Business Technology

Friday 24 May 2019

Share Watch: Apple's tech is winding up fabled Swiss watch makers


The Swatch brand logo is seen on Carnaby Street in London, UK. Photo: Keith Mayhew/SOPA Images/LightRocket via Getty Images
The Swatch brand logo is seen on Carnaby Street in London, UK. Photo: Keith Mayhew/SOPA Images/LightRocket via Getty Images

John Lynch

I had occasion a while back to speak to a group of students who, I suppose, could be lumped into the category we now call 'millennials'. While their individual views of the world may differ (a little), it did not take long for me to discover that the thing they all had in common was that none possessed a watch.

They all had smart phones, but no watches. More recently, I heard that the Swiss flagship watch fair, the 103-year-old Baselworld, was shaken to its core by the news that one of its stalwarts, the Swatch group, would not be an exhibitor this year, and maybe never again. It was clear the magic of Swiss time-keeping, which dates back to the early part of the 16th century, is not what it once was. So a close look at Swatch was an obvious way to help tease out the changes that face one of Europe's most fabled luxury goods industries.

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The Swiss watch industry was one of the spin-offs of the Protestant Reformation. The reformer, John Calvin, had set his face against jewellery and in response the Geneva gold and silversmiths turned to the manufacture of precision time pieces for their living. Over the centuries the Swiss pretty much cornered the market and by the time the wrist watch was popular, fashionable and collectable, the Swiss watch was the byword for style. That began to change with the arrival of the quartz watch from Seiko in the 1970s when the Swiss struggled to compete.

Worried Swiss banks turned to Nicholas Hayek, an engineering consultant, for solutions. In 1983, Hayek proposed a merger between the two largest but financially troubled watch companies. He and other investors purchased the merged companies, renaming them the Swatch Group. Following the merger the new group launched an affordable entry-level colourful plastic cased watch with half of the usual components. They called it Swatch and it was a runaway success.

Today, the Swatch group is headquartered in Biel and quoted on the Swiss stock exchange with a market value of €15bn. The company operates in all segments of the watch business, from entry level to luxury. It supplies almost all components for watch-making to third parties in Switzerland. Swatch trades in 50 countries, has 150 production plants in Switzerland, employs 37,000 people with 18 watch brands like Omega, Rado, Longines, Swatch and its children's brand Flix Flax. It is also the largest industrial employer in Switzerland.

The Swiss watch industry has had its troubles in the last 50 years, but the arrival in 2015 of the Apple Watch with its technology did not help. Swatch sales fell following the Apple Watch launch. While the Apple Watch has been successful, the company remains reluctant to provide sales figures citing competition reasons. Observers estimate they could be as high as 20 million units.

Last year, the entire Swiss watch industry exported 24 million units but at a much higher price point. There is little doubt that the Apple Watch is a disrupter.

Last year was a challenging one for the Swatch group, but growth was realised in the luxury and prestige ranges. Revenues of €7.5bn were up 6pc but operating profits were below analysts' estimates as demand weakened in the last quarter. Dividends inched up 6pc. The shares declined last year, from a high of €439 to €274 today. A significant negative for the year was the capacity bottleneck for components, which hindered the sales of some of its luxury brands.

Surprisingly, the group anticipates healthy growth this year and is bullish on China. It also expects gains in Japan and the US, with growth drivers being its high-end and luxury category watches and plans to expand its e-commerce presence. Investors still worry that the Swatch entry-level offering is vulnerable to Apple Watch and its luxury brands being at risk of a downturn in the important Chinese market. Swatch is a recovery stock.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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