The Only Way Out Of Winter Is Through It

So the export numbers are in, and they are pretty sucky.

Courtesy of the FH

As the graph shows, while things slightly stabilized, they are still not nearly where they need to be. Also keep in mind that the Swiss Watch Makers holidays are upon us, so there is a desire to push out as much as possible before shipping stops for 3 weeks or so.

Of the top markets, China is the only one that is "up" by 47.7%. The argument could be made that China being the first major economy to pass through the first wave of COVID-19 is showing signs of growth and recovery. Well, yes and no. Let's be honest with ourselves about a few
realities -

1. As has been said here Ad nauseam - Exports Do Not Equal Sales. More likely than a huge uptick in sales, we are watching a fairly large scale shift of stock so that it is "in country" before the second wave hits. Granted, there are sales happening, but not on the scale that would indicate a strong recovery.

2. The big Swiss brands are still refusing to learn from previous lessons. When it comes to eggs, there are 2 rules -
A. Don't count your chickens before they hatch -Simply put, exports do not equal sales.
B. Don't put all of your eggs in one basket -
When you put all of your focus on one market, what do you do when that market is suffering?

If these past months have taught us anything, it is that nothing is likely going to be the same as it was, even once we are past the worst of the current pandemic. Wishing, hoping and wanting things to return to the way they were is not going to magically make it happen.

Crack is Wack - Or When Watch Town Finally Hits Bottom

The numbers are in, and not really surprising, the export numbers have cratered.

Courtesy of Wikipedia

And yes, gentle reader, for the purpose of this article, crack is a metaphor. But it is a fairly apt one. Crack decimated entire districts in metropolitan US cities back in the 80s. It was readily available, highly addictive, and its safe to say would cause those using it to lose all sense of reality. And not unlike stupidity, crack does not discriminate - white, black, female, male, rich or poor? Well, as that other great commentator on the watch business, Rodney Little as played by Delroy Lindo in Clockers put it -

“If God created anything better than crack cocaine he kept that shit for himself.”

I talk to a lot of brand managers and even some owners. And interesting to relate, some of the brands (small, scrappy, hungry, independent, one or two person bands) are having some of their best months ever. Several of the big brands are re-shuffling the decks. More on that in a future post, but the point is that the quick, nimble and not-so-rich are having their moment. And those waiting for valet service might be slinging their hooks as they "pursue other professional opportunities".


Watch Town attracts some unique personalities. And those who sit on the Town Council have, if were honest, some pretty powerful egos that need to be fed. A big part of that feeding is reflected in payment. As many know, Sophie Guieysse was removed from her position on the senior executive board. What is particularly hilarious about this is what drove this decision. Essentially, cost cutting steps were put into place, and (if I understand it correctly) several senior executives who were making ridiculously high salaries were bent out of shape because while they were still making ridiculously high salaries, they weren't as ridiculously high as they'd like. Now in fairness, while they had been reigned in, the top executives saw a fairly significant increase. I am also curious where all of this angst and concern was when lower-paid employees saw their jobs simply cut. A watch maker gets laid off or made redundant, hey that's life. But a mid-level executive doesn't get their second serving of pay? Well that's an outrage! It's hard to have sympathy for the levels of gluttony and greed that engender wrath when left unappeased. Sure, that still leaves four deadly sins to work through, but you get my point.

Courtesy of the FH

And really, what all of this discord at Richemont underscores is the same disconnect that is taking place all over Watch Town. As the above graph makes clear, things are not exactly improving. And keep in mind, that as shitty as the export numbers are, they are nowhere near as bad as the sales actuals. Remember pals and gals, exports DO NOT EQUAL SALES. And for once? Thank goodness they don't.

At a time where the bottom is rushing up to meet the watch business, it might be a good time for the leaders of Watch Town to reassess just what is important. Bonuses and company cars are great, but having your brand survive so you can actually have a job might, just might, be a more constructive use of time.

Deja Vu All Over Again

Am I the only one who remembers the 70s and 80s?  

With the latest results from the FH, I am more and more convinced that maybe myself and a handful of other people are the only ones who do.  Right now according to the FH and some of the reporting from some very fine (sincerely) and respected writers in the industry it would be easy to keep sipping the Kool Aid and assume that everything is fine.

Shamelessly borrowed from the world-wide info web

Sometimes it is easy to go for and accept the simple answer without really looking in depth at what is hiding just below the surface.  So allow me to yank this particular band aid off.

To quote that other great commentator on the watch industry, Lily Tomlin -

Things are going to get a lot worse before they get worse

FACT 1 - Exports do not equal sell through.
Anecdotal evidence from several sources that I tend to put a lot of faith in report that the sell-through in Hong Kong has plunged in some stores by 80% over the past 8 weeks. Now the easy argument would be that this is the reason for the downturn in exports. But if you look at the graph from the FH over the past YEAR, you will note that the export numbers have consistently been trending DEEP SOUTH. That's right pals and gals, long before the protests started in Hong Kong. Now recent events have firmly planted the accelerator to the floor. So sorry great watch authority from Outlet X, you're not looking at the whole picture.

This is real boys and girls, and it will have a massive impact on future shipments over the next 6 to 12 months.
FACT 2 - The fewer watches you manufacture, the fewer you can sell (whether through authorized outlets or our old friend the grey market).
Based on the Swiss Federal Institute of Statistics and the Swiss Watch Federation the Swiss Watch Industry exported in 2014 28,582,190 MILLION watches. Now add to this quantity what was sold in the Swiss domestic market (which is estimated to 1.4 Million) and we're at around 30 million. 

Now for the Pepsi Challenge -

Shamelessly borrowed from the world-wide info web

Let's compare this to the current reporting of the Swiss Watch Federation. We are projecting to be slightly over 1/3 less in terms of manufacturing. 
Now, before you assemble a care package for your favorite CEO who treats you to that tasting menu each year during your visit... oh wait, that's right! You are NEVER going to be feted at one of these press carnivals.  Sorry...

At any rate, the CEO is covered, it's cheaper for the brand to keep paying him or her to do nothing. The sales manager and heads of pr and marketing will not have to start driving used cars or shopping at the Salvation Army. But let's talk about the people actually making those watches in (most typically) assembly houses, and some who work for the big brands. Believe me, those folks will get the axe long before brand x cancels their America's Cup partnership, their Wine Country press junket, or their brand ambassador from the Marvel Universe. You might not hear too much about these people in terms of the Swiss employment statistics. Why? Well also curious to relate, a lot of the people who assemble your watch in Switzerland are not, by actual definition, Swiss. Italian and French citizens cross the borders every day to work for Swiss companies making Swiss watches. It's not to say that they don't count, but in terms of Swiss employment figures, let's just say it tends to skew the graph plot.

As one Swiss insider stated, "the tissue is melting away!" But according to the Swiss Watch Federation, and the reporting of some tail waggers out there, things are even better now than ever before because, wait for it, the export value is increasing! 

Now I am 51 years old, and in fairness, I was not exactly engaged in the watch business at 11 years of age. But I do make a point of trying to understand the past and how it has influenced where we are now, and I also try to pay attention to where we're heading.

FACT 3 - And the one reality that should have the management at the SWATCH group up late nights and shitting themselves? Low priced Swiss watches where the big volumes are in production and (it stands to reason) sales are dramatically dropping again. While Hublot Big Bangs and Vacheron Constantin Overseas are sexy, they are not exactly owned and worn by the masses. And the Swiss watch industry is, well, industrial - meaning it involves thousands of people with thousands of jobs making (ideally) millions of watches. But just like 40 years ago there have been, and continue to be, warning signs that are being ignored.

Think about this basically, we‘re talking about millions of pieces that are not manufactured and assembled anymore. This inevitably leads to thousands of jobs lost already and thousands more that will be lost in the near future.
The shit's about to get even realer.

The Real State of the Union

So another update from the FH squirts more ink into the water, further clouding the reality of where things stand. 

For the record, here are the numbers as reported -

Courtesy of the FH

So the short and sweet?  Exports are down.  But let's take a deeper dive, shall we?

Remember mighty Singapore?  They were up 25% last month!  Guess how they did this month?  Down 49.4%.  Un petit mystère, n'est-ce pas?

Not really.  Because what you will come to figure out if you dig even a little into the uncomfortable reality?  Sales, overall, are down.  Actually, let me re-phrase that.  Sales through traditional, traceable, "normal" channels are down.  And our old friend the Grey Market?  Boom times!

And this is where it gets even murkier - the rise of the "limited edition" / "collaboration" watch.  Not so long ago, a watch brand would not go near anywhere near such limited series.  Anything below a certain threshold would be dismissed out of hand.  It was more headache for smaller margins than they thought it was worth.  And interestingly enough, the margins now seem worth it.  What does that tell you?  Very simple, the brands realize that they need to grab ahold of any margins that they can.  There is a wee bit of marketing thrown in, but simply put, the realities are starker than anyone wants to admit.

And once again, if you think I'm full of it, ask the most recently departed CEO as to just how good real sales really are.  You can make a million watches, you can export a million watches, but if you don't sell a million watches?  Well that is a totally different story.

As a commentator on this sort of stuff, I find myself in a weird place.  I work with brands, both big and small as a consultant.  And I find generally that I have two types of clients - those who are ready to listen and self-reflect, and those who are not.  And in fairness, that is human nature.  

I think what is (for me at least) painfully ironic, is that in many ways we have already been here before.  And the brand CEOs who are frequently finding themselves right back in the same situation that they were before.  

The watch industry, as it is currently structured, is not sustainable.  It simply isn't.   It is currently predicated on some very unrealistic expectations that are based on some very general presumptions without any real hard analysis about population, real income, real levels of disposable income.  When you have a brand that proudly tells you that they only make 50 watches per year, priced at $45,000 each, it raises some very real questions, and this is a summary of one such conversation I had this past BaselWorld:

Q.  How many employees do you have?
A.  Ten
REALITY CHECK - Figure that the CEO is getting at least 100,000 CHF per year.  The other 9 must be making at least 50,000 but likely more.  So that's about half a million right there in payroll.

Q.  Do you sell direct to the customer?
A.  No, we work with distribution agents who then sell to retail partners.
REALITY CHECK - That means that the $45,000 retail is actually 30% coming back to the company.  If we go by the old UN rule of 7% production costs, that really translates into 23% (but it is likely less) which comes out to 10,350 per watch.  Let's multiply that by 45 and we come up with 465,750.  So right away, we have already. outstripped our payroll.  You are already operating at a deficit.

Q.  What do you do if you don't have enough stock?
A.  Well, we still haven't had a year yet where we sell completely through our stock.
REALITY CHECK - SEE ABOVE

Q.  How many foreign travel trips do you make?
A.  Oh, I am always on the road.  I typically have 2 trips to the Middle East, 2 trips to China, and several trips to other locations.
REALITY CHECK - SEE ABOVE

Q.  How many fairs do you participate in addition to BaselWorld?
A.  Probably 5 major fairs.
REALITY CHECK - SEE ABOVE, and the administrators have come in and taken everything.

But somehow, some of these brands magically keep going.  Up until recently it was Chinese money coming in.  But the Chinese have begun realizing that they were throwing good money after bad.  So several of those brands either did a Sleeping Beauty, or they have or are in the process of untangling themselves from these losing enterprises.

What next?  Investors, and by investors I mean money fund managers who (most likely) are passionate about watches and are convinced (often wrongly) that they can turn things around.

Every BaselWorld you see the third entity, the wealthy people who can't afford a Premier League football club, but owning (part or more) of a watch brand is a safer, slower way to flush their money down the toilet.  And up till now, several brands have kept going with what can best be described as a semi-annual search for new investors.  And for the smaller brands, they can probably float along for another 3 - 5 years.

But this year it seems that brands are finally hitting bottom.  And I truly do feel bad for all of the people that this is going to hurt, the midlevel employees.  It remains unclear whether the (now former) CEOs will land on their feet again and live to spend foolishly another day, but the number of brands pulling out of BaselWorld is a true sign, whether or not anyone wants to acknowledge it.  There is a very real culling happening right now.  Some people see it, others will probably only accept it when they are no longer in the positions that they currently enjoy.

What is interesting to me is that we have come somewhat full-circle from where we were in the 70s, then 2008, and we are really right back there again.  

But it's not all doom and gloom.  Because what I think is going to start happening is that the truly talented managers and leaders are now going to be sought after, boards and directors are going to realize that good things will take time, and that yacht sponsorships and celebrity partnerships will not pay the milk bill when wages are due.

December...

Is in the books, and December does nothing to really establish what the new "new" is in watch sales.

Courtesy of the FH

Now on the one hand, the numbers are still trending upwards, but leveling off a wee bit.  But what remains baffling is the continual slipping of the numbers in the second largest market, the US.

Hong Kong
233.6
+11.8%
14.0%
USA
162.0
-9.5%
9.7%


So what does this really mean?  Well, the grey market is a big part of the problem.  This is complicated because many of the brands directly supply them.  So it's a little bit like the father lamenting his son's overdose while he (the father) is selling heroin out of his home office ; )

The second problem is the retailer.  The honest ones have been burned too many times.  When you walk into one of the largest, most well-known retail locations in the area and they say things like:

"Thank God for the second-hand market", it makes it very clear that the perception of the majority of people out there potentially buying a watch feel that they are being screwed if they pay full price, so they will either go "gently used", or grey market.  

Then there are the retailers out there who have decided that they are better served by putting on black hats and becoming conduits for the grey market.  In fairness, you can't really blame them.  Because the single greatest irony in all of this is that Americans ARE buying watches, just not in the traditional ways.


So no offense, but you can't know about a market from thousands of miles away, and if your only answer is to send Swiss management to manage an area that they are unfamiliar with, turn over staff, and frustrate retail partners, and when that doesn't work, you then flood the grey market with your surplus product via parallel markets (trans shipping through Hong Kong and other ports)?  You shouldn't still wonder why a handful of brands continue to dominate the market space and you keep not getting any traction here. 

Exports Are Up! So Sales...

Are not necessarily.

Confused?  Fair enough, many have given up trying to make any sense of how the Swiss export numbers actually match up to real sales. 

Courtesy of the FH

On the one hand, the numbers continue to show improvement.  And that would seem to be good news.  But the fact that larger numbers of watches are departing the country does not correlate with greater sales.  So while some might think that happy days are here again, it might be useful to ask the question that continues to be pretty uncomfortable - just where are all of those watches really going?

Most of us can only really rely on anecdotal evidence as to the reality of the market place.  I visit a lot of retailers, and I talk to A LOT of brand managers.  And without putting too fine a point on it, I am not hearing the same level of optimism.  Now granted, this is by no means an exhaustive analysis.  But long story short?  The majority are still not seeing the kinds of sales that they did in the good old days.

Another measure of the industry's health can be taken by the brands participating actively in the grey and the light grey market.  Even the mighty Swatch group is seeing some of its shinier lower priced brands (Tissot and Hamilton) being dumped at more more than 40% off of retail on a few of the "group shop" sites.  Whether this product is coming directly from the brands or from disgruntled retailers remains to be seen.  And this is not one or two pieces, but fairly large amounts of inventory.  So on the one hand, it's definitely a buyer's market.  But on the other?  It underscores the reality that there are still too many watches sloshing around the market place.  Which means that space has to be made for the new flood of watches steaming their way towards the US (and other ports).  And that still has not done enough to create the same type of uptick in the export figures for the US, which is reporting -0.4% for November.

Curious again are the numbers for Japan +22.5%.  

So, let's wait and see.  If the particularly goofy pr initiatives of some of the brands are anything to go by, in addition to the increasing number of job departures in mid-level industry positions, I suspect that the actual sales are not matching up to the number of watches departing the Swiss borders.

 

Reading the Tea Leaves at the FH

In fairness, July's numbers were posted a little while back, but I wanted to take a little time and really think about what these numbers might really mean.

Courtesy of the FH

Now to be completely fair, the graph is definitely heading north.  And in principle, that is really good news because the export numbers have been so stinky for so long.

And while the uptick in the export numbers would be welcome in any situation, there are still a few factors that continue to be ignored, or at least not really discussed.

While the export numbers continue to climb, the actual sales numbers being reported by retail store operators continues to run contrary to this increase.  

Another point of curiosity is the drop off of a few recently strong market places.  The UK is dramatically down with an -8% decrease.  And Italy, that convenient dumping enclave just across the line from Lugano?  A fairly serious drop-off of -14.3%.

Also interesting to relate, Hong Kong and China are both up dramatically.  But with more and more companies replacing CEOs, brand managers and sales reps?  It all points back to the same inescapable reality - the actual sales numbers do not match up to the increase in exports.

About a year ago, a good friend of mine who knows about these things predicted that we would see something like this - in his words, something akin to "a tsunami of grey market product" sloshing around the parallel markets owing to the need to liquidate all of the existing stock that would not pass muster under the new "Swissness" codes.  This would explain the very sharp upticks in exports.

To some extent we could look at the numbers in any light and come up with reasons for positive or negative feelings.  But there are a few inescapable truths that keep looping back.  Brands continue to make cuts, advertising spending has clearly dropped and shows no signs of coming back this year, and more and more talented people are being let go, and not being replaced.  And if the whispers are to be believed, we may see some more brands join others in the deep sleep of a coma patient that has been removed from life support, but the brain has not fully received the message that the body is dead.

The good news?  If brands continue to toe the line and keep production down, once the current flood of grey market merchandise is flushed through the system, then the sales numbers might stabilize.  

We shall see, stay tuned!