president and ceo Olivier Bernheim. “The market has shrunk by 50 percent and is now re-expanding, and we have a large customer base coming up, ready to buy watches — young professionals, 25 to 35 years old — and they have a different approach to what they would like to buy.”
Meanwhile, Versace is hoping to open a fourth specialized watch and jewelry store in Paris by the second half of the year, on the heels of Rome, Dubai and Beijing, according to ceo Gian Giacomo Ferraris.
The openings are part of his overall plan to have accessories account for 50 percent of group sales within the next two or three years, from around 40 percent at present, thanks in part to the introduction of the more accessibly priced Versus line of watches, launched in Italy last September.
“There is still a lot of potential, especially with Versus, because Versus will become a mass product,” Ferraris said.
Indeed, the lower-priced end of the market is likely to benefit from global economic turmoil.
“We are in a period of uncertainty. We have to be adapted to that. The long trends, long cycles are no longer there,” said Jacques-Philippe Auriol, ceo of TechnoMarine.
“Consumer behavior is changing a lot. At the end of the day, indulgence is always the driver of high-end consumption. So the impact probably is that people will spend their money differently. They will still self-purchase to reward themselves, with maybe, in the watch industry, a price point which will be lower,” he added.
With that in mind, many brands drew inspiration from the past with heritage aesthetics and classic watches that will be marketed as heirloom pieces.
Cody Kondo, group senior vice president and general merchandise manager at Saks Fifth Avenue, cited Zenith and Hermès as standouts in this category. The latter carved out new territory with its Arceau Time Suspended, a mechanical watch that allows the wearer to stop the clock and pick up again at the accurate time.
Kondo also praised designers for producing attractive and innovative pieces despite the pressure of increased raw material costs, which has forced many brands to raise prices.
“Innovation was just as important as tradition, with cutting-edge mechanics from Chopard’s LUC and fashion-forward technology from Chanel and Dior bringing exciting modernity,” he said.
Alongside a strong showing of retro-inspired collections, such as Hamilton’s Sixties-inspired Thin-o-Matic range, brands tapped into materials like ceramic, carbon and titanium for a more sporty, futuristic look.
Black and white remained the key color story, as epitomized by de Grisogono, which celebrated the 15th anniversary of its first black diamond jewels with re-edited versions of seven of its most emblematic timepieces in a collection dubbed “Black Forever.”