High Times for Luxury Watchmakers
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Time, as the adage goes, is money. For luxury watchmakers these days, time is a great deal of money indeed. High-end tickers, from the dainty and diamond-encrusted Cartier, to the solid-gold Rolex and the sporty-chic Omega, are selling quicker than a New York minute. Watch exports from Switzerland, where most of these pricey timepieces are made, rose 11% last year, to more than $9.5 billion, according to the Federation of the Swiss Watch Industry.
Fine watchmakers are riding high, as they prepare for BaselWorld, the industry's annual trade show that opens Mar. 30 in Basel, Switzerland. The watch division of Paris-based LVMH Moët Hennessy Louis Vuitton (LVMHF), whose brands include TAG Heuer and Dior, was that company's top performer, with profits up fivefold to $46 million.
Richemont, the Geneva-based luxury group whose watch brands include Cartier and Jaeger-LeCoultre, reported earnings in its watch division up 56% last year, to $178 million. It was the biggest increase of any Richemont unit. "The industry is booming," says Sylvie Ritter, director of the watch and jewelry show BaselWorld, set to begin Mar. 30.
What's behind the boom? One big driver is a rise in the number of seriously wealthy individuals. In the U.S., there were 10% more millionaires in 2005 than the previous year, and 8% more in Asia, according to the latest World Wealth Report from Merrill Lynch (MER) and Paris-based consultancy Capgemini. Sales of luxury Swiss watches rose 14.5% in the U.S., 15.7% in Japan, and 7.7% in Hong Kong, the industry's top three markets.
And these people aren't satisfied with just one watch. Time was, a single Rolex would suffice. But now it's common to own a different timepiece for every occasion, whether it's a classy dinner party, a business meeting, or an afternoon on the golf course. "The essence of luxury is variety," says Milton Pedraza, chief executive of New York-based research firm The Luxury Institute.
Of course, in order to collect watches, you must understand them. In recent years collectors have been able to refer to a plethora of watch publications. "It's just like the wine market," Pedraza says. "A few decades ago, people only wanted French and Californian, but now you have connoisseurs who are trying Chilean, Australian, and even Latvian wines. There's so much to know about watches, and people are just getting interested."
"SELL A DREAM."
That improved knowledge has given a big boost to smaller watch companies. Switzerland's Patek Philippe is widely considered one of the most technically accomplished watchmakers, but has long been overshadowed by bigger, richer brands such as Rolex and TAG Heuer. Now, though, Patek Philippe President Philippe Stern says: "The growing knowledge among American consumers pushed our U.S. sales up 15% last year, and we're expecting better in 2006."
Other watch companies have relied on celebrity ad campaigns to woo luxury consumers. TAG Heuer signed up championship golfer Tiger Woods in 2003, and added film stars Brad Pitt and Uma Thurman last year. "People don't buy luxury watches as often as they buy washing powder, so we can't rely on brand loyalty," says TAG Heuer CEO Jean-Christophe Babin. "We have to sell a dream, and these guys are that dream personified."
For luxury watch purveyors, the boom has been a long time coming. During 1999, the three biggest players -- LVMH, Richemont, and Switzerland's Swatch -- spent a combined $3 billion to acquire high-end watch brands. More than a dozen companies changed hands, ranging from TAG Heuer and Jaeger-LeCoultre to Germany's tiny Glashutte, now part of Swatch. But then in 2001, sales of luxury goods took a nosedive on a combination of the September 11 terrorist attacks and a global slowdown.
Profit margins in the sector now are back to pre-millennium levels, and some analysts think the big groups are in the market for new acquisitions. The pickings are slimmer this time around, however. "Few [profitable brands] are for sale, and the price will likely reflect this scarcity," Merrill Lynch luxury goods analyst Antoine Colonna said in a recent report.
Instead, Colonna advises the companies to concentrate on ramping up sales in emerging markets. Swatch, for example, has enjoyed strong growth in China, where sales of Swiss watches rose 25.7% last year. Four of the five best-selling brands in China belong to Swatch, including Omega, which holds an impressive 20% of the market.
That still leaves plenty of room for other players. "Self-made millionaires in China and India will always want a Rolex," says The Luxury Institute's Pedraza. "There are many finer watchmakers, but Rolex has created a fantastic, aspirational brand. By wearing one, rich consumers in emerging markets will feel that they've made it." For luxury watchmakers, the best times could still lie ahead.
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