The World Presentation of Haute Horlogerie (WPHH) and the Salon Internationale de la Haute Horlogerie (SIHH), two watch exhibitions organized by Franck Muller and Richemont respectively, opened doors in Geneva earlier this month in the middle of a 12-month period with plenty of challenges for the watch industry, and more generally for the hard luxury sector as a whole.
Indeed, 2016 was a difficult year as the subsector revenues were down -5% on average. According to Bain, watch sales decreased by -8% at constant exchange rates while jewelry grew by a mere +2% after several years of rapid growth. The global luxury market was flat due to lower tourist flows in major European capitals as well as political uncertainties in the UK and US that turned away demand for high-end spending. In a context where consumer behaviour is changing (from baby boomers to millennials), luxury companies need to adapt their brand positioning to better address consumer expectations in a market that has become more polarized.
Decreased tourism impacts Europe
Interviewing European distributors during the WPHH about 2016 activity gave us a clear picture of the current state of the watches & jewelry market. Hit by terrorist attacks and several strikes (particularly in France), 80% of our panel of distributors reported lower financial results in 2016. The decrease in store traffic was mainly the result of lower Chinese tourists but also fewer local customers affected by the negative economic mood in Europe. The only market which exceeded expectations was the UK, helped by the weak sterling after the Brexit vote in June.
Cautious outlook in the US
In the US, almost all watch and jewelry retailers experienced a tough year due to a slowdown in consumption ahead of the presidential election. On a yearly scale, some watch retailers highlighted the resilience of the Rolex brand in the price category of $3,000 and above. However, overall watch sales in the US decreased in volume while unit prices held up well. A large number of distributors gave a cautious outlook due to their fear of an unexpected tariff or tax on imported products to the US.
The changing reality of Chinese tourism
The Asian market, mostly Hong Kong, has been at the center of the major concerns of watchmakers. Hong Kong became the Asian hub for watches and jewelry for more than a decade now thanks, particularly, to strong Chinese consumption. Luxury companies accelerated their store footprint in Asia to meet the fast growing demand of Chinese, increasing inventories and fixed costs to operate their store network. Local retailers reported lower results compared to 2015, blaming less tourism from Chinese consumers after tighter customs controls. However, with harmonization between Asia and Europe/Americas, high-end watchmakers did better during the second half of the year. The brands mentioned most frequently by survey respondents are Patek Philippe, Rolex and Cartier.
Charting the market
The picture is not rosy for the industry but some improvements are noticeable since mid-2016 as reported on our market index - composed of 24 equally weighted stocks operating in watches & jewelry sector.
The inflexion point on the chart represents better than expected results of hard luxury companies or positive announcements from industry leaders such as Richemont and its inventory buyback to help distributors with ageing inventories as well as bold changes in management. Jewelry companies such as Chow Tai Fook (HKSE) or Tiffany (NYSE) were among the positive contributors of the index for the second half of the year. Generally speaking jewelry companies were more resilient than watchmakers, among them the best performers were “Aspirational” and “Absolute” luxury brands.
“Absolute” luxury brands like Richard Mille, Audemars Piguet and Franck Muller performed better than the rest of the watch market and will continue being resilient thanks to their niche and reliable image. Another trend during the year-end holiday sales showed that the future for luxury is also value-for-money. Multi-brand distributors and independents retailers mentioned brands such as Dinh Van, Movado and Swatch among top performers. On the high-end and absolute luxury side, Haute Horlogerie exhibitions were good opportunities for brands to tell the market that they still have the power to innovate and adapt to the new normal. If jewelers are on the right path for a recovery, watchmakers will stabilize in 2017.
Mixed confidence for 2017
The sentiment among distributors for 2017 is mixed. 18.2% are pessimistic, assuming that signs of improvements seen in 2016 were too weak to reveal a real trend for a stabilization or turnaround. 36.4% are neutral, waiting for more clear signs before making a clear statement. Surprisingly, 45% were cautiously optimistic based on recent year-end holiday trends. First, the discounting environment was weaker in their stores during the last months of 2016 compared to 2015. Furthermore, the previous year of slowing demand gives luxury companies an easier comparison basis. According to the Swiss Watch Federation, Swiss watch exports were clearly better in December with a -4.6% decrease compared to a -10% for the whole year. Moreover, business and consumer sentiments are improving in almost all the major markets (except Japan where indexes are flattish) according to most recent OECD (Organisation for Economic Co-operation and Development) data. We believe that hard luxury brands with the right product positioning will be able to benefit from this trend.
Jewelry makers were among the first to initiate the focus on value-for-money and adapting their positioning to Millennials. We believe watchmakers still need 6 months to completely fix over-stocking issues in Asia, whereas Hong Kong will continue to be a challenging market. Hence, only the most reactive brands such as Pandora should be able to deliver better results and outperform their peers. The demand still exists in every segment of the watch category and the product offering needs to be improved while threats of high-end wearables are still existing. Hard luxury insiders are positive that the momentum will eventually improve. The question is more about who will survive the storm and who will take advantage of it to gain more market share in a sector that is growing at slower rates, yet healthier.