Watch Industry
Time is money? Yes, but what if money’s gone? As the economic slump affecting the world today has caused consumers to worry about wealth, spending and even their future, spoiling oneself with luxurious timepieces is no longer a priority. And the watch industry has been especially hard hit by the worldwide decrease in demand.
“This crisis is not specific to a region, a client, a brand or an industry. It is everywhere; it is killing everybody,” says Georges Bechara, brand manager of Zenith in the MENA region.
Some regions are more affected than others. America — including North and Latin — is heading the list; then comes Europe, and then Asia. Still, the slump in overall demand has been significant in the first two months of the year, leaving watchmakers and retailers on the lookout for any and all business that might come their ways.
According to the Federation of the Swiss Watch Industry, the export of Swiss watches and movements has dropped 35 percent in units and 22 percent in value in the first two months of the year compared to the same period in 2008. In the Middle East during the same period, the drop in units and value was 36 and 22 percent, respectively. In the USA alone, the drop was 47 and 39 percent.
Slower Growth
“The only thing we can say is yes, there is a global crisis. Our sales are down worldwide definitely… but the thing is that we view it more as a correction,” says Eric Vergnes, Middle East’s general manager of Tag Heuer.
The double-digit growth that was sweeping the watch industry in the last couple years was mainly fueled by ever-increasing demand and very short supply. Retailers and customers had to sometimes wait for months on long waiting lists for their purchase to be delivered.
“A double-digit growth is not normal economically speaking,” says Jean Tamer, president of Tamer Frères, the official distributor of some luxurious watch brands in Lebanon. Watchmakers are rather secretive about their growth and sales numbers, but currently it seems that some might worry about negative growth if sales continue to fall and the overall economic situation deteriorates further. All the market players agree that the market has not yet hit bottom, making near-term planning difficult.
“Definitely one of the main issues will be for us to continue to grow the way that we have been growing regardless of the crisis,” says Raynald Aeschlimann, vice-president of Omega.
Aeschlimann adds that buying a watch is not like acquiring any ordinary product, as it “appeals to your sense of lifestyle and aesthetics.” He says there’s still demand for palatial and captivating timepieces. However, the fact that consumers are more cautious about their spending is affecting sales, and thereafter growth of the overall industry.
Smaller portfolio and investment
The watch market does not operate under the basic economic law of supply and demand which states that when demand is less than supply, a price decrease will result — and vice-versa. When demand falls in the watch market, watchmakers deal with it differently. They decrease their production, and thus their portfolios, in order not to overstock. This practice leaves the market at a certain level of equilibrium.
“They (the watchmakers) are all concerned; they want to make sure not to over-produce. Instead of producing 10 complications and 10,000 watches for example, they will make maybe 50 complications and 5,000 watches,” says Zeina Khawaji, general manager of Cadrans in Lebanon, distributors of watch brands like Dior, Piaget, Vacheron Constantin and others.
Watchmakers are currently picking the most successful models, producing fewer quantities, and being cautious with new launches since the product might not answer today’s consumer demand.
“Now we are studying what worked for the last two to three years in terms of sell-out, and we are focusing on these products. We are adding some novelties which complement each collection apart, but mainly trimming the collection to [include] the most important collections and models,” says Bechara from Zenith.
Still, as prestigious watchmakers have their own identities, positions and ranks in the market, none have found it necessary to alter their models, production tactic or any other related strategies. The watchmakers say they are only playing with quantity, and not quality, staying loyal to their unique characteristics and historical image.
Moreover, watchmakers are now being more cautious with new investments. They have not entirely stopped their expansion plans, but they are certainly studying the feasibility of these developments and only investing in what is necessary. For example, although Zenith will soon open two boutiques in Dubai, it seems that some other investment have been halted, Bechara says.
“When you look at 2008, of course [brands] prepared for 2009 with big offers, but they stopped because it is not the right moment, and we did the same,” he says. “We will launch it in due time.”
In addition to the smaller portfolio, watchmakers have to find ways to cut down their costs. But they say they try to avoid laying employees off, because they’ll need the talent when the market starts to pick up again.
“[We are] checking all our costs and trying to reduce [them] by postponing certain investments… unless it is necessary, we are keeping the money for the right moment,” says Paulo Marai, managing director of Versace Watches. “But of course we are very conscious of reducing the number of employees and not really touching positions which are key to the future of the company.”
Who will suffer the most?
As regions are not equally affected, the same applies for brands. Market players say that during good times, some brands increased prices without adding value to their products. “A lot of our competitors were tempted to become luxury brands and they moved upscale,” says Matthias Berschan, president of Hamilton International. “There is now a big gap between the price they are asking for versus the substance of the products, and I think those brands will have huge difficulties.”
Now, consumers are pickier, harder to please, and very selective, and therefore pay more attention to details and to getting value for what they are paying.
“With this crisis, [the customer] is taking into consideration the equity of the brand, the history, the DNA. So he is not going to newly established brands,” says Barkev Ataminan, business manager at Ets. Hagop Atamian.
Tamer echoes Atamian by saying customers want “more for the same.”
Experts say the brands that do not offer value for money, and new brands, are considered weak and might not survive the downturn.
“I think we will also hear of some small brands which will disappear because there is no room,” says Bechara.
In boom times, the high returns in the watch industry enabled many to become watchmakers, but without solid communication or a structural base.
“The mistake of the watch industry is that anybody could really have it very easy to start up. So many have decided to enter the market [and] I think today these companies that do not have solid bases will suffer the most,” says Marai from Versace.
The Middle East
“The Middle East is at the forefront of the evolution of luxury goods,” says Aeschlimann from Omega. As a new and growing market, the region has been an attractive destination for many brands looking for new investments and aiming to position themselves as leading market players.
Luckily, Middle Eastern economies are still better positioned to cope with the current downturn, and the watch market in these countries will follow suit. The demand has decreased, but certainly not as sharply as in other parts of the world.
“The Arabs have very substantial fortunes, and if they lose some money it will be a small percentage of it; it is still a small drop in their fortune,” says Tamer from Tamer Frères.
Even in the region, some countries are more affected than others. Dubai has been the worst hit, since a large amount of demand depends on tourists and the many expatriate workers, who are now fleeing the Emirate after they lost their jobs.
“One way we will [face] this is by focusing on forging relationships with the people from this region and not just tourists,” says Aeschlimann.
Other GCC countries are more stable, since their market mostly depends on local demand. The Levant is still considered by watchmakers to be a good opportunity for growth.
“We are actually growing in Lebanon and Syria, and suffering more in markets which are more dependent on international tourists,” says Vergnes from TAG Heuer.
TAG Heuer is even planning to open a new boutique at the Beirut Central District this fall.
“Lebanon is for us a key market. A big part of growth is coming from the Levant area,” says Vergnes.
Although the Lebanese economy has been less affected by the global downturn, Khawaji says the decreased demand is felt in the country.
“We are affected because most of our clients are people who are investors outside Lebanon. They haven’t stopped spending, but they have decreased their spending,” she says. “There is a kind of panic.”
Barkev Atamian says the decreased demand for luxury watches is expected to be temporary, and will not severely impact the market.
“Countries like Lebanon and Syria have room to grow. These will come back to the 2008 situation much quicker than other countries.” Barkev Atamian says. “We are investing much in Lebanon and Syria by opening boutiques in downtown and boutiques in several cities in Syria.”
The gray market
Manufacturers are concerned about the increasing activity in the gray market. As demand dries up, some authorized dealers might sell off their supply at a huge discount, just to get rid of the stock and ensure they survive.
“I know somebody yesterday who dropped a big bulk of some other brand at 40 percent less than the cost just to get rid of them,” says Bechara from Zenith.
Retailers may have many reasons to do so.
“With the huge currency fluctuations in some countries… in the short term [they] can make such big deals,” says Berschan from Hamilton.
This might severally hurt the reputation of the watchmaker, which will be very hard to reverse.
“It brings in a big mess. It can jeopardize the whole work in establishing the brands in terms of brand image and distribution image; it can blow a whole long-term strategy because of a very short-term opportunity,” says Berschan.
If such things happen, manufacturers immediately halt their relationships with retailers, who will have a hard time regaining their credibility — if ever.
“If they do something like this with only one of the Swatch group brands, the Swatch group closes them down,” says Berschan.
New incentives
Watchmakers are not only working on their development strategies and portfolio, but they are also trying to pamper their customers, to give them more incentive to buy their products.
“If customers want to spend, they need to be reassured. And the best way to reassure a potential buyer is to assure them a top-notch experience, and it means the best possible environment for a boutique or products that are properly displayed, and the team has fantastic knowledge of the product,” says Vergnes from Tag Heuer.
Brands are also emphasizing the need to keep on improving their products, and adding novelties, in order to keep-up with their customers’ expectations.
“It is about sticking to the roots by continuing to surprise people,” says Aeshclimann from Omega. “If you have the right product, clients will come.”
Marai from Versace agrees.
“We have decided, despite the downturn, not to stop our process of developing new products,” Marai says. “We can come up with some novelties that are interesting if we just stay in our existing lines.”
Future expectations
The watch industry, as with every industry these days, is facing difficulties. And like other sectors, watch companies have to rethink their business strategies, expansion plans and other long-term goals. In the end, when demand returns to its excessive levels and people start adorning themselves with plush watches and bravado pieces again, those who showed their solid base and ability to adapt will be the ones benefiting.
“A crisis like this will clearly show who had a long-term strategy and speaks to the substance of the product, versus the price and who did not, and I think there will be a huge difference between those who will suffer a lot, and those who will still perform well in this difficult environment,” says Berschan from Hamilton.
Tamer seems downbeat regarding the length of the current downturn.
“Surely we entered a crisis that will take over three if not five years to recover,” he says. “We still have not reached half the way, and it has still not reached the bottom.”
As some try to predict the future, others find it impossible to expect what the turnout of the current situation will be. “It is totally impossible to tell. I just hope that we keep on doing well,” says Vergnes.
