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.

When corporatism leads to corporate governance failure

Over the past number of years many watch experts and industry insiders have shared juicy details about the murky dealings of the Swiss corporate world.  Others, like myself, simply conveyed thoughts and predictions based on micro-events, trying to build a bigger picture. However, a few months ago, we finally got an amazing opportunity to find out the truth. Dr Isabelle Campo and Dr Philipp Aerni, from the Center for Corporate Responsibility and Sustainability (CCRS) at the University of Zurich, have published a 120-page report, and this report is the work of a true insider.
The report draws on archival sources, accessible since 2015, that were also extensively discussed in the Swiss print media in early 2016. They provide increasing evidence of corporate governance failure in the 1983 merger of SSIH (Société suisse pour l’industrie horlogère) and ASUAG (Allgemeine Schweizerische Uhrenindustrie AG) that led to today’s Swatch Group.
The merger, induced by Swiss banks, was portrayed as a necessary step to save the two allegedly bankrupt watch companies. Yet, the archival sources show that ASUAG had already been successfully restructured and was ready to conquer global markets with its new product; the Swatch.
Through the forced merger of the two unequal parties, the banks were able to avoid heavy losses that would have resulted from the bankruptcy of the ailing SSIH. The merger essentially enabled the conversion of a former state monopoly, ASUAG, into an even stronger private monopoly; eventually called the Swatch Group. The Swatch Group was able to establish itself as the leading watch company in the world by benefiting from prior innovation and corporate restructuring. In addition, the company built up its market power through extensive brand and “Swissness” marketing, political lobbying designed to preserve its monopoly pricing power in the production of certain watch parts, and the rhetoric of innovation to keep shareholders in good spirits.
The report also explains how bankers 'assisted' Nicholas Hayek to take over 51% of the Swatch group turning it into a private monopoly and, consequently, making the Hayek family billionaires.
The focus is then shifted to 2016 and beyond. A large part of the report analyses industry challenges in relation to the Government's role in the 'smart watch segment' as the industry regulator. While the protection and support of the Swiss watch industry was previously based on a deal behind closed doors, the new protectionism was publicly announced as a patriotic step to protect the value of “Swiss made” products. However, at the other end of the watch market spectrum, there are serious doubts that Swiss watches, especially in the higher price segments, will always fetch a high premium.
Why is the Swatch Group sitting on $1.4 billion worth of unsold stock?
Why is the Swatch Group the lowest ranked watch company on the Swiss Stock Exchange which fails to disclose much information on its products, sales and prices, yet still is a trusted brand name?
What might Swatch and Volkswagen have in common?
What is the reason for the $500 million lawsuit between Tiffany and the Swatch Group?
Why did SG buy Harry Winston Jewellers for $1 billion?
How does all of the above affect the company’s share price?
Why is SG frantically buying back shares to shore up its price?
All these questions are answered in the report which is a must-read for anyone seriously interested in untangling the dealings between watch manufacturers, multinationals, banks, shareholders, the Hayek family, and the Swiss Government.
One thing, however, is certain. This Report does not pay much attention to you, the Swiss watch owner; nor me, a small independent watchmaker. It seems that swissness stops the moment you part with your cash and strap on your new Rolex, Omega or Patek. It completely overlooks the buyer's needs, desires, support - or lack of it - or its crucial role in the watch market. It neglects the feedback effect and portrays (rightly, yet unintentionally) the Swiss watch industry as a one-way street; still immune and resilient from outside criticism. The watch business issues are just Swiss internal matter, to be solved by Swiss themselves, as an internal affair.

The report 'When Corporatism Leads To Corporate Governance Failure' is available as free .pdf download or as a book ( $15).  Enjoy it.

FH is the Federation of the Swiss Watch Industry

Happy collecting,
Nick