A Better Time for Luxury Watchmakers?
(This story has been updated to correct the spelling of two of the watches cited in this article.)
In January 2009, one of the bleakest months of the latest recession, a watch collector from the Middle East dropped $3.3 million on Piaget's new, one-of-a-kind tourbillon watch studded with 1,200 diamonds and shaped like an ancient temple.
Though sales like that are as rare as the watches themselves, buyers from the Middle East, Asia, and Latin America helped to mitigate both a drastic drop in demand from Europe and the U.S. and a spike in gold prices in 2009.
In the U.S., sales of watches costing more than $100 declined by 33% in 2009, according to Port Washington (N.Y.)-based retail analytics group NPD. Swiss exports of watches dropped 22% in 2009, the biggest decline since 1932, according to the Federation of the Swiss Watch Industry.
The outlook for 2010 is more optimistic. Swiss watch shipments, the barometer for the watch industry, rose 14% in February, led by a 174.1% increase in Morocco, a 157.4% gain in Saudi Arabia, a 68.2% increase to the United Arab Emirates and a 49.5% increase to China. The luxury sector, which had the steepest losses in 2009, is recovering at a slower pace than the rest of the industry, said Jean-Daniel Pasche, the group's president.
"We've had a difficult year," says Francois-Henry Bennahmias, North American president and chief operating officer of Swiss luxury watchmaker Audemars Piguet. "It will take time to rebuild completely but the true potential is much bigger than we think."
Piaget, a subsidiary of Cie. Financière Richemont (CFRHF), will see a single-digit decline in growth for the year ended Mar. 31, says Chief Executive Officer Philippe Leopold-Metzger. Richemont also owns luxury watchmakers Cartier, Van Cleef & Arpels, Vacheron Constantin, A. Lange & Söhne, Officine Panerai, International Watch Co., Baume & Mercier, and Montblanc.
Piaget's positive results are "not due to genius," Leopold-Metzger says in a phone interview. "As a brand, in the last two to three years, the expansion in emerging markets has been generating momentum."
The company, which makes watches with an average price of $25,000, has beefed up its presence in China to 14 stores from five stores two years ago. Of 11 new boutiques planned for the next fiscal year, five will be in China and three in the Middle East, he says.
Chinese nouveaux-riches and Middle Eastern royalty "like to show off their wealth," he says. For men, a fancy watch "is one of the signs to show people that you're successful."
Latin America was the only growth region last year for Audemars Piguet, whose watches have an average price of $35,000 and are known for their octagonal-shaped cases. The company saw a 25% increase in sales in Latin America in 2009. Not coincidentally, two 2010 models are called "Pride of Mexico" and "Pride of Argentina."
"The Latin American market is booming," Bennahmias says in an interview at his office, with unobstructed views of Manhattan's Chrysler and Empire State buildings. "I showed up at a dinner in Caracas for 30 people. Each had more than $150,000 on his wrist."
Luxury watchmakers cut production in 2009 to adjust to lower demand from consumers. Piaget made 18,000 watches, 10% below its typical output of 20,000, says Leopold-Metzger. Patek Philippe held thousands of watches in stock rather than force retailers that had ordered them to accept delivery. Audemars manufactured 23,000 watches, down from a projected 29,000.
Although most luxury watchmakers didn't reduce prices, some had to adjust to currency fluctuations in specific markets, says Rene Weber, analyst with Bank Vontobel. Audemars dropped its U.S. prices by 10% when the dollar gained against the euro, Bennahmias says. On the other hand, F.P. Journe, a small Swiss manufacturer that produces about 950 watches a year, stopped deliveries to retailers that were offering discounts.
While the entire watch market has taken a hit, specific figures are hard to come by because the companies are either privately held or part of conglomerates such as Richemont and LVMH (LVMUY) that don't report results for individual brands and their divisions. Still, unlike other industries, which saw weaker brands go under during the downturn, the watch industry has been remarkably resilient; only a couple of little-known brands went bankrupt, Weber says.
Mass-produced timepieces priced at $1,000 to $10,000, as well as some fashion brands, lost more value and allure than mechanically complex brands, dealers and experts said. Sales of Bulgari (BULIF) timepieces, the company's third-biggest product category by revenue, fell 19.5% to 212.2 million euros in 2009. Gucci Group sold its subsidiary Bedat & Co. in 2009, saying the Swiss watch brand performed worse than expected.
The High End Holds Up
"The decline of bonus culture had a big effect on the watch market," says Catherine Macdonald, editor of Luxury Briefing, a trade publication. "A lot of guys would buy a watch with their first bonus. It was seen as a rite of passage."
Complicated, limited-edition watches by top brands like Rolex, Patek Philippe, Cartier, and Richard Mille fared better, dealers, experts, and retailers said.
"Anything over $60,000 is holding up," says Macdonald. "It has to be something that's a limited edition or of a very high quality. Quite a lot of people are still buying at that level. They are not relying on their next bonus. The money is in the bank."
Even wealthy clients are not buying as aggressively as they did during the boom years. "They have become a lot more selective about where they put their money," says Roberto Chiappelloni, owner of Manfredi Jewels in Greenwich, Conn. "They negotiate harder than they used to."
While he sold a $690,000 watch by Greubel Forsey in December, overall sales declined by 15% in 2009, he says. In an industry where most watchmakers can trace their histories back a century or more, Greubel Forsey is a rare newcomer. Based in La Chaux-de-Fonds, Switzerland, the brand was founded by Robert Greubel and Stephen Forsey in 2004, making its debut that year at Baselworld, the watch industry's premier trade show. In late 2006, Richemont acquired 20% of the company.
In this tough economic climate, oversized, extravagant watches are being replaced by more elegant models.
"People are not keen to be spending money in an ostentatious way," says Macdonald. "If you are laying people off, you don't want to be flashing your new watch."
To attract more cautious consumers, watchmakers are outdoing one another with unusual designs and mechanical virtuosity.
Ikepod, a tiny Swiss brand that produces retro-futuristic wristwatches by designer Marc Newson, introduced a "Cannonballs" model by artist Jeff Koons. Instead of launching it at a watch fair, Ikepod released it at Art Basel Miami Beach, the biggest contemporary art fair in the U.S. The wristwatch features colorful circles that mimic the palette of one of Koons' Hulk Elvis paintings. The edition of 10 resembles that of a limited-edition artwork. The platinum model is priced at 36,000 euros ($48,614).
Piaget is heralding its 2010 Altiplano model as "the slimmest" automatic watch ever, with a 2.35mm movement and a 5.25mm case. The platinum watch's price ranges from $18,900 to $22,000.
Meanwhile, Vacheron Constantin launched its own slimmest-ever mechanical watch, with a 1.64mm movement and a 4.1mm case. It will sell for $22,900.
Anticipating a stronger year, Manfredi's Chiappelloni doubled his orders from 2009. He even ordered four new Chopard watches marking the Swiss maker's 150th anniversary. The four timepieces have the same serial number, yet different styles and complexity. Chiappelloni expects to sell the four to a single collector for $480,000, he says.
"I thought they were very special and I got the whole set," Chiappelloni says. "Last year I would not have dared to. I would not have had the confidence."
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