The Luxury Watches Downturn, Explained

The worth of Swiss watch exports fell by 16.1 % in March in comparison with the identical month final yr, in line with a report launched mid-April, simply days after Watches & Wonders, by the Federation of the Swiss Watch Trade. The sharp decline, which was equal to 380 million Swiss francs and capped a primary quarter lower of 6.3 %, follows months of retailer stories that shopper demand had cooled.

Exports to China and Hong Kong had been significantly onerous hit, falling 41.5 % and 44.2 % respectively in March. The US, by far the business’s largest export market, recorded a smaller decline, with exports falling 6.5 % over the month.

How dangerous is the slowdown?

The slide in Swiss watches seems to be extra pronounced than the broader luxurious slowdown. Sector chief LVMH’s whole first quarter gross sales had been up 3 % to €20.7 billion. (Exhausting luxurious titan Richemont will report its annual outcomes on Might 17.) However analysts urged perspective.

“We have to see the evolution in Swiss watch exports within the broader context of luxurious demand moderation after post-Covid euphoria,” mentioned Luca Solca, Bernstein’s head of luxurious items analysis. “The moderation on this class appears higher due to increased publicity to wholesale: the wholesale channel would shift to destocking mode after they see softer demand.”

Because the pandemic waned, Swiss watch exports spiked, reaching a file 26.7 billion Swiss francs final yr, a year-on-year improve of seven.6 %. However some argue this has created unrealistic expectations. “A return to 2019 ranges of demand would translate into Swiss watch exports of twenty-two million Swiss francs, which was a excessive watermark for the whole 2010s decade,” mentioned Rob Cordero, editor-in-chief of the specialist business title WatchPro. “This yr’s cooling gross sales shouldn’t be seen as a disaster that poses an existential menace to established manufacturers.”

In a report printed final week, RBC Capital Markets forecasted that the Swiss watch business may contract by 7 % in 2024, however referred to as it a “post-pandemic normalisation part.”

In addition to being geographically numerous, the decline was evident throughout export value segments.

The upper finish, that’s watches with an export worth above 3,000 Swiss francs, has been a big progress driver for the business, with exports within the section rising in worth by 9.4 % in 2023 and accounting for 92 % of the business’s growth, in line with the FH. However RBC forecasts a high-end section lower in worth of 10 % this yr, not a lot better than the 12 % decline in values within the 500 to three,000 Swiss franc section. (Export values are roughly half retail.)

What’s driving the decline?

Trade insiders put a lot of the blame for flagging exports on China.

“We’ve seen a decline, notably as a result of unsure financial scenario in China,” mentioned Yves Bugmann, president of the FH. “The actual property market is below strain there, which creates insecurity on this market and this phenomenon has an affect on shopper confidence. Different markets nonetheless are nonetheless optimistic within the first trimester.” Exports to the US, Japan and the UAE all recorded low-level progress within the first three months of the yr, however reversing the present downward development would depend upon the Chinese language market, added Bugmann.

One analyst linked March’s sudden decline to an “overreaction” from retailers. “The 16 % drop seen in March would possibly replicate an overreaction of the market,” mentioned LuxeConsult founder Oliver Müller, noting “the true and tangible consequence of shops considerably lowering their orders, as a result of they’ve been sitting on inventories which might be turning into an issue, tying up money.”

Manufacturers and retailers will probably be nervous of the affect the downturn may have on discounting tradition and significantly the gray market, the place re-sellers record new watches offloaded by cash-strapped retailers at lowered costs. In 2018, some manufacturers had been pressured to buy-back unsold inventory to counter the rise of discounted new watches on the gray market. Richemont was reported to have destroyed practically €500 million value of watches on the time.

“There’s a hazard that producers won’t step on the brakes onerous sufficient, and can produce extra watches this yr than they’ll promote,” mentioned Cordero. “When model new watches are being provided at 25 % or extra beneath retail on Chrono24, they turn into an important deal tougher to shift for authorised sellers.”

In response to RBC’s report, stock ranges on the web watch market Chrono24 elevated year-on-year to March by 11 % to 355,000 items, though listings of recent watches recorded solely a 3 % rise.

When will the tide flip?

Analysts mentioned it was troublesome to forecast when the tide would possibly flip. “We anticipate moderation to proceed no less than into 1H24E,” mentioned Solca. “The wild card can be an enchancment in Chinese language center class sentiment, which in the mean time remains to be low.”

Müller went additional. “I’m listening to unusual theories that the second half of 2024 would possibly present a change of development, however I don’t perceive why this is able to occur,” he mentioned. “The geopolitical elements received’t flip to inexperienced by then, with no less than two main conflicts happening in Ukraine and the Center East. There are additionally numerous detrimental financial elements, which aren’t going to vary rapidly. And foremost, China received’t restart its luxurious consumption to pre-Covid ranges anytime quickly.”

In response to a Morgan Stanley report analysing the Swiss watch business, even in a file yr, 15 of the highest 50 Swiss watch corporations noticed a decline in revenues in 2023, together with Longines at Swatch Group, IWC at Richemont and TAG Heuer at LVMH.

Müller, who co-authored the report, mentioned the business can be propped up by a small handful of manufacturers. “Sturdy manufacturers corresponding to Rolex, Patek Philippe and Richard Mille have all of the pricing energy to implement value will increase, which can compensate for the shortage of natural progress,” he mentioned.

There have been vivid spots. Whereas most segments had been feeling the pinch, Müller mentioned the highest finish of the market remained unaffected. “The one value section nonetheless rising within the first quarter of 2024 is the one with watches promoting above 40,000 Swiss francs,” he mentioned.

Bugmann pointed to India, the place exports within the first quarter elevated by 13.2 %. India has lengthy been recognized by analysts as a future progress marketplace for luxurious watches, though so far, it’s been a sluggish burn. However a free-trade settlement between the European Free Commerce Affiliation (which incorporates Switzerland) and India signed in March is ready to cut back import duties on Swiss watches regularly over the following seven years. “India will definitely additionally give a brand new strategic significance for Swiss watch exports,” mentioned Bugmann.

The business will journey out the storm, he predicted. “The Swiss watch business is a centuries-old business and has numerous expertise with financial fluctuations,” he mentioned. “I’m very optimistic for our merchandise and the long run.”