Luxury Goods: The Timing Couldn't Have Been Worse

High-end retailers splurged on watchmakers--then sales ran down

Tiger Woods isn't saying how much he is being paid to strap on a TAG Heuer watch, ending his longtime promotional contract with Rolex. But it's a safe bet that TAG Heuer's owner, French luxury group LVMH Moët Hennessy Louis Vuitton (LVMH ), spent plenty to snare the recent endorsement of the world's best golfer. After paying $746 million to acquire the Swiss sports-watch brand in 1999, LVMH is sparing no expense to develop it. The company has opened eight TAG Heuer boutiques from New York to New Delhi, while pumping up its ad budget and introducing a line of TAG Heuer eyeglass frames.

Unleashing the Tiger is just one part of a global scramble to turn luxury watches into a much bigger business. Over the past three years, LVMH and Swiss rivals Richemont, which owns Piaget, and Swatch Group Ltd. have gone on an unprecedented shopping spree, spending a combined $3 billion to acquire some of the most venerable names in the business. More than a dozen companies have changed hands, ranging from Switzerland's Jaeger-LeCoultre, purchased by Richemont, to Germany's tiny Glashütte, now part of Swatch.

The sellers made out like bandits. The question now is whether the buyers will ever make a decent return on their investments. Richemont, for example, spent $1.8 billion on Jaeger-LeCoultre and two other brands formerly owned by Germany's Mannesmann, which together commanded annual sales of less than $300 million. "Those are outrageous multiples," says Dale N. Dewey, head of Luxury Solutions Inc., a marketing research group based in New Canaan, Conn.

The timing of these deals also couldn't have been worse. LVMH and its rivals were still wrapping up their purchases when the luxury-goods business headed into one of its worst tailspins ever, buffeted by the global downturn and post-September 11 travel decline. Watches were particularly hard-hit. Rather than go without the season's must-have handbag or jacket, the fashion-conscious are more likely to put off buying a new watch, since watch styling doesn't change much from one year to the next. The LVMH watch and jewelry division lost $7 million in the first half of this year, with sales down 3%, to $250 million, the worst performance of any of its product lines. Operating profits at Richemont and Swatch also swooned.

For the moment, none of these players is sounding a retreat. "It's a time to build market share, but you have to have the courage," says Daniel Lalonde, who runs the North American operations of the LVMH watch and jewelry division.

Courage--and cash. LVMH and its competitors are having to invest heavily to turn little-known watch brands into global players. Jaquet Droz, a tiny Swiss watchmaker famed for its workmanship, commanded annual sales of less than $1.4 million when it was acquired by Swatch two years ago, according to analyst estimates. To boost sales of Jaquet Droz and its other premium brands, Swatch is launching a chain of stores, Tourbillon. "These brands are like the family silver--you can only buy them if they are tarnished, which means you are going to have to spend a lot of money polishing them up," says luxury analyst Andrew Gowen of Lehman Brothers Inc. He reckons it will take at least 7 to 10 years for buyers to recoup their investments.

The bigger question is whether the watch business, even in a stronger economy, will be big enough to accommodate all the players. Gowen says sales globally were growing 15% to 20% annually before the downturn, but even so, luxury watches are only a $4.3 billion business. Privately held Rolex has about 25% of the market, and with its powerful brand recognition it is likely to keep that share--even without Tiger Woods. The field is growing more crowded, with fashion houses such as Gucci and LVMH's Christian Dior trotting out their own upscale lines. Dior, which until now has mostly sold watches under $1,000, now offers a Harley-Davidson-inspired solid gold model, the Dior 66, that retails for $10,000. But with competition heating up, don't expect watchmakers to be living life high on the hog any time soon.

By Carol Matlack in Paris

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