The graph says it all

 

During the past 12 months, Swatch (Omega, Longines, Breguet etc.) shares have lost 35% of their value. Actually, after they peaked at almost CHF 800 in 2014, they are now down more than 75%. According to Bloomberg, “Swatch group reported a 70% drop in operating profit and a 14% drop in sales for the first six months of the year". Apparently, Omega is sitting on 7.1 billion CHF worth of unsold stock. And that calculation is on manufacturing cost price, not the retail watch value.

Is the world of watches, as we know it, ending tonight? Should we all sell our Omega watches, cut our losses and exit the market before it’s too late?   Absolutely not. And here is why.   While the low demand for luxury products is obviously affecting the sales, the truth is that low demand is not the result of an inferior product, nor a customer’s desire to invest in watches. There are three mighty forces in play which are directly affecting the sales. First, interest rates which jumped from zero to well over 6% (US, Australia) and around 4% (Europe). The disposable income of about one third of all watch enthusiasts has been sucked out by banks. The second reason is very low demand from mainland China. Swiss analysts say that “Chinese consumers are becoming increasingly sensitive to the prices of luxury goods”. That may be the truth, but only partially. Chinese buyers are increasingly sensitive to constant anti-Chinese sentiments, tariffs, trade restrictions, trade wars, to downright economic bullying. There is a strong and growing sentiment that domestic spending on domestically manufactured goods is good for China. Buying a Rolex or Patek is still a way to reward yourself, mark an important milestone, or simply display one’s wealth, but there is definitely a constrain in ‘investing’ in multiple pieces. The Chinese market is simply maturing, becoming more sophisticated. The third reason is post-Covid back to reality. During the lockdown, luxury watch manufacturing had it good. Exceedingly good. Buyers were forced to stay at home, bored, eager to reward themselves with a watch or two. Online sales exploded; and the myth of ‘luxury watches being the ultimate investment’ created an artificial market boom. A horological tulip mania. No commodity can sustain a 300% price ‘growth’ in just a year or two. We had it good, the party is over. And by over, we simply mean: back to normal.   I am absolutely not worried about Omega as a brand. Omega is not a newcomer to commerce, nor luxury goods. The excess stock will be quietly disposed to the grey market, as has happened so many times in the past. There are thousands of second hand dealers in Hong Kong, Tokyo, Singapore, the US and the Middle East who would be more than happy to get their hands on such desirable stock. They are major players who are financially capable of investing in luxury watches, with their own distribution network. If anything, overstock is great news for you, and me.   The “ups and downs” in the luxury watch trade are nothing more than regular cycles of supply, demand, amplified by external financial and economical forces, hype, political trends, news, and wars. To the Swiss: business as usual.