FT: Watches and Jewellery March 2012

If 2011 was the year of euphoria for the watch and jewellery industry, gathered this month for its annual beanfeast in Basel, 2012 looks set to be characterised by continued, but more restrained, celebration.

Sales and profits are almost certain to climb further for top watch and jewellery houses such as Swatch Group, Richemont and LVMH, as well as the countless independents represented at BaselWorld, the world’s biggest trade show.

The euphoria will be hard to miss. Figures for Swiss watch exports, the only industry data available, confirmed 2011 was a record, with exports up more than 19 per cent year on year to SFr19.3bn ($21.2bn). “Except for 2010, which followed a major downturn, growth in the last 20 years has never been so strong,” says the Federation of the Swiss Watch Industry (FHS).

The upbeat mood has been seen virtually across the board. In February, Swatch Group posted record sales and earnings, with net profits reaching SFr1.28bn and sales for the first time exceeding SFr7bn to hit SFr7.14bn. This year has started in similar vein. Figures for January showed exports climbing 15.5 per cent year on year to SFr1.3bn.
Full year 2011-12 results for Richemont will only come in May. But the group, as familiar for its jewellery brands such as Cartier and Van Cleef & Arpels as its watch marques, has already disclosed that sales jumped 24 per cent to €2.62bn in the three months including Christmas. Normally restrained when it comes to forecasts, Richemont acknowledged higher revenues pointed to “significantly higher” operating profits for the year.

LVMH, less active in watches and jewellery than its two Switzerland based rivals but nevertheless a growing force, has been as buoyant. Like-for-like sales rose 16 per cent to €23.7bn last year, while net profits edged up to €3.1bn.

Even privately owned groups, such as Rolex, Patek Philippe and Graff, which guard their data fiercely, are believed to have enjoyed a good year. Word is that Graff is considering going public – something that remains taboo at Rolex and Patek.
Booming markets have helped the quoted groups fill their coffers. Richemont boosted its net cash to €2.9bn at end December, compared with €2.2bn a year earlier. At Swatch, cash at the end of 2011 declined slightly to SFr1.6bn. But analysts attributed the SFr209m drop mainly to investment in production capacity and company owned stores, as well as higher stocks. Last month, the group unveiled a redevelopment plan for part of its Biel site, aimed at creating showcase new headquarters for its Omega and Swatch brands in a leafy plaza designed by one of Japan’s leading architects.

All the groups have expressed confidence about 2012. “Excuse me for being repetitive, but we had an excellent year last year, and hope to have in 2012,” said LVMH’s Bernard Arnault last month. He was “fairly confident” about the current year. “Barring a major accident and despite the difficulties in Europe, the world is growing and wants more and more of our products,” he added.
Swatch Group’s Nick Hayek has been as upbeat, forecasting sales this year should rise by up to 10 per cent and margins improve. He has already disclosed that watch sales rose at double digit levels in January. “This year is expected to show significant growth and therefore exceed the already very high level of 2011,” observes the FHS.

The boom has left almost all manufacturers struggling to meet demand, amid bottlenecks in important components and, in certain cases, labour. Swatch Group created more than 2,800 new jobs last year, taking its total to more than 28,000.
Reports of new hiring – or of manufacturers searching for suitably qualified staff – arise with almost horological punctuality. In January, Cartier announced an expansion at its watch base of La Chaux-de-Fonds, with a new building and an extra 300 jobs on top of the 1,100 already there. IWC, another Richemont brand, plans to take further space at its Schaffhausen headquarters, and hire more. And LVMH’s TAG Heuer subsidiary has disclosed a SFr25m project for a new production site in the Jura, with 150 new jobs.

Expansion has often been linked to increased verticalisation as brands choose – or find themselves obliged – to undertake more operations in house. Among many recent examples, LVMH bought three formerly independent specialist suppliers for its watch operations, including providers of cases and watch hands. Even Hermès, not traditionally known for watches, last year bought a big stake in Joseph Erard, a crucial supplier.

One reason for accelerating vertical integration has been the decision by Swatch, backed by Switzerland’s competition authorities, to reduce supplies of finished watch movements. Under an interim ruling, supplies of finished movements can this year be cut to 85 per cent of 2011 levels, while sales of regulating mechanisms – a virtual Swatch monopoly – can be lowered to 95 per cent this year.

The change has sent shockwaves through the industry, prompting some brands to accuse Swatch of abusing its virtual monopoly and prioritising its own brands.
Mr Hayek has responded by saying the move will stimulate long overdue investment by other companies in manufacturing. With an initial legal challenge to the ruling overthrown, Swatch Group customers have been left with little choice but to accept the new reality and, most analysts forecast, to invest more in production.

But the pressure on parts is just one of the difficulties facing watchmakers, explaining why the euphoria at BaselWorld may be damped. Currencies remain a big consideration. With most brands manufacturing in Switzerland, the strength of the franc has been a stiff test. Mr Hayek estimates sales at Swatch Group alone would have been SFr700m higher last year bar for the strong Swiss currency.
Last September’s decision by the Swiss National Bank to enforce a minimum level of SFr1.20 for the euro against the franc has helped to depreciate the Swiss currency after its dramatic summer rise to near parity. But many Swiss exporters, not just in watchmaking, complain the floor is still too low. The central bank itself recognises the Swiss currency remains significantly overvalued.

The evidence available suggests many manufacturers have bitten into margins to preserve their market share. Swatch Group’s results suggested the company had deliberately avoided additional, short- term, exchange-rate driven price rises to avoid compromising its longer term goal of expanding sales in foreign markets.
The broader world economic situation – and particularly the outlook for China – is the other core consideration. Richemont has referred to a “volatile and challenging economic environment” ahead.

So far, watch industry data has pointed to an improvement of sentiment in the US, and some signs difficulties might be lifting in Europe. But the country that has emerged as crucial to almost every manufacturer is China. Sales in the Asia-Pacific region – for which generally read China – have boomed as the world’s most populous nation has increasingly gained the watch and jewellery buying bug. Part of the upturn in Europe is also attributed to Chinese tourists.

Data for watch exports in 2011 showed China moved up one notch to third place in sales by country, with a near 50 per cent leap in exports to SFr1.64bn. Add separately counted Hong Kong, where exports rose by more than 28 per cent to SFr4.09bn, and the region’s influence comes into full relief. Some deceleration may be inevitable this year. But the biggest threat to the party in Basel would be a serious China slowdown.