Patek Philippe Chairman Thierry Stern had advice for Swiss watchmakers several years ago that most rivals didn’t heed: don’t overinvest in China. Amid the recent slowdown in China, the executive’s call has proved prescient.
Stern said everyone laughed at him when he decided to limit sales in that market to 130 pieces a year as brands including Omega and Cartier opened shops across the mainland. Patek is now selling about 3 percent of the 53,000 watches it makes annually to shops there, reserving the bulk of its production for traditional U.S. and European markets and making Chinese customers who want its watches travel to buy them. Stern warned two years ago that market would slow down.
“I said, I’m not willing to jeopardize the relationships that we have in the world with all the retailers and just to tell them, thank you for your help, but after a hundred years, now I go to China,” Stern said in an interview at the Baselworld trade fair. “So I decided, and it was courageous at the time, to say, well, China is the last one, so they will have what is left.”
The 14 percent decline in Swiss watch exports to China and Hong Kong has led some rivals to report declines in overall sales and has led others like Omega to expand outside of the market. This month, Hermes International (RMS) SCA reported a decline in watch sales due to China, while LVMH Moet Hennessy Louis Vuitton SA (MC), the world’s largest maker of luxury goods, said Chinese retailers have been purchasing fewer watches than expected. Greater China imported more than a quarter of Swiss watches last year, according to trade group statistics.
“Maybe they were too optimistic,” Stern said, referring to the competition in general.
Swiss watchmakers are bracing for a slowdown this year as Kepler Capital Markets forecasts the industry’s exports may increase 5 percent, which would be the worst performance since the 22 percent decline in 2009. The Chinese market has been shrinking as the administration cracks down on extravagant spending by government officials.
LVMH dropped 3.8 percent April 16 after saying weaker Asian demand contributed to the slowest growth in sales of fashion and leather products in more than three years. Revenue from watches and jewelry rose 2 percent in the first quarter excluding currency shifts and acquisitions. Patek Philippe, being closely held, doesn’t report sales or earnings.
Stern said he figured that Chinese clients who can afford 30,000 Swiss-franc ($32,000) products would buy them abroad instead. Chinese purchases make up as much as 20 percent of the watchmaker’s sales in Europe, according to the executive.
Omega is counting on markets such as the U.S., where it has 30 stores in cities including New York, Nashville and Pittsburgh. The brand, which is the official timekeeper of the Olympics, is also preparing for future growth in Russia and Brazil ahead of the games in those countries, President Stephen Urquhart said in an interview.
“The Chinese consumer is still there,” Urquhart said, adding Omega has continued adding shops in that market. “One thing certain, more and more Chinese are travelling” and buying watches abroad.
Swatch is diversifying within China by expanding its selection of low and mid-priced watches there. CEO Nick Hayek on April 25 unveiled a new model of mechanical watches called Sistem51 that the plastic watch brand will start selling worldwide in October for 100 Swiss francs to 200 francs.
“The Chinese market for the Swatch Group brands is very healthy,” he said. “There are billions of people in the world with no watches on their wrist.”
Hermes’s watch sales will rise this year as the company benefits from growth in Europe, the U.S., and Japan, said Luc Perramond, CEO of Hermes’s watch unit.
“China is in a delicate spot, but that can be compensated with other areas,” Perramond said. “We’ve got lots of markets that are becoming growth drivers, such as Middle East, Russia, Central Asia, India. In Southeast Asia, Indonesia will become an enormous motor for growth. Japan is also transforming itself” and has expanded at a double-digit pace.
Hermes has 20 stores in China and about that many “shops in shops” in other retailers. Over “the long-term I have no worries as the market has enormous potential. There’s a huge amount of wealth creation and purchasing power in the country each year.”
Indeed, there are still plenty of optimists betting that the slowdown doesn’t mean the end of the country’s potential.
“China has not even started,” said Jean-Claude Biver, chairman of Hublot, a brand owned by LVMH. “How many people in China can afford a Swiss watch? Nearly nobody. So we are in the beginning in the growth of China, of course, we have now a little slowdown, but believe me, the market will just go up.”
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