Short-Time Work in Watch Town

As things start to get "realer" in Watch Town, the collective belts are needing to be tightened. On the upside? Unlike years past where brands made hundreds of watchmakers redundant but still kept their pet PR projects like yacht sponsorships and million CHF media excursions untouched, this time around the majority of suppliers and brands are taking advantage of short-time work. Essentially, the state in the guise of the Office for Economy and Employment will cover up to 80% of the cost (i.e. lost earnings), with the employer responsible for the remaining 20%. 

The usual suspects are being blamed - poorly performing markets in China and Hong Kong. But as someone with their ear to the ground here in the lower 48, allow me to inform the guys and gals in Watch Town that, in fact, it is a slowdown being felt pretty much everywhere. Here in the US there is anxious anticipation as to what the election in November will bring. Despite high inflation, overall the economy is strong with very low levels of unemployment. That is a reality. But just as people who lived through the Great Depression remain frugal even in good times, many would-be watch buyers remain cautious having made it through the worst of the pandemic, Hodinkee had to learn that lesson the hard way. 

I am guessing that purchase of Universal Genève is probably not looking so great right now. The argument could be made that it wasn't Breitling so much as their deep-pocketed investors, but keep in mind it is those same deep-pocketed investors Breitling will need to man the pumps should they start to take on water.

The downturn, more honestly, is down to a growing fear of the unknown... that is what is shaping the not-so-sexy sales figures here in the US, and I suspect elsewhere. What remains to be seen is how long Watch Town will be stuck in this funk. Because the other side of this reality is that although the goose may not be getting fat, Christmas is still coming. This means between now and Halloween, brand managers and sales reps will be wearing out shoe leather to try and get those holiday season orders in. And here's the rub - if all of the components, etc., are delayed because of short-time work...

Well, let's just say it might be a blue, blue Christmas. But you never know, there might be a Festivus Miracle in store for Watch Town. 

Watches and Wondering - Waiting for Godot

With the dearth of new releases out there, and the notable silence from the fair's organizers, it is seeming less and less likely that 2022 (at least March/April) will see the return of large scale, in-person watch fairs in Geneva.

Credit: https://www.imdb.com/title/tt0276613/

On the one hand, it appears that the latest COVID surge has peaked in several countries. But reaching the peak does not put us back to a safe infection level... at least not yet. Geneva is one of the strictest cantons in Switzerland in terms of health and safety policy, and for all of the foreign buyers and press that hope to come to attend a show there are quite a few hoops that they will have to jump through - I say this having travelled in September and November. And that's just to get into Switzerland. I will also make clear that I agree with Switzerland's stance. Which I guess means that Novak Djocovic won't be making any personal appearances at the Hublot booth in the near future.

China and Hong Kong represent the largest block of customers for Richemont and most likely LVMH and Kering. For those folks, getting to Switzerland is one thing. Coming back home? Well, that's quite the other. Lengthy quarantine requirements have marked a significant drop in travel both from and to this region. So with all of that being said, I don't expect that a lot of these folks will be opting to attend. And let's not even get started with the US, where (for better or worse) public health and safety has become more of a political issue than, well, a health and safety issue. Unless the Swiss government opts to drop the vaccination requirements for entry at the Zurich, Basel, and Geneva airports, a large swath of folks from North America will be staying home. 

That leaves the Middle East, Africa, South America and parts of Europe. This is not to say that these are not important markets or customers, but it is to say that they do not, unfortunately, represent the same percentage of turnover for the brands.

And lastly, there are the organizers of the show itself. Watches and Wonders, along with its predecessor the SIHH, went to great lengths to create an atmosphere of not only exclusivity, but exclusion in the past. And while it might be "the only game in town", I give Watches and Wonders about as much consideration as I do NOMOS
Glashütte, which is to say I don't consider it at all.

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.

When the Other Penny Drops

Before we even start talking about watches, it is safe to say that the coronavirus is very serious, is not really "knowable" in terms of impact, and is nothing to make light of in any way, shape or form.  The shit is getting a bit scary.  And despite what some of my right leaning colleagues in the Fourth and Fifth Estate might muse, that it is "not even as bad as the flu..."  I think it is fair to say that this is a major health and welfare reality that no amount of swagger, jingoism or America First/Deep State Conspiracy Theory will explain away.  The coronavirus does not give two shits about who you voted for, or whether or not you believe in the reporting of the media, the reality of global warming, the earth being round, or buy into that other left-wing fairy tale, gravity.


With the SWATCH group's announcement yesterday to pull the plug on their (now not) annual Time To Move event some interesting questions have been raised beyond the obvious health concerns.


It is important to keep a few things in mind, not least of which is that most flights between the Chinese mainland and, well, anywhere else, let alone Switzerland have been suspended -
https://lenews.ch/2020/01/29/swiss-cancels-all-flights-to-china/

And per SWISS -

https://www.swiss.com/us/EN/various/breaking-news

This also includes:  KLM, United, American, Delta, Air Canada, ANA, Korean, Cathay Pacific... and the list goes on and on.  My point being, if you are in mainland China, it is highly unlikely that you will be able to get a direct flight.  Most of the international airlines will not "re-open" those routes until late this month/early March at the earliest.  And what does that mean?  Chinese customers and journalists will not be able to attend any shows.  And cynical though this may sound, I suspect that this is what is really at the heart of the cancellation of the event.  To the best of my knowledge, international conferences and trade fairs are (at least as of this writing) still planning to move forward, except in China and Hong Kong, of course. 

And what this really underscores is the now undeniable reality of just how dependent the Swiss watch industry is upon China.  Because at this moment the concern is about people's ability to travel from China to attend a trade fair.  But that is really just the tip of the iceberg.  What comes next is multi-faceted.

Actual watch manufacturing - despite what the FH and the regulations regarding Swiss Made might have you believe, you would have very few watches made anywhere without China and it's suppliers, assemblers, manufacturers and prototypers.  

So what?  Why does this matter?  These people don't have to travel to Switzerland!  Well, yes and no.  They do have to travel to the factory where they work, which for many now is...

CLOSED

The word around the campfires in Switzerland, Germany and Japan is that in China, more than a few (now) former loyalists were asked to enjoy their New Year holidays and, well, not come back.  In other instances, people are being forced to stay home to ensure that the virus cannot spread through a given factory.  And then the dominoes begin to fall.  Because even mighty SWATCH, Richemont and LVMH depend upon some (in some cases, many) things that are sourced from China.  That's just a simple reality.

Now, it goes without saying that we all hope that the virus will be successfully quarantined and if not eradicated, controlled from further spread.  But for right now, it might be a good time to put your politics aside, because it's about to bite everyone's ass on a global level, no matter what industry you're in. 

So spare a thought for the health of the people out there suffering.  And if you can't do it out of, I don't know, simple human decency?  You can always take the pragmatic view of the health of your bank account, that way you won't feel like a "snowflake".

We live in interesting times.

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!

The "New" Swissness and Overproduction

So what happens when you take an aggressive new stance on what "Made in Switzerland" means, mix in 2 cups of overproduction, and bake it for approximately 15 months in a major watch sales slump?

Well, suffice it to say, it is not going to be pretty.

Here are the "armchair" basics as I understand them.  As always, if I have gotten a fact wrong I welcome feedback and will correct it immediately -

1.  Introduction of the Swissness legislation will take effect finally on 1 January, 2017.

Meaning that a lot of the "semi-Swiss" watches out there still unsold that were produced before January 1, 2017 will need to be sold before the end of 2018.  Seems like a long time, doesn't it?  Well let's take a few other considerations into account.  It is closing in on the end of 2015 and several brands are still trying to blow out preexisting stock from the overproduction from previous years, which will be replaced by the need to sell the over production of this year and next year and on and on.  Think I'm kidding?  Check your favorite Internet/grey market source.  And that is just what you can see.  Like cockroaches, most grey marketers spend their time scurrying around in the dark.  In fairness, they are the creation of overly rapacious watch company CEOs.  

2.  If you can sell 4000 watches, then by all means you should double that production to 8000 because you can always dump those watches in Hong Kong and mainland China... not any longer.  Many retail giants in Asia are reporting deep stocks of unsold watches.  And they are PISSED.

3.  We are in the depths of one of the worst watch sales periods on record, and we still do not know where the "bottom" is.  But it is likely that we have not reached it yet.  Smart watches?  Cell phones?  Slowdown in China?  Those are all excuses.  What the brands are now learning in a very painful way is despite what IWC's Mr. Kern so boldly claimed - that essentially an IWC watch represented a somewhat inelastic demand - meaning no matter how high you jack up the price, the demand will still be there, they in fact do not.  

Wanna' revisit those talking points Mr. Kern?  While I agree with him that watches are emotional purchases, sooner or later rational thinking will collide with and surmount emotion.  And rational thinking is now governing watch buying decisions.

What I suspect we will see in the coming months?

Even greater numbers of watches flooding the discount/grey market at even more deeply discounted prices.  More and more retail stores struggling and ultimately giving up.  The brands that can't survive will either go broke or go "dormant" - which by the way is the suspicion that many people are starting to have about Zenith - it is their anniversary and it is being celebrated with all of the excitement of Arbor Day.  In other words, it is not being celebrated AT ALL.  

A person with a great deal of knowledge has described this gathering catastrophe as a tsunami.  I think that is probably a pretty apt analogy.  As we know, those who see the signs and make the adjustments will make it to a safe harbor.  Those who insist on going the same way as always will find themselves broken on the shore.  

Let's hope I'm wrong.

The Gathering Storm

With the watch world's eyes squarely resting on China we wait, and we watch - and if the big dogs in Switzerland have the good sense that God gave them, they will start living in the reality of the world today.

I read a very good article on Watches by SJX - the link is here if you'd like to take a moment:
http://www.watchesbysjx.com/2015/05/watch-retailers-in-hong-kong-band.html


The basics are this - watch retailers in Hong Kong are sitting on a LOT of inventory owing to decreasing demand.  In addition, several of Hong Kong's watch retail leaders have joined together to request rebates owing to poor sales so far this quarter - reported to be some 40% down in the first quarter.

It is important to understand that this is not down to smart watches.  Moreover, it is not solely due to clamp-downs on anti-corruption in China, nor is it solely due to the currency fluctuation that the Swiss Franc created earlier this year.  These are all factors, but the problem is perhaps a little more basic and a little more "predictable" than that because it is one that has existed for quite some time.

So allow me to reintroduce my 2 favorite characters in the watch business -
Cause and Effect.  Or as I sometimes say: "Why the watch you paid full-price for back in November is now available for 35% off through the grey-market "new in box with papers".

The watch business is not entirely unlike many others - you make a product, you market it, you (hopefully) sell it, and then you (hopefully) offer service.  The core, basic, KNOWABLE reason why watches are being treated like "expired baked goods" is, if we are honest, the fault of the brand.
Why would a brand knowingly sabotage itself?  Well, as with pretty much every other endeavor, we all start out with good intentions.

Step 1.  Budgets are vetted by the board via the CEO and approved.  It is important to understand that these budgets are based on PROJECTIONS, not ACTUALS (because, of course, we have no way of knowing what the actuals will be until December 31st).  These budgets dictate production, sales, etc.  Production numbers are therefore tailored to accommodate the projections.

Step 2.  Watches then run through assembly, and new watches are "prototyped" for SIHH and BaselWorld.  And orders (hopefully) are taken.

Step 3.  Watches start to be delivered - for a well-established retailer this is not unlike using a very flexible credit card - the agreement says that the retailer will pay 1/3 within 30 days, another 1/3 after 60 days, and complete the transaction within 90 days.  This, in turn, motivates the retail partner to sell at least 55 - 60% of their stock within that time frame.

If the watch brand manager is new, desperate (or both)  the retail store may receive that magical thing known as "memo" - meaning the store does not pay anything for the watches until they have sold them.  And it then becomes even more expensive for the brand to work with the retail partner because the ONLY way that the brand can know whether or not the store has sold any watches is to spend the money for a ticket, rental car and hotel and come and "count" the watches in the store's safe.  It might be that the store sold the watches 3 months ago, but because the safe count comes 3 months after the fact it is only then that an invoice will be generated at HQ.  The retailer will receive it in about 14 days, which their accounts receivable office will typically "age" for 30 days before paying, by check which will then take (likely) another 14 days for the brand to receive and deposit in their bank.  This then means that the brand has waited nearly half a year to get paid.

Now multiply that 1 example by, I don't know...25!  As you can imagine that creates more than a bit of a cash-flow crunch for a brand's US distributor or office.

Step 4.  Several retail stores are slow to pay, and several of the "new" accounts from SIHH and BaselWorld are not selling through, and the brand manager can just forget about them re-ordering.  The brand starts to realize as September looms, that it is becoming abundantly clear to the folks back in "the factory" that they are nowhere near their numbers.  Action has to be taken, and the senior sales managers are then dispatched to places like, I don't know, Hong Kong where great volumes of watches are dumped.  The brand takes a small hit, but not nearly the hit they would take if the watches were still sitting at HQ.  And in most cases, the "grey market purge" has already been accounted for as a line item on the spreadsheet.

Step 5.  That watch you spent $5,000 (full price, mind you) is now available via the grey market for 35 - 50% off.

Step 6.  This was still not enough to stem the tide and brand managers and sales directors are let go.  You can truly set your calendar to this - September - February is traditional.  New brand managers and sales directors are brought it - and the dance begins again.  And inevitably the cycle repeats itself.

So getting back to China -Steps 1 - 6 have always existed, but with China buying up boatloads of discounted watches there was always a place to "sweep" your excess inventory "under the rug".  That option is now becoming less and less possible and the brands are going to have to do some serious "soul searching" to see if they can find a more practical way to go forward.

It is ironic that the lessons of the 30s, the 70s and even 2008 are slow to sink in with many brands.  First class travel, ridiculously expensive press junkets and downright waste seem to go hand in hand with brand management.  Over production, panic and an unwillingness to wait it out rather than blow out a collection, create a brand new one for next year and go through exactly the same pain 12 months later.  Only now the realities are a little bit starker.

The storm is coming, let's hope at least some of the brands have enough sense to close the windows and bring the dog in.

Franck Muller in Hong Kong

This just in from Franck Muller -

Courtesy of Franck Muller

Franck Muller unveiled its first four-storey Maison in Hong Kong today. Located at the prime retail location on Sharp Street East, Causeway Bay, the new location boasts 9,500- square-feet. 

NOMOS Tangente Hong Kong

This was a limited edition put out in 2007 -

And the back detail shows further tips of the NOMOS hat to Hong Kong.

Enjoy your watches!

The Chinese Timekeeper in Santa Barbara!

Any watch fans in the LA/Santa Barbara area?

Courtesy of the Chinese Timekeeper

The Chinese Timekeeper will be having an event at 33 Jewels in Santa Barbara on Saturday March 9th and Sunday March 10th. Come check out the collection!

http://33jewels.com/