Switzerland, traditionally synonymous with a spate of luxury brands, could be en route to a rocky patch, reports Fflur Roberts, head of luxury goods at Euromonitor.
Valued at CHF5.5 billion (US$6.2 billion) in 2014, luxury goods in Switzerland ranks 13th out of the 32 countries covered by Euromonitor International’s luxury goods research and accounts for just over 2% of the global market.
Whilst total luxury spend ranks 13th on a global scale, per capita expenditure on luxury goods was the second highest in the world behind Hong Kong.
Traditionally considered the birthplace of luxury timepieces, Switzerland is home to some of the world’s most coveted luxury watch brands such as Rolex, Patek Philippe, Vacheron Constantin, Hubolt, Blancpain, Breguet, Audemars Piguet and Jager le Coultre to name but a few.
Total luxury goods sales increased by almost 13% in real value terms over the 2009-2014 review period, with growth being fuelled by rising demand for luxury accessories, as well as luxury jewellery and timepieces.
In addition, Swiss luxury goods sales were boosted by a steep increase in demand amongst wealthy Chinese tourists who were keen to take advantage of favourable exchange rate; however fluctuating currencies have since put a dampener on these shopping trends with the road ahead looking a bit rocky for the Swiss market.
“ The road ahead looking a bit rocky for the Swiss market ”
The central bank cut the link between the Swiss Franc and the Euro in January 2015. This move resulted in a substantial appreciation of the Franc and will likely add deflationary pressures. Interest rates have been cut to negative levels as this is helpful in reducing the effects of Franc appreciation.
Switzerland’s economy is also expected to slow in 2015. In 2015, real GDP is expected to rise by 1.0% – down from 2.0% in 2014. Exchange rate appreciation has left the Swiss franc significantly overvalued and undermines the growth of exports, and a slowdown in investment is another complication thrown into the mix.
Unemployment was 4.5% in 2014 and it will drop to 4.2% in 2015, and while such figures are low by international standards, they are relatively high for Switzerland.
The jobless rate could also rise in the medium term as companies in the export sectors, such as luxury watches, are forced to make redundancies owing to appreciation of the Franc. Additionally, in May 2014, voters rejected a national minimum wage of CHF22.
With some of the world’s highest incomes, Switzerland has for many years been a solid market for luxury and high-end goods, and generally the capacity for discretionary spending clearly outperforms its Western European peers.
The population is rising, driven by migrant inflows, while the expansion of the elderly cohort opens up an array of opportunities for marketers targeting a senior consumer profile. However, income equality is being eroded, and household income growth will compare unfavourably with regional figures through to 2030.
In 2014, Swiss per capita annual gross income stood at CHF72,788 (US$79,533), the highest sum both in Western Europe and the world that year. Over the 2009-2014 period, the indicator rose by 4.6% in real terms (which converted to an average real uptick of 0.9% per year).
Although per capita annual gross income rose in real terms in every year between 2009 and 2014, real annual growth did not exceed 1.5%, as overspill from the sovereign debt crisis in the Eurozone – the European Union (EU) is Switzerland’s main trading partner – reached the Swiss economy and the local currency (traditionally considered a safe haven) appreciated, to the detriment of exports.
“ Population ageing will see the elderly cohort tighten its grip on the country’s top earnings. ”
Going forward, improvements in exports and tourism should underpin economic advances, as stability returns, although labour market challenges are expected to cool growth. Over the 2015-2030 period, per capita annual gross income in Switzerland is on course to rise by an average of 1.0% per year in real terms to stand at CHF84,885 (US$92,751) in 2030.
Through to 2030, the 65+ cohort will up its already significant weight in the uppermost earnings bracket:
In 2014, Swiss individuals aged 65 and above made up the greatest share of the population in receipt of an annual gross income of US$150,000+, at 21.2%, over 7.5 percentage points ahead of the next cohort. As well as representing a sizable chunk of society (in 2014, the 65+ age band accounted for 17.9% of the total population), these members of the Swiss baby boom demographic have been able to rise steadily in their careers and amass assets on the back of decades of post-war prosperity.
Population ageing will see this elderly cohort tighten its grip on the country’s top earnings. In 2030, 26.3% of individuals on an annual gross income of US$150,000+ will belong to the 65+ demographic (which will by then account for 23.7% of the total populace), with all other cohorts on 10.0% or below. This underlines the expanding commercial attraction of marketing high-end and luxury purchases to Swiss seniors.
“ Growth rates in several key markets slowed considerably in 2014 ”
With four out of the top five global watch players being based in Switzerland, the decision by the Swiss National Bank removed a three-year cap on its national currency is also likely to have a negative impact on the industry’s growth in the short to medium term.
Luxury watches accounted for 45% of global watch sales in 2014, and was the linchpin of growth in the five years to 2015. However, growth rates in several key markets such as Mainland China, Japan, Hong Kong and Russia slowed considerably in 2014.
While austerity measures continue to hamper luxury watch sales in China, increased sales tax and the depreciating yen has led to slowing sales in Japan. In addition, sales growth in Hong Kong was affected by public protests while in Russia, sales have dropped due to political developments and currency fluctuations. None of the aforementioned markets are expected to return to double-digit growth rates in 2015 or 2016, signalling a slow recovery for global sales.
Rolex Headquarters, Geneva Switzerland
The immediate impact of the rising franc was seen in the share prices for Swatch Group and Richemont, both of which fell by double-digit percentage rates.
Consumers in Singapore invested heavily in Rolex watches during January, as they expect an imminent rise in prices.
Although the appreciation of a settled Swiss Franc is likely to be less than the 20% quoted above, Swiss manufacturers will have to raise unit prices by 5-10%, even if they do not pass on all of the rising cost of production and exports to the consumer.
Owing to rising product prices, demand from distributors across the world is expected to decline. Although they might raise prices selectively in various markets, growth rates for leading brands such as Rolex, Omega and Cartier will, in turn, decline somewhat in 2015.
However in the long term, there is less uncertainty about the top end of the Swiss luxury watch category, because the world’s super-rich consumers are virtually immune to such currency headwinds.
The biggest squeeze will be in demand for mid-market brands, which is fuelled primarily by the middle class. Swiss Watch brands such as Longines and Tissot could struggle, for example.
This is also where some of the more affordable luxury watch brands could pick up some of the slack. As a direct consequence of the Swiss Franc’s tailspin, the price of watch brands could go up considerably this year, unless manufacturers are prepared to slash margins.
Of course, political and economic instability and fluctuation economies across other markets in the works will likely translate the aspirational middle class travelling abroad less over the year ahead, which could wield further downside implications for big-name global watch brands.
“ Japanese and American manufacturers are positioned well to challenge Swiss manufacturers ”
Japanese and American manufacturers are positioned well to challenge the dominance of Swiss manufacturers.
Appreciation of the Swiss Franc in 2015 is likely to further limit growth for high watch brands from Switzerland and thus presents a promising scenario for high watch collections from brands such as Citizen, Seiko and Movado Group.
Similarly the Apple Watch has been the most anticipated consumer product of the year, and demand is already outstripping supply. One of the big unknowns, however, is how much it will actually shake up the Swiss luxury timepieces market. Apple wants its smartwatch to replace not only wearable electronics, but traditional watches too, so the stakes are high.
However, one of the key competitive advantages of traditional Swiss luxury timepieces is the legacy factor. Fathers are unlikely to bequeath an Apple Watch to a son in the way they do a Rolex watch, for example. Also, the more visible the Apple Watch becomes, the less prestigious it could become too, especially in status-conscious developing markets (including China and much of Asia Pacific and Latin America).
Similarly, the heritage and art of Swiss watchmaking associated with leading global brands is likely to ensure a slow recovery for Swiss manufacturers and the Swiss luxury goods market overall. Leading players Swatch Group, Richemont and Rolex have a substantial lead in high-end watches, ensuring their global positions for the near future.
“ It could be a mistake for Swiss luxury timepieces to put too much stock in their heritage ”
Ultimately, though, it could be a mistake for Swiss luxury timepieces to put too much stock in their heritage and legacy values. That type of consumption culture could dissolve in time. What the Apple Watch is bringing to the market is unprecedented competition in the recruitment of new luxury goods consumers. Rather than allow Apple and other technology firms to seize the smartwatch momentum, Swiss luxury watchmakers need to stake their claim too.
TAG Heuer is attempting just that with the recent announcement that they plan to release their own smartwatch in time for Christmas 2015. Details on design and functionality are sketchy, but prices are expected to start at around US$1,400, making it slightly more expensive than Apple’s stainless steel range.
The company’s CEO, Jean-Claude Biver, believes that the Apple Watch is a good thing for the luxury watchmaking industry, as it has the potential to encourage younger consumers to start wearing watches. Other Swiss luxury watch brands will no doubt follow suit in the short to medium term.
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