Wednesday, December 23, 2009

Luxury watches winding down their production as sales slow

With so many cooperations feeling the pinch of the recession this year fewer top executives are receiving their typical large end of year bonuses.  Without the bonuses, these executives have less disposable income to spend on high end timepieces.

Swiss watchmakers had hoped recession-weary holiday shoppers would regain some of their taste for self-indulgence, giving the luxury-watch business its first spark of life since the financial crisis set in. But it may take the return of big bank bonuses, possibly early next year, to produce any significant uptick in sales of Rolexes, Patek Philippes and Piagets.

In recent years, the banking industry's bonus payments to top employees helped fuel a global splurge on luxury goods, including handcrafted watches priced at thousands of dollars.

But those payouts, which can total hundreds of thousands or even millions of dollars—fell substantially over the past year as banks struggled with soured investments and tight credit conditions, leaving Swiss watches among
the hardest-hit luxury items.

During the boom, the industry, which has annual revenue of roughly 17 billion Swiss francs ($16.4 billion), ramped up production, and retailers loaded up on classic brands, as well as flashy new names, only to be caught out when sales plummeted.

The result is the toughest market for Swiss watchmakers since the 1970s, when cheap Japanese quartz watches threatened their franchise. Swiss watch exports in November were down 11% from a year earlier at 1.4 billion Swiss francs, an improvement from their 23% decline in October. While consumers in Asia, particularly China, are still hungry for luxury timepieces, Switzerland's November watch exports to the U.S. fell 21%, and were down 40% for the year through November.

Sales of Rolex watches, the powerhouse of Swiss watchmaking, probably will fall to about $3 billion this year from around $4 billion at the peak of the boom, according to Jon Cox, analyst with Kepler Capital Markets. Rolex, owned by a Swiss foundation, doesn't release sales or profit figures.

Watch dealers are seeing some pickup in the Christmas market. "It's definitely better than last year," says Mark Udell, owner of London Jeweler in Manhasset, N.Y., "although I don't want to get overly positive yet."Mr. Udell says the watches that are doing well this season are sporty models, such as Rolex's Daytona, or those with multiple features like delicately configured dials that track phases of the moon or the tides.

"The spirit seems a bit stronger [this year]," he adds,Many watch dealers have higher hopes for January, when banks are expected to pay their first bonuses for 2009 performance. Industry watchers say that while Swiss luxury watches given as Christmas gifts tend to have price tags of thousands of dollars, bonus recipients are more likely than Christmas shoppers to splurge on the highest-end timepieces that cost $100,000 or more.

There are limits, however, to how much bank bonuses can boost the market.

Banks around the world are generally under pressure from their regulators to defer large chunks of their bonuses and to pay much of them in equity, rather than cash. It isn't clear how much that will leave for watch splurges.

On top of a sharp drop in demand, Swiss watchmakers have been struggling with other pressures, including high costs, particularly for personnel. Big brands typically take two to four years to train skilled craftsmen before they let them hand-assemble the hundreds of components that go into a luxury watch, and so are reluctant to lay them off during a down turn. As a result, their profits have plunged.

At the same time, the strength of the Swiss franc and rising gold prices have forced brands to raise prices, particularly in dollar-denominated markets. This fall, privately held Parmigiani Fleurier and Audemars Piguet both raised the suggested retail prices of their brands by about 10% for the U.S. market, dealers say. Audemar Piguet declined to comment.

Operating profit margins at the watch division of Compagnie Financière Richemont SA, maker of the Cartier brand, are likely to fall sharply to 14% next year from 27% last year, according to UBS Equity Research.

In response to falling margins, Cartier put some of its workers on a short workweek this year, while independent watchmaker Franck Muller announced it would roughly halve its staff, cutting 200 jobs.

More info here
Do you think the luxury watch industry will see some casualties at the end of 2010?  If any watch maker does go out of business this will make their exisiting timepieces even more valuable.


Anonymous Anonymous said...

This blog is a straight lift off from a Wall Street Journal article. The author has infringed on copy write with out the basic courtesy of mentioning the source and try’s to come across as extremely proficient on the topic. It is a shame and hopefully better sense will prevail in the future.

January 28, 2010 10:19 AM  
Anonymous Luxury Watch said...

This watch is so different. It has beautiful attraction that recognizes one’s achievement. It is luxurious in style. When we say luxury, first thing that come to our mind is the price. Luxury watch is expensive and only rich people can afford to buy it. But there are branded watches that come from authorized dealer that are of high quality and good design.

December 06, 2010 9:27 AM  

Post a Comment

<< Home