Switzerland, traditionally known as the home of luxury watches and jewellery, has experienced some hurdles of late. Here, as Baselworld 2016 kicks off, Euromonitor investigates the state of the market now – and its future.
“Made in Switzerland” is, for many, the ultimate guarantee of quality and craftsmanship in the luxury goods world when it comes to watches and is home to the most renowned luxury timepiece brands in the world.
Yet, these are sticky times for the Swiss luxury goods industry which was one of the worse performing markets in 2015. The Swiss franc has been surging on foreign exchange markets since the start of the year, when the Swiss National Bank unexpectedly allowed it to float.
“ The Swiss luxury goods industry was one of the worse performing markets in 2015 ”
With some of the world’s highest incomes, Switzerland is a solid market for luxury and high-end goods, and it generally outperformed its Western European peers in the last 5 years. Valued at CHF 5.2 billion (US$5.4 billion) in 2015, its luxury goods market ranked 13th out of the 32 countries covered by Euromonitor International’s luxury goods research accounting for just under 2% of the global market. 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 wealthy senior consumer profile.
However, owing to the fact that its luxury goods market is driven mainly by its luxury watch market the appreciation of the Swiss currency is weighing heavily on performance for two main reasons. Firstly, almost all the costs related to making Swiss watches are in Swiss francs – so there is limited room for downward pressure on prices.
Secondly, a big chunk of the industry’s consumer base is in markets where the local currency is going in the opposite direction (i.e. depreciating), for example in China, Japan, Brazil and Russia. The result is that Swiss watches are becoming increasingly unaffordable for vast swathes of the global population.
Where does all this leave the global watches industry, going forward?
“ Switzerland’s short-term economic growth outlook has been negatively impacted by sluggish global demand ”
Switzerland features high levels of economic and political stability, a favourable business environment and a strong exports sector, which have helped the country become one of the world’s most competitive economies. Nevertheless, Switzerland’s short-term economic growth outlook has been negatively impacted by sluggish global demand and the strength of the Swiss franc, although a sound fiscal policy and extensive foreign exchange reserves would help the country withstand external shocks.
The size of the Swiss economy reached CHF648 billion (US$708 billion) in 2014, after growing by 2.0% on an annual basis in real terms. Over the period of 2009-2014, Switzerland’s real GDP expanded on average by 1.9% per year, lower than the 3.3% annual average rate observed over the period of 2003-2008. This was the consequence of Switzerland’s weaker external sector, caused by the impact of the 2008-2009 global financial crisis; the eurozone debt crisis; and the strength of the Swiss franc during this period.
In the short run, annual growth of the Swiss economy (in real terms) is expected to remain weak at 0.9% in 2015 and 1.4% in 2016, owing to sluggish global demand and the strength of the Swiss franc. On the other hand, the expansion of the European Central Bank (ECB)’s asset purchasing programme (set to run during the period of March 2015 – September 2016) could provide some support to Switzerland’s economic growth, by spurring demand from countries within the eurozone (and wider European Union (EU)).
In 2015, Swiss per capita annual gross income stood at CHF72,876 (US$79,533), the highest sum both in Western Europe and the world that year. In the 5 years to 2015 the indicator rose by just under 6% in real terms (which converted to an average real uptick of 1% per year).
Although per capita annual gross income rose in real terms in every year between 2010 and 2015, 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.
Going forward, improvements in exports and tourism should underpin economic advances, as stability returns, although labour market challenges are expected to cool growth.
“ The Swiss middle class expanded incrementally in absolute terms in the last five years ”
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 2015, 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.
“ An absolute expansion, despite a proportional decline in the middle class, will continue for the short to medium term ”
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 luxury purchases to Swiss seniors.
The Swiss middle class, namely households earning between 75.0% and 125% of median income – exceeded 1.2 million households in 2015, or 33.5% of the total number of households that year. This group, which is paramount to the affordable luxury goods area, expanded incrementally in absolute terms in the last five years. However, the increase is attributable to an overall gain in the total number of Swiss households: in proportional terms the middle class posted steady decline from just under 35% of the overall number of households just 10 years ago, squeezed by a widening income gap.
These trends – an absolute expansion, despite a proportional decline in the middle class – will continue for the short to medium term as the overall number of homes and socioeconomic disparities both maintain their advance which may add additional pressure to the performance of luxury good sales in the more affordable price platforms. In 2030, 1.4 million households, or 33.1% of the country’s total that year, will belong to the Swiss middle class.
In 2015 Switzerland has the world’s second highest household disposable income. However, moving forward over the 2015-2030 period, annual disposable income per household is forecast to advance by 10.8% in real terms (or an average annual real uptick of 0.7%), the slowest projected growth rate in Western Europe outside Italy, as the Swiss economy – slowed by productivity and labour market challenges – is outpaced by developed peer nations.
Whilst Switzerland continues to offer a wealth of culture, leisure, entertainment and picturesque views, it has become an expensive destination, especially for tourists coming from the eurozone. Hotels, transportation, food and activities are amongst the most expensive in the world, even further exacerbated by the unfavourable exchange rate, and the country is often considered to be Europe’s most expensive winter destination.
Nonetheless, travel to Switzerland remains very popular, especially amongst wealthy consumers, and tourists significantly shape the demand for luxury goods in Switzerland.
“ The strong Swiss franc and the weak euro encouraged tourists, who are vital to the luxury goods market ”
The three leading source countries for inbound arrivals in Switzerland during 2014 were Germany, China and the US. Whilst Germany shares a border with Switzerland and has a common culture, China was the second source market in 2014, with 753,000 trips. Visitors from China tend to remain in Europe only for a short period of time, and select a handful of destinations.
Their main interest is shopping, thus providing a boost to sales of Swiss luxury goods during the review period. The Schweizer Tourismus-Verband (STV), for example, found that in 2012 the average per capita spending by Chinese tourists on goods in Europe was higher than the spending by US, German or other EU tourists.
That said, the strong Swiss franc and the weak euro encouraged tourists, who are vital to the luxury goods market, to shop in neighbouring European countries. Furthermore, the slowdown of the Chinese economy in 2015, as well as the Russian economy, had an impact on foreign spending on luxury goods in Switzerland.
“ Luxury watches posted 2% real growth versus 0.9% real growth for the luxury goods industry overall ”
Consequently, whereas rising foreign retail expenditure helped to propel sales of luxury goods in recent years, the percentage of foreign retail expenditure remained flat in 2015, accounting for 29% of overall sales of luxury goods.
In this context, luxury timepieces was an exception, not least because this category continued to see a positive performance in 2015 posting a 2% real growth for luxury watches versus 0.9% real growth for the luxury goods industry overall.
Since luxury timepieces in particular are the most typical products that tourists tend to buy in Switzerland, both domestic and foreign cash-rich consumers continued to spend on these products, with this category seeing less of a shift in sales towards other markets (at least for the time being).
Almost 90% of the Swiss population are online with 6.7 million Internet users in 2014. This represents a 13.1% expansion over 2009. The Internet user base is expected to increase to 8.2 million by 2030, a growth of 19.8% over 2015. The percentage of the total population using the Internet stood at 87.6% in 2014, up from 81.3% in 2009. The country has one of the most advanced Internet landscapes in the world. The penetration rate is expected to increase to 96.7% by 2030.
Luxury goods internet retailing continued to record positive growth in Switzerland in 2015. Growth in online sales was primarily stimulated by the growing penetration of PCs and internet connections as well as the strong development of internet retailing platforms by retailers as they seek to facilitate online purchases and payments.
The strong expansion of pure internet retailing players such as Zalando in Switzerland also stimulated strong growth in online sales as shoppers became more familiar with using the internet for buying products. As a result, massive investment in marketing and advertising were allocated to the development of these operators’ online capabilities. In addition, many retailers introduced or intensified their multichannel strategies, and were able to increase sales through online orders and click-and-collect services.
“ The strong expansion of pure internet retailing players in Switzerland has also stimulated strong growth ”
The technology giant Apple is able to get away with a mission statement “Designed in California” (but made elsewhere).
However, “Designed in Switzerland” would not pass muster for Swiss watches. Consumers need to know they are made in Switzerland. It is key to their cachet and success. It means we are unlikely to see brands such as Rolex, Omega or Tag Heuer ever move their manufacturing to Asia Pacific or Africa in a bit to reduce costs, at least not any time soon.
It is problematic that Switzerland is one of the most expensive places on the planet to make things, though. The luxury end of the Swiss timepieces market has been battling global headwinds for some time, thanks to the ostentation clampdown in China and the social upheaval in Hong Kong. But the removal of the cap on the Swiss franc is something the industry did not see coming. It has turned a difficult operating environment into a crisis one.
“ Exports to China – formerly a crucial growth market – dropped 42% in July ”
Given all the headwinds, it is small wonder that in the first seven months of 2015 exports of Swiss watches were down 1.2% in value terms against the same period last year, according to the Federation of the Swiss Watch Industry. The biggest monthly drop, at 9% year-on-year, occurred in July.
Tellingly, exports to China – formerly a crucial growth market – dropped 42% in that month (versus the same month in 2014). This drop is all the more disappointing when considering that, in July 2014, exports to China had recorded an uptick of 49% (versus July 2013). Other formerly key export markets are in free fall too, notably Hong Kong and the United Arab Emirates.
A low value CAGR at constant 2015 prices is expected for luxury goods in Switzerland in the forecast period. The negative effects on consumer demand caused by the strong Swiss franc are expected to continue well into the forecast period.
“ Cash-rich tourists are expected to reduce their spending, due to the strong Swiss franc against the weak Euro ”
Even cash-rich tourists are expected to reduce their spending in Switzerland, due to the strong Swiss franc against the weak Euro. Unit prices are therefore expected to decline in the first part of the forecast period, as retailers will engage in further discounting to remain competitive, but prices are expected to increase towards the latter part of the forecast period.
It is not all doom and gloom, though. Through its Swiss watch industry the market is managing to carve out pockets of growth but there is little doubt that the overall global operating environment has more headwinds than tailwinds for the short to medium term and has probably never been tougher to navigate.
One small blessing from the Swiss watchmakers’ perspective is that the rise of wearable electronics, the Apple Watch especially, has not appeared to dampen enthusiasm for traditional watches. Yes, to an extent, the Apple watch phenomenon has made it more difficult to recruit new, younger consumers.
But, it is also opening up an entirely new market – and one that the Swiss watchmakers might be able to exploit more effectively in the long term. Perhaps a mission statement in the future along the lines “Made in Switzerland, Designed in California”, is not as outlandish as it might seem.
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