At Geneva’s annual luxury watch fair, Vincent Malissen was delighting in the intricacies of a gleaming timepiece from Vacheron Constantin, one of Switzerland’s most prestigious watchmakers. The price starts at 288,000 euros.
But when it came to confirming whether that pricing, equivalent to Dh1.19 million at current exchange rates, would hold by the time the watch went on display next year, Malissen, a marketing manager for the brand, threw up his hands in a gesture of “who knows?”
So goes the angst of Swiss watchmakers, many of them reeling from the abrupt scrapping of a currency cap. The move sent the Swiss franc soaring, making exports like watches a good deal more expensive and pressuring companies to increase prices or book lower profits.
The currency shock has the Swiss companies especially perplexed because the country is the leading exporter of luxury watches and the sector was already feeling the effects of slowed sales to wealthy buyers in China and Russia, as well as competition from a new batch of smartwatches. The country is also a top competitor in areas like pharmaceuticals, machinery and chemicals.
The Swiss National Bank for more than three years had pegged the franc to the euro mostly to protect Swiss exporters against a weakening of the euro. But the sudden reversal of the policy of preventing the franc from appreciating beyond 1.20 euros caused the currency to spike as much as 30 per cent.
The chorus of complaints against the central bank’s U-turn was led by Nick Hayek, chief executive of Swatch Group, the world’s largest watchmaker, who said the decision was “a tsunami: for the export industry and for tourism, and finally for the entire country”.
Its ripple effect has been felt far beyond Switzerland. Some currency brokerage firms in London and New York, unable to cover the franc’s unprecedented volatility, have closed or been pushed close to collapse. In Poland, the authorities are studying how to support borrowers who took franc-denominated mortgages, in the belief that a Swiss investment guaranteed not only favourable rates but also stability.
But nowhere are the gyrations of the Swiss franc more directly felt than among the Swiss watch industry, which exports more than 90 per cent of its timepieces while maintaining a largely domestic cost base because of its reliance on the appeal of a ‘Made in Switzerland’ label. Switzerland recently toughened its label protection rules to ensure that at least 60 per cent of the value of a Swiss product would be generated within the country.
In the industry’s most rarefied precincts, timepieces with highly complex movements that require years to develop and assemble can cost more than $2 million (Dh7.35 million) — even without diamonds. At Patek Philippe, a timepiece introduced in October to honour the brand’s 175th anniversary has an esoteric chiming mechanism and a perpetual calendar; it took seven years to develop and costs $2.6 million.
On the more modest end, a new Cartier model that leaves the moving parts exposed and is housed in a ghostly 47-millimeter case of 18-karat white gold, starts at $150,000.
Even before the franc’s rise, watchmakers faced other challenges. Based on preliminary estimates, the worldwide sales growth of Swiss watches tapered to around 2 per cent last year, compared with 22 per cent in 2010.
Much of that slowdown has occurred in China, which accounted for about two-thirds of the sales growth in the past decade. A clampdown on gift-giving, as part of an anticorruption drive by the Beijing government, has coincided with recent unrest in Hong Kong, a major retailing hub for Swiss watches.
At the same time, recent political sanctions against Russia weakened the rouble and Russians’ purchasing power. In recent months, shares in Swatch also fell over concerns about pending competition from Apple and other makers of smartwatches.
Richemont, parent to brands like Cartier, Vacheron Constantin and Piaget watches, reported that sales rose almost 4 per cent to 3.05 billion euros in its fourth quarter. The announcement, however, was eclipsed by the Swiss currency shock, which sent Richemont shares plunging 16 per cent that day.
Even if the mood was less ebullient at the watch show in Geneva this year, executives insisted it was too early to calculate the impact of a stronger franc on earnings. Some sounded defiant. Alain Bernard, president of the Americas for Van Cleef & Arpels, said the company had “no plans to change anything”, as far as the pricing of watches was concerned.
Other watchmakers pointed out that deep-pocketed buyers of luxury watches rarely focused on pricing. “When you set a watch at, say, $600,000, the fact that you come to $650,000 or $680,000 doesn’t change much,” said Richard Mille, founder and chairman of the Richard Mille brand. “I’m not going to create myself any headache that I don’t deserve.”
To offset falling margins, Jean-Claude Biver, head the watchmaking division of LVMH Moet Hennessy Louis Vuitton, predicted Swiss watchmakers would raise prices on average 3 to 5 per cent, “but nothing comparable to the franc’s rise against the euro”.
The currency upheaval could also cause further consolidation in a sector already dominated by three groups. In 2008, LVMH acquired Hublot, as part of its efforts to diversify and challenge the two giants of the watch industry, Swatch and Richemont.
“We’re now going to have to sail through the kind of storm from which the stronger and larger companies typically emerge stronger while the weak ones get weaker,” Biver said. Richemont, for instance, said it had more than $5 billion in cash.
Indeed, some smaller watchmakers said the central bank’s decision had an immediate impact. Some retailers cancelled orders within hours, Edouard Meylan, chief executive of H. Moser, a family-owned company that sells 95 per cent of its watches outside Switzerland, wrote in an open letter sent to Thomas Jordan, the president of the Swiss National Bank.
“What for a larger company is perhaps a problem of having to deal with unhappy shareholders is for a company like ours a huge shock and closer to a question of survival,” Meylan said. “In one second, we lost two years of efforts to improve our margins.”
Larry Pelzel, an executive from Neiman Marcus, said the US luxury retailer was not placing orders during the Geneva fair. “We’re going to wait until the dust settles,” he said.
