State of the Industry – Swiss Watchmaking in 2023Another record year for the industry.
Geneva “wonder week” has just started with the opening of trade fair Watches & Wonders, and the whirlwind of new products will be the talk of the town in the coming days. The other topic on everyone’s lips will be Morgan Stanley’s annual report on the luxury watch industry co-authored by LuxeConsult, the consultancy specialising in watchmaking I founded.
Swiss watch exports – a proxy for the global luxury watch business – once again broke records in 2022 with the year’s tally standing at CHF23.7 billion, an all-time record thanks to year-on-year growth of 11.6%.
The growth is even more impressive compared to the figure for 2019, the last year before Covid. Twenty twenty-two was up 15.5% over 2019, meaning an additional CHF3.2 billion of watch exports.
Polarisation and “premiumisation” continue unabated
The “big four” – Rolex, Audemars Piguet, Patek Philippe, and Richard Mille – continued to outperform the broader industry and together captured a consolidated market share of 41.7%, up from 36.7% in 2019.
The key to their impressive and sustained growth is arguably the long-term vision made possible by being privately-held brands – all four brands are either owned by families, or a non-profit in the case of Rolex. Notable amongst the quartet was Audemars Piguet, which achieved 27% growth in revenue, resulting in annual sales passing the CHF2 billon threshold for the first time.
Rising value, falling volume
After a steady decline in volume over the past 20 years, with exports reaching an all-time low of 13.8 million wristwatches in 2020, Swiss watch export volume continued to scrape the bottom. The industry exported only 15.8 million watches in 2022, representing an increase of just 49,000 units or 0.3% growth over 2021, whereas in 2000 Switzerland was still exporting 30 million watches per year. In other words, the number of Swiss watches exported has declined almost 50% over the last 23 years.
And the numbers conceal an even grimmer reality. Taking the MoonSwatch out of the equation, the drop in export volume would have been a decline of about 900,000 units compared to 2021. That’s based on our estimates of the MoonSwatch accounting for 950,000 units exported and 1,000,000 units sold globally in 2022.
The decline in volume is largely due to smartwatches, especially the Apple Watch, which have decimated the entry-level segment of Swiss watchmaking, excepting the tremendous success of the MoonSwatch.
With the MoonSwatch, Swatch Group has regained its number-one position as the main contributor of volume to the Swiss watch industry, with the group selling an estimated 4.9 million last year across its multiple brands that include Omega, Longines, Tissot, and Swatch. In fact, Swatch Group and Rolex are now by far the two primary contributors in volume growth for the industry. Rolex production grew by an estimated 150,000 units in 2022.
The declining volume over the broader industry illustrates a simple point: the average export value of a Swiss watch increased by an average of 51% from 2019 to 2022 – rising from CHF993 to about CHF1,500.
The Swiss watch industry illustrates the Pareto principle, otherwise known as the 80:20 rule. A mere 17% of volume accounts for 83% of value.
The most expensive watches demonstrate this in the most extreme manner. Switzerland exported only about 25,000 watches with a retail price above CHF100,000, just 0.2% of a total of 15.8 million watches, but they accounted for CHF3 billion of export value, or 12.5% of the total value.
The winners and losers
The top four brands in terms of revenue remain unchanged over the year, but one brand fell out of the top ten – Tissot, largely due to its dependence to the weak Chinese market. For the same reason, its sister brand Longines dropped two places in the ranking.
Breitling and Vacheron Constantin are newcomers to the top ten, with neither of them coming as a surprise.
Breitling has been performing extremely well under its current owners – private equity groups CVC and more recently Partners Group – and management led by Georges Kern. Its strong performance is the logical consequence of a carefully planned and sharply executed re-branding. And the brand still has a tremendous potential, considering only 5% of its sales are in China, the world’s largest watch market before Covid.
Vacheron Constantin, on the other hand, rode the wave of demand for luxury-sports watches, with its Overseas becoming a sought-after trophy watch. After a period of reliance on the Chinese market for boost sales, the brand has diversified geographically under its current chief executive Louis Ferla, who has also tweaked the brand to attract a younger demographic.
Amongst the four top, Rolex outperformed the market and consolidated its supremacy as the biggest luxury watch brand in the world with an estimated 21% growth in revenue – of which 13% was organic and 8% due to two price increases over the year – matched by a 14% increase in volume with its 2022 production tally standing at 1.2 million units.
The next milestone for Rolex will be CHF10 billon in annual revenue, which will put the marque on par with über-brands such as Gucci, which had sales of €10.5 billion in 2022. But unlike other brands in the category, Rolex sells just one product.
Audemars Piguet had the 50th anniversary of its iconic Royal Oak (which accounts for over 90% of sales) to help push revenue over the CHF2 billion mark for the first time in its history. This also means the brand tripled sales in a decade.
The challenge for the incoming chief executive after François-Henri Bennahmias’ departure will be to tame the horses rather than to accelerate; at some point a brand needs to stabilise after a period of major growth.
Patek Philippe and Richard Mille are delivered exceptional performances with opposite retail strategies: the former relying almost entirely on third party retailers, whereas the latter controls its own retail network, either owning the boutiques or relying on joint ventures.
Swatch Group lost one brand in the top ten after Tissot saw revenue decline 12% due to poor sales in China. The group still has Omega in third place and Longines, which dropped from fifth to seventh place, carrying the Swatch Group banner amongst the top ten. Making up one third of the group’s sales but two-thirds of its operational profit, Omega is the jewel in the crown.
Vacheron Constantin is the third Richemont brand in the top ten after IWC and Cartier. IWC and Vacheron Constantin will be probably the next members of the billion-franc revenue club alongside Breitling, which also joined the top ten thanks to revenue growth in 2022 of 25%.
Breitling’s performance must be put in perspective with the fact that it has a very low percentage of sales coming from China which we estimate at about 5%, giving it tremendous runway to grow in that market. The other potential growth factor could be ladies’ watches, which accounts for less than a quarter of the brand’s sales, substantially lower than its direct competitors.
Hermès continued its successful focus on mechanical watches, achieving success in a wide price spectrum from Apple Watches with Hermès leather straps retailing at about CHF1,300,00 to high-end timepieces at more than CHF300,000.
This proves its incredible brand equity can retain credibility across totally different price segments in the same product category. Achieving revenue growth of 43%, Hermes’ watch sales overtook Chopard, a pure-play jewellery and watch brand. Hermès, on the other hand, counts just 4.5% of its total sales coming from watches and jewellery.
Jacob & Co. entered the ranking at 32nd place after a staggering growth gave its watch division sales of CHF130 million. The success is due to a long-term strategy of creating a brand universe of three-dimensional mechanical marvels selling at six-digit prices while maintaining a bread-and-butter business at a lower price level.
Ulysse Nardin and Girard-Perregaux – two brands sold by Kering to management – are rebounding after a long period of cleaning out sales channels to eliminate a substantial grey market business, which was damaging the brands’ credibility. The Laureato was Girard-Perregaux’s main growth driver by taking advantage of the scarcity of the Nautilus and Royal Oak.
Even though the Swatch Group is the most important contributor to industry volume with an estimated 68% of total Swiss watch exports by quantity, its brands are not growing at the pace of the industry.
With a 4.6% growth in sales (at constant exchange rates), compared with the average growth of 11.6% for the wider Swiss watch industry, it is instantly clear that most of the 17 brands owned by the group are in reverse gear.
This disparity is even more obvious if since the group’s biggest selling brand, Omega, had a successful year with growth above the industry’s average. In fact, we estimate that Omega is the main sales, growth, and margin contributor to Swatch Group, with the brand generating two-thirds of the group’s total EBIT.
One can question the relevance of maintaining such an extensive brand portfolio, knowing the complexity of managing all these brand that span the price segment and positioning.
The Swatch Group involved lockdowns in China linked to explain an estimated shortfall of CHF700 million in revenue compared to a year earlier. That’s one way to look at things, or you could say that the Swatch Group is depending on way too much on a single market. The only exception to this observation is again Omega, which has successfully diversified its sales and gained substantial market share in the United States.
A positive outlook
With the reopening of the Chinese market, the outlook for the luxury goods industry and Swiss watchmaking is promising there, but the situation in other countries, including the United States (the biggest market in 2022 with 26% share of exports), will probably get more complicated this year.
The Swatch Group is likely to be the main beneficiary of the positive trend in China as its two leading brands, Omega and Longines, are ranked first and second respectively by revenue in China. Tissot is also a major player in the country.
Twenty twenty-three should still be a record year, albeit with more modest growth in value of 3-4%. There will be increased polarisation, with even greater divergence between brands that outperform and those that will have difficulty compensating for the decline in sales after the buoyant demand in 2021 and 2022.
In short, the Swiss watch industry will continue to be an extremely polarised market, with five brands accounting for 50% of sales, with a few niche, independent brands (that account for under 1% of total exports) that will continue to do very well. And one brand will mitigate the decline in export volume, Swatch.
Addendum: Understanding the facts and figures behind the Morgan Stanley report
The report on the Swiss watch industry published by Morgan Stanley is based on a methodology where ex-works sales are converted into retail value in order for accurate comparisons.
We take in account the margins given to the retailers and the degree of verticalisation of the wholesale and retail network. Some brands differ widely in the degree of integration of their retail network. For instance, Rolex sells exclusively through third parties retailers (except for one boutique in Geneva) whereas Richard Mille sells exclusively through its own boutiques or points of sales.
Using Swiss Watch Federation export statistics, public information from listed companies, and interviews with industry players, we estimate the sales for the largest 50 watch brands. Five brands accounted for more than 50% of the total sales of the Swiss watch industry, 13 brands accounted for 75%, and 25 brands for 90%, set against of a total of 350 active Swiss-made watch brands.
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