Ambivalent Times for Watches

The global market for watches is fluctuating amid shifts in macroeconomic conditions, technological developments, and thereof adaptive changes in consumer preferences. This situation seems to put under strain particularly the Swiss watch industry. The compromising situation for the Swiss watchmakers has been evolving for some time now, at least since 2015, affecting the revenues from low-end and high-end watches in different ways.

A major player in the Swiss watch industry is Swatch Group; its salient presence is evident worldwide, from its national market in Switzerland to markets of Europe, the Middle East, the Americas, and Asia. Indications conflicting between recent performance figures (sales, financial) and the share price of Swatch Group are attention-grabbing and raise questions about how this is happening.

The Swatch Group is a manufacturer and marketer of watches (& jewellery), spanning the price range from low to high. It is best recognised by its namesake (‘flagship’) brand Swatch — its watches are positioned in the low-end of the price range but are distinguished by their art creative and colourful designs (e.g., NEON, Art Journey, two more recent successful collections will be addressed below). The brand’s strength is in offering good quality yet especially affordable watches, where their value emanates foremost from their designs. The brand is designated mostly for younger consumers who like a dynamic, original and joyful image.

However, as stated above, the Swatch Group owns a variety of brands of watches (17 in total) that can be classified into three price tiers (examples given here):

• Low-end brands: Swatch, Certina;
• Mid-range brands: Tissot, Longines, Rado, MIDO;
• High-end brands (luxury): Harry Winston, Blancpain, Breguet, Glashütte; Omega which has a special status in the high-end tier as it highlights superior precision, building on its credence as an Olympic timekeeper (intended as an official timekeeper also in the upcoming Olympic Games in Paris 2024).

It should be noted that for its expansion Swatch Group acquired over the years horologic houses established since the late 18th century and through the 19th century (Swatch Group itself was founded in the 1980s by a merger of two older watchmakers). The Swatch Group is engaged in additional activity areas: production (complete watches & components), electronic systems, and distribution, including two retailing chains: Tourbillon (boutique) and Hour Passion. (Note: there are also brand-dedicated stores, e.g., Swatch, Tissot, Blancpain, Omega that sell and provide repair services). [See Brands & Companies of Swatch Group.]

• The involvement in jewellery refers largely to the mounting of diamonds, precious stones and metals (e.g., gold, silver, platinum) on watches by some of the brands (stones like rubies have been used to reduce friction in movement mechanisms inside watches, [FHS: Knowledge]).

The revenues of Swatch Group from sales (net) rose 12.6% in 2023 at constant exchange rates, to CHF 7.88bn. (Note: Revenue went up only 5% at current rates — the difference is explained by negative impact on global monetary results due to strength of the Swiss franc). Operating margin overall was 15.1% (15.4% in 2022), while in the Watches & Jewellery segment alone it stood at 17.2% [Swatch Group: Key Figures 2023, also see report on Sales Growth in 2023 by Federation of the Swiss Watch Industry FHS, 8 February 2024, figures for first half of 2024 are expected in July-August].

The FHS added that the group’s exports, up 11.9%, were above expected for watches in 2023. Sales and market share gains were recorded in all brands and regions, especially in the low-price sub-range thanks to the Swatch brand. Asia is a main contributor, mainly China. Growth in Europe was weaker, except for Switzerland (‘home’ market) where sales grew 30%. The stronger brands in North America are Omega, Tissot and Swatch. The brand Swatch in particular posted a record increase in retail sales (60%), followed by Longines, Tissot and Harry Winston (double-digit increases) [FHS, 8 February 2024].

However, figures of the share price of Swatch Group (UHR:SWX) reflect less bright projections and sentiment of investors. During 2023 the share price of Swatch Group slide down from CHF ~330 (January, peak) to ~230 (December)(average price CHF 272). In the first half of 2024 the share price continued dropping under CHF ~200 (to ~190 April-June 2024). It is noted that in the two previous years (2021-2022) the share price fluctuated within the CHF 220-320 band (high ~320 in June 2021, low ~226-228 in August-September 2022, average ~260). [Equities market data FT.com, also see Swatch Group’s Financial Dashboard — the chart for the past 5 Years shows two peaks at CHF 325-335 in May-June 2021 and January-March 2023, and the slide down during the past 18 months.]

What do investors foresee in global trends that turn them less optimistic for Swatch Group? The group is actually subject to shifts that challenge the competing Swiss watchmakers as well (e.g., Rolex, IWC, TAG Heuer, Patek Phillipe, Audemars-Piguet). Furthermore, the challenges seem to differ with respect to high-end watches from those faced by low-end watches, with mixed implications in the mid-range class.

The volume of Swiss watches exported dropped from a level of 28.1m units in 2015 to 13.8m in 2020. Even around the time of the financial crisis of 2008 such a drop was not recorded. The situation somewhat improved until 2023 with the volume reaching 16.9m units. Still, in the first five months of 2024, the year-on-year changes in monthly volumes of exports were mostly negative, and for the five-month period in total, the volume of exports declined 7.7% (from 6.6m units in 2023 to 6.1m units in 2024)[FHS: Statistics, see historic data from 2000, note that export figures do not equate to sales to end-consumers].

When looking into four different price categories, it is seen that watches in some categories prevailed better than others. The low-end category (CHF <200) indeed was hit badly from 2015 to 2020 (-61%) but partly recuperated by 2023 (+30%). The mid-low category (CHF 200-500) seems to have done worse, from 2015 to 2020 (-42%) and again by 2023 (-15%). The mid-high category (CHF 500-3000) suffered mildly from 2015 to 2020 (-23%) but regained (25%) by 2023. In terms of volume, the high-end category also lost more mildly from 2015 to 2020 (-15%), then regained nicely by 2023 (+55%). Volumes of exports decreased in all four categories between 2023 and 2024 in the January-May period:

Price Category	January-May 2023	January-May 2024	% Change
Low-end CHF <200	3,502	3,301	-5.7%
Mid-low CHF 200-500	857	800	-6.7%
Mid-high CHF 500-3000	1,370	1,153	-15.8%
High-end CHF >3000	874	839	-4.0%
Total Unit Exports ‘000	6,603	6,093	-7.7%

The low-end category is the largest in volume (accounting for 55% of unit exports in 2023), vis-à-vis the high-end (luxury) category (12%) which is the smallest in volume. The weights of watches in the high-end and even mid-high categories, however, are more significant in monetary value (in CHF). Due to the weights by value of these categories, particularly the most expensive watches, the impact of changes in their volume of exports (or sales) would be more dominant on exports’ value (or revenues).

Price Category	Weight by Volume (watches)	Weight by Value (CHF)
Low-end CHF <200	55.1%	3.1%
Mid-low CHF 200-500	13.0%	2.6%
Mid-high CHF 500-3000	19.5%	17.2%
High-end CHF >3000	12.4%	77.2%
Total	100.0%	100.0%

Many countries have been inflicted in the past 2-3 years by persistent inflation, rising living costs, and increased uncertainty. After resurgence of economies from the recession due to the coronavirus pandemic, the inflation, fueled now by continuing armed conflicts and international tensions, appears to take a stronger toll in 2024 on consumers’ purchasing power. The demand for more expensive, discretionary and luxury products is more likely to be negatively affected. In watches, it is hurting exports of luxury watches but furthermore watches in the mid-high category (“pre-luxury”); the impact of decline is stronger yet in terms of monetary value for luxury watches. A loss in exports is attributed especially to China (and its ‘satellites’ like Hong-Kong), where the shopping surge of recovery from the pandemic seems to have been exhausted. But exports to other countries also declined (e.g., USA, Europe with emphasis on the UK and France, Japan) [“Watches Have Stopped“, Bryce Elder, FT.com, 18 April 2024].

The traditional mechanical wristwatches are usually the more expensive and lucrative ones (compared with electronic watches). The standard mechanism of these watches has around 130 components, comprising energy source (spring with gear train), regulating parts (movement) and display (analogue) [FHS: Knowledge]. One of the great attractions, and specialties, of such watches is the addition of complications (sub-indicators adjacent to the main time display), which require more components to support them. Complications (e.g., calendar, chronograph/timer, extra time zone) in particular make the watches more expensive. This class of watches usually has its dedicated segment of buyers, users, and also investors. Adverse inflationary conditions may have an impeding effect on their willingness to buy at this time, but the more affluent consumers are less sensitive to prices of the luxury watches. On the other hand, consumers who can afford watches in the mid-high category (likely mechanical) could be more discouraged from buying them (e.g., as valued gifts or to ‘self-reward’) when prices rise.

However, the type of watches consumers more commonly buy is electronic watches. These watches are powered by a battery and operated with a quartz oscillator (movement) with an integrated circuit; still, most of them are preferred with an analogue display versus digital display, maintaining the traditional look [FHS: Knowledge]. Three in four watches, according to FHS, are electronic, but mechanical watches account for 75% of the value of sales of watches. Yet, the data on exports suggest that in the past decade the ratio in volume has changed: the proportion of electronic watches declined from 72% in 2015 to 63% in 2023 (increasing the weight of mechanical watches from 28% to 37%, respectively). The chart below demonstrates how the exports of electronic Swiss watches suffered more than their mechanical counterparts, which largely turned out to be more resilient to developments discussed next.

In recent years there is a trend of retraction of consumers from wearing wristwatches on a regular basis. The appeal of traditional wristwatches, primarily to younger consumers, as a fashionable accessory to wear on hand seems to have declined. Many of them appear satisfied enough with checking the time on their smartphones, which in any case they open and use very frequently through the day. Then, smart watches apparently tapped right onto bridging between the smartphones and watches.

A smart watch is a wearable device whose power derives from offering additional functionalities beyond showing time, including connectivity, interactivity, and access to real-time information, all via a touch screen. These capabilities make the smartwatch attractive mostly to consumers who focus on practical uses of the device. Specifically, the smartwatch has become popular because it allows easy use of highly and most frequently needed functions of a smartphone (e.g., receiving calls, using certain apps & getting updates, integrated fitness tracker) on a light-weight wrist device.

The category of smartwatches has been flourishing mainly since the introduction of Apple Watch (2015), still being the dominant brand in this domain (market share ~25%-30%), followed by Samsung, Huawei and Fitbit (origin in fitness). To make the bond stronger, a smart watch & phone matching from the same brand can be synchronised. The smartwatches are appealing mainly to young consumers (ages 20-35), considered the main target segment. Nonetheless, consumers-users of other segments may find practical benefits in wearing a smartwatch, such as managers (during work & business activities) or pensioners (fitness & health tracking, location tracking).

Smartwatches seem as most relevant, and advantageous, to consumers for replacing lower-priced electronic watches. Those watches are not truly a fitting substitute to the more intricate, mechanical, prestigious and luxury watches. Electronic (quartz) watches that look like classic watches may feel easier to pass-on and substitute than the genuine traditional, mechanical watches — yet the design of analogue display may still be an appealing factor to many consumers even in electronic watches.

The latest successful watch collection of the Swatch brand is MoonSwatch (joint with Omega). MoonSwatch, launched in 2022, was conceived as an affordable version (at 250 SFr.) of the Omega’s Speedmaster Moonwatch. The Swatch brand is heading to record sales in 2024, and the MoonSwatch is regarded a primary contributor to the brand’s recovery, boosting its sales after a long time of slowing down [SwissInfo, Philippe Monnier, 19 June 2024]. Sales of MoonSwatch peaked all over the world, with stores “virtually besieged” by customers in demand for its Gold editions [FHS, 8 February 2024]. Also a successful collection by Swatch is Scuba Fifty Fathoms (joint with Blancpain). The recovery of the Swatch brand is also attributed to its industrial innovation of the past ten years, with its Sistem51 of watch movement (a mechanism of just 51 components), which can be produced and assembled in a fully automated process; it helped the brand regain competitiveness in the low-price tier [cf. SwissInfo].

The dramatic lower volume of exports in 2020 compared with 2015 was surely driven by economic impact of the COVID-19 pandemic, but the more crucial, and probably more permanent, explanation to the decline is the ongoing shift to smartwatches. Evidently, the exports did not return as yet to their previous pre-pandemic level (24m to 30m watches during 2000 to 2015 [FHS: Statistics]. Launching a smartwatch is not necessarily the solution; it may be perceived as a marginal ‘fix’. It should also be remembered that the revenues are reliant heavily on the higher-priced, ‘pre luxury’ and luxury watches. First, Swatch Group may need to focus on its strengths in mechanisms of watches, for their more ‘serious’ users, and designs of analogue displays. Second, furthermore important, orientation may be developed to propose the appropriate use of different watches for different times and occasions: work versus leisure, casual versus social and business events — assign the smartwatch to the former and the traditional watch to the latter. This kind of assignment should not be adopted as an exclusive or strict rule — mix them as one likes.

The global watch market is at a crossroad as consumers’ attitude and approach to watches changes. Some factors (e.g., current macroeconomic conditions) could be only temporary in effect whereas behavioural human factors are likely to have longer-term effects. A watchmaker such as Swatch Group may have to align its marketing to offer its watches for fulfilling different purposes, as solutions to different jobs. Traditional watches should still make a better impression with aesthetic, creative, elegant, and prestigious analogue displays, some of them enhanced with practical uses of complications.