Troubles in the luxury watch market continue, evidenced by the latest report from the Federation of the Swiss Watch Industry.
Swiss watch exports in August were 1.2 million units, 125,000 less than last year. Despite the decline in unit volumes, the total value of wristwatch exports increased by 7.8% to CHF 1.8 billion, although the increase in value was due to higher prices for precious metal watches. Steel watches, the largest segment of the market, recorded a fall of 7.0% and a decline of 10.5% in volume terms. According to the Federation, the mid- and entry-level-priced watch market suffered the most. Watches with an export price below 3,000 Swiss francs dropped 14 percent by value and 11 percent by volume.
Watch exports to China (-5.9%) and Hong Kong (-11.1%) continued to fall in August but less significantly than in prior months. “Nonetheless, the forecasts for both these markets remain very negative for the next few months,” the report highlighted. “Firms in the sector are lamenting the lack of visibility in the medium term, which is prompting them to be more cautious going forward or even, in some cases, cutting back.”
Overproduction is a growing issue for the industry. Johann Rupert, Chairman of Richemont, which owns several popular brands such as IWC, Cartier, and Vacheron Constantin, expressed concern over global demand in a note to stakeholders at the company’s Annual General Meeting on September 11th. He called for luxury watchmakers to reduce production due to a downturn in demand for high-end timepieces, stating that “global demand for watches has gone past the boom” and urged caution in pursuing volume.
Despite the gloomy message, there were some positive aspects to the latest export figures. Outside of China and Hong Kong, demand for luxury watches seems to be improving. Notable increases were in the United States (+7.6%), Japan (+14.4%), Singapore (+9.3%), the United Arab Emirates (+26.9%), Italy (+17.6%) and South Korea (+14.2%).
Industry stress was illuminated earlier this month when Bloomberg reported that makers of watch components and some brands are using a Swiss government program that allows them to furlough employees and reduce production without permanent job cuts. Sowind Group brands Girard-Perregaux and Ulysse Nardin, for example, put approximately 15% of workers on furlough, the company’s chief executive officer told Bloomberg last month. The local government reportedly covers up to 80% of the cost of workers during the leave.
Furthermore, last week, the Swiss Watch Industry Employers’ Association called for government action to support the watch sector, highlighting the strong Swiss franc as an impediment to sales. The Swiss France has appreciated by 13.75% against the US dollar in the last two years. As a result of the strong currency, Swiss watch manufacturers have had to either raise prices or lower margins to compete with other producers.
Rolex CEO Jean-Frédéric Dufour summed up the situation earlier this year. “A phase in which all manufacturers were doing well is coming to an end,” he said. “In good times, too much is often produced. When the markets weaken, as is the case now, watch dealers come under pressure and respond with discounts,” Dufour added. Discounting at the retail level to bring in new demand is adding to the margin pressure for Swiss manufacturers.
Retailers are also challenged by falling prices in the secondary market. The WatchCharts Overall Market Index, comprised of 60 watches taken from the top 10 luxury watch brands, has fallen 7.1% over the last year. While falling secondary values do not have a direct impact on new watch dealers, they do impact buyer sentiment and provide an alternative for buyers to obtain some brands at below retail prices.
With secondary watch values falling and new and pre-owned inventories taking longer to sell, the Swiss watch industry is still wrestling with the post-pandemic demand boom. Restoration of demand in Asia, discipline in avoiding overproduction, and a weaker Swiss franc would certainly help arrest the downturn. Otherwise, it is still a “buyers market” for luxury watches.