An Uptick for Swatch on Tiffany Deal

The world's leading watchmaker is no longer mass-market. Its alliance with the No. 1 name in jewelry ensures its place in the luxury lineup

Swatch Group (UHR.DE) shares rose as much as 5.5% Dec. 6 after the watchmaker unveiled an alliance with Tiffany (TIF) the day before. Citibank (C) upgraded Swatch to "buy," noting "it has gradually become a significant luxury player, not the mass-market consumer company some view it as. We believe it is an attractive, long-term growth story."

Swatch, the world's leading watchmaker, has been riding high since reporting a first-half net income of $406 million—a 39.4% increase year-on-year—on sales of $2.42 billion, up 16.7%. Watch and jewelry sales grew 20% year-on-year, to $1.87 billion. The company credited its high-end and Swatch brand watches for the surge in business.

Despite apprehension that demand for watches will taper off, Swatch's luxury brands—Omega, Breguet, and Blancpain—should grow substantially to comprise 22.4% of the company's sales by 2010, Citibank says. Omega models, the top sellers among Swatch's luxury lines, retail for $2,763 on average, while Blancpain and Breguet sell for about $9,458 and $14,544, respectively.

Two Strong Brands

The deal with Tiffany to design, manufacture, market, and distribute Tiffany brand watches through a new Swiss-based, Swatch-owned company should prove a boost to Swatch on a relatively small investment. The company is investing nearly $4 million to expand its production capacity, Chairman Nicolas Hayek said Dec. 5 at a press conference in New York.

"With Tiffany, they clearly have a really strong brand—they're the No. 1 player in jewelry worldwide—and a real potential [exists] to sell watches under the Tiffany brand," says Patrik Schwendimann, an analyst at Zurich Cantonal Bank.

The Tiffany name also may help Swatch market to women, not an easy feat for watchmakers. "With watches, it's more a man's world," Schwendimann says. Women's models make up 35% to 40% of the luxury watch market, according to the Citibank report. "There is a huge opportunity for women's watches to be increasingly sold directly to women as an impulse purchase, just like apparel or leather goods," the bank says.

Competing With Cartier

Analysts also expect Swatch to score big in China, a fast-growing market of $2.3 billion that already represents one-fifth of Swiss watch exports. Omega will be the official timekeeper at the 2008 Olympic Games in Beijing, and China's growing middle class, developing awareness of high-end brands, and burgeoning international travel industry should create many new Swatch customers.

Tiffany hopes the agreement will make it a strong competitor to Cartier and Bulgari (BULG.MI), two jewelers that have successfully moved into the luxury watch business. The company will absorb a writedown of $20 million on inventory of watches it plans to discontinue, but will keep its three most popular lines—Atlas, Mark, and Grand—in production. The first new products will launch in the second half of 2008, with the first full collection to follow in 2009. "This is about the long-term health of the brand," says Tiffany Chief Executive Officer Michael Kowalski.

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