The Deloitte Swiss Watch Industry Study 2020. The impact of COVID-19 on Swiss watch exports (2019 vs 2020)

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Industry overview

The Deloitte Swiss Watch Industry Study 2020 | An accelerated transformation


COVID-19: Unexpected and unprecedented Growth has defined the Swiss watch industry over the past two decades and the country holds a unique position within the luxury segment of the industry. An estimated 95% of all watches retailing at over CHF10,000 are produced in Switzerland. This position, its capacity for innovation and the exceptional brand image and tradition of its major players have enabled the industry to remain resilient despite changing market conditions and crises.

The majority of high-end Swiss watches are mechanical and have been the primary drivers of growth over the past few years. Entry-level quartz watches in contrast continue to suffer from an increase in non-Swiss fashion brands, smartwatches, and less importance being placed on the ’Swiss made’ label by select fashion brands operating in this segment and price range. Today, the Swiss watch industry is led mainly by a number of well-known brands including independents such as Rolex, Patek Philippe, Audemars Piguet, Breitling, Chopard, and those part of large luxury groups like Omega and Longines (Swatch Group), Cartier, Jaeger-LeCoultre and IWC (Richemont) and Hublot, Zenith and Tag Heuer (LVMH). A number of smaller independent brands such as MB&F, Richard Mille or FP Journe, are differentiating themselves from a crowd of over 400 Swiss watch brands.

Switzerland has a number of independent subcontractors and suppliers working for luxury groups or independent watch brands. The Swiss watch industry has developed a specialised horizontal structure where suppliers, craftsmen and subcontractors supply movements and external parts to brands that assemble the final product. Less common is vertical integration whereby watches are made entirely by the same company, called a ‘manufacture’ although these ‘manufacture brands’ also rely on independent subcontractors for some components. Suppliers working for leading brands or working on specific components in the high-end segment have fared better than those working for volume brands in the low to medium range price point. Generally, independent subcontractors are the first part in the value chain to experience a slowdown but also a restart.

Despite growth in global exports from approximately CHF9 billion in 2000 to CHF21 billion in 2019, the Swiss watch industry is cyclical in nature. After a sharp decrease in 2009 following the 2008 financial crisis (by 22% in export value), exports increased strongly in 2010 (by 23% in value) and growth continued until 2014, led mainly by demand from China and Hong Kong. After a slowdown in 2015 and 2016, the export industry returned to growth in 2017 and 2018 with a 4% increase in export volumes of mechanical watches for each of these two years. The high-end segment experienced even stronger volume growth of 8% in 2018. The industry as a whole, however, experienced only moderate growth due to the continuing decline in entry-level quartz watches in the face of competition from smartwatches. An economic slowdown in China and geopolitical uncertainty in many regions made 2019 a more challenging year, with a 3.8% decline in export volumes of mechanical watches.

Hopes were high in January 2020, with the industry off to a good start and heading towards a better year than 2019. COVID-19 intervened unfortunately, leading to one of the most disruptive periods the Swiss watch industry has ever faced. Exports dropped significantly in February, 9% YoY in value, but the effect of the pandemic and subsequent lockdown peaked in April with a debilitating 80% YoY decline (see Chart 1). This was linked directly to factory closures in Switzerland for four to five weeks, and globally most boutiques were closed. Exports started to recover slowly over the summer, although still substantially down on 2019 levels. Until the end of August 2020, many brands, manufacturers and suppliers had part-time working in place and some even required employees to take extended summer holidays. A few leading brands, primarily active in the high-end segment, and their respective suppliers, were able to get back to 100% production capacity as of September and October.

Leading brands and their suppliers entered the COVID-19 crisis with stronger balance sheets and, despite seeing a decrease in activity, were least affected by the pandemic. Already facing a challenging 2019, higher volume brands operating in the low to medium range segments were most affected. The suppliers working with these brands entered the pandemic with lower liquidity levels and had little buffer to navigate these difficult times. This led some to lay-off their employees while others were forced to sell their business, or sell off assets to avoid bankruptcy. It is likely that these suppliers will continue to suffer in the months ahead.

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COVID-19 was a perfect storm for the consumer goods industry in general, and particularly for fashion and luxury goods. Coupled with prolonged store closures – in China, most luxury boutiques were closed from January to March – the collapse in worldwide travel removed the industry’s most valued and valuable consumers. Ongoing uncertainty about COVID-19 also dampened consumer sentiment.

The Swiss watch industry is traditional at its core, relying primarily on sales at flagship bricks and mortar stores and retail outlets. The industry recently started developing its digital channels in an effort to get closer to their end customers. As the pandemic progressed they were forced to accelerate their digitalisation and quickly rethink their business model and strategies to face a new reality in which in-store buying was either impossible, or less comfortable for customers.

In April 2020, Patek Philippe announced that it was authorising selected dealers to sell its current stock of watches online for a limited period. Although a temporary measure, it was seen as a small revolution for this traditional brand given that it has never sold its watches online.1 Industry giants like the Richemont Group announced its intention to further develop its digital capabilities because online retail sales, although down, grew stronger and were more resilient, contributing 8% of Group sales in Q1 2020 compared to 2% in Q1 2019.

Brands such as Piaget and IWC offered virtual experiences and augmented reality. Omega rolled out its European e-commerce site which until 2020 was restricted to the US and UK. In April, Breitling shifted its Breitling Summits to a Webcast Summit to launch its 2020 collections. That same month Cartier launched an online platform, Watchmaking Encounters, to showcase its new releases. Tudor and HYT stayed close to their customers through increased social media activity. To keep its community connected, Panerai introduced #OwnYourTime, an interactive content platform with live talks and Q&A sessions. MB&F normally relies on a network of retail partners to sell its watches. This summer it ventured online to sell a portion of their two limited edition watches crafted in collaboration with H.

Moser & Cie. MB&F used this foray into e-commerce to offer select models for a limited time on a rotation basis. An industry first, their e-shop also included selected pieces sourced from their retail partners; an initiative accelerated when a majority of their retailers closed at the height of the lockdown.

A similar digital acceleration happened in the collectible watches auction market, which saw online auctions boom during lockdown and extended to watches of all price points. Sotheby’s for example recorded strong growth driven by its weekly online auctions, which are now much more frequent and will comprise a major part of its business going forward.

Amidst a great deal of uncertainty, the industry is struggling to adapt and deal with an undefined ‘new normal’, torn between the hope for a recovery during the second half of the year, and the fear of a second wave of the coronavirus. A resurgence of infections during autumn and winter, as is currently the case in much of Europe and the US, would inevitably force additional restrictions on travel and freedom of movement.

A second lockdown in the last quarter of the year with similar market effects as seen from March to June would mean substantial losses for the holiday business season and a more negative outlook for 2020 exports. The latest results of Deloitte’s State of the Consumer tracker,which gauges consumer behaviour and confidence across nearly 20 countries, indicate that only 52% of consumers feel safe going to shops: this is up slightly from the summer (49%), but nowhere near a return to normal.

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Quartz watches: Continuing drop in exports and sales Since 2012, the trend in exports of entrylevel quartz watches has been downwards, growing more acute in 2019 when export volumes were 10 million units lower than in 2011. This decline was further accelerated in 2020 by COVID-19, as illustrated in Chart 2, with a decrease of around 45% in the first half of the year.

During times of crisis, those with less discretionary income have a tendency to save, and there has been a big impact on sales of entry-level watches from cautious spending, growing competition from similarly priced smartwatches and non Swiss fashion brands, and less need for the ‘Swiss Made’ label in this price range.

Mechanical watches have driven market growth in recent years and are partially responsible for helping the industry recover from slowdowns and crises over the past decade. This has also been the case in 2020 as the mechanical segment fared better than the overall industry with a lesser decline of 33% over the first six months. The high-end mechanical segment (export price above CHF3,000) has been the least affected this year and, in August export sales rebounded back to 2019 volumes. In line with recent years, high end mechanical watches should drive the recovery of the Swiss watch industry, which historically has experienced periods of growth after difficult times.

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Strong sales in China can imply that the eagerness of consumers to ‘get back to normal’ will facilitate a quicker ‘V-shaped’ recovery from the crisis. If true, the rebound in the second half of the year could partially compensate for the first part of the year, with the prospect of a more sizable rebound in 2021.

However, what is true for the local Chinese market might not be the case for the rest of the world. Historically Chinese buyers have been responsible not only for growth in China and the rest of Asia, but have also constituted a large part of the travel retail sales in Europe and the US. Tourist sales in big European and US cities as well as in Switzerland have been attributable in large part due to Chinese buyers. With travel retail down and not expected to recover fully until at least 2022–2023,4 a return to growth outside China will prove more difficult.

China is also incentivising its citizens to purchase more domestically, for example with a generous revision of the duty free shopping policy at its Hainan Free Trade Port area. From 1 July 2020, the duty free shopping limit significantly increased from approximately USD400 to USD14,000 per year which includes the purchase of an unlimited number of watches provided the total annual limit is not exceeded.5 This effort to stimulate purchases may lead Chinese consumers to shift a substantial portion of their buying power within the domestic market and away from Hong Kong, the US and Europe.

Sales and growth curves still need to normalise, but it is too early to make any definitive prediction about the post-pandemic market particularly with COVID-19’s second wave affecting Europe and the US. There is strong reason to believe that the recovery will come earlier across luxury segments in particular, driven by consumers’ financial means to fund discretionary purchases, including travel, rather than solely by the (still quite uncertain) evolution of the macroeconomic landscape.

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link pdf continued pages 13 onward

Conclusion

The Swiss watch industry is in a phase of accelerated transformation that will last beyond 2020. Recent years have shown that the industry is resilient; the pandemic gives it a new opportunity to show again how agile and adaptable it can be.

Large brands and those focused on the high-end segment, and their suppliers, have weathered the current crisis well; but the low-to-mid-range segments will struggle in the coming months and will need to adapt accordingly. Further industry concentration will ensue, favouring larger brands, but independent and smaller brands are also well placed to thrive. Their size can be an advantage, by providing the agility and creativity to respond to changing consumer tastes and industry dynamics.

While COVID-19 has fast-tracked the transition to e-commerce and social selling channels for brands that have traditionally shied away from such platforms, this change will only prove beneficial for the industry in the long-term by giving consumers the opportunity to buy watches wherever and however they choose. Customer-centricity will be a critical issue in the years ahead: consumers are looking for personalised, authentic and consistent experiences with brands in both the offline and online spaces. Engagement through digital channels will introduce brands to an even wider potential customer base.

The future is not fully virtual, however. Particularly in the luxury watch segment, building relationships, establishing trust and providing exceptional service are difficult to achieve in the digital space. Using augmented reality to visualise a luxury timepiece on your wrist evokes far less emotion than experiencing it in real life.

Shifting consumer behaviours will also hasten the shift towards sustainability. This is a positive development for the industry. Investing in quality, tradition and durability will continue to be a unique selling point for the industry at a time when consumers are hopefully shifting to quality over quantity. This investment in quality, in assets that retain value even in times of uncertainty, is testament to the thriving pre-owned market, a segment with considerable, and demonstrable, growth potential.

With the second wave of the COVID pandemic currently affecting Europe and the US, no one can say for certain how long the crisis will last. However, as the country’s third largest exporter and a pillar of the Swiss economy, the Swiss watch industry will adapt and recover. Regardless of how the pandemic plays out, the watch industry will look back on the year 2020 as the year of accelerated transformation.

 
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