Swatch Group reported sales of 4.1 billion Swiss francs (CHF) for the first half of 2019, down 3.7% compared to the year previous. Meanwhile, net income of CHF 415 million was down 11.3% compared to the previous year, while net margin also shrank slightly.
As I covered in the Swiss watch exports report last week, the Hong Kong market saw significant declines due to political turmoil, which Swatch Group was not immune from, though it did report growth in all price segments its other major markets (U.S., mainland China, Japan). I highlight the “all price segments” language because the Swiss watch industry as a whole has experience a continued decline in sales in the low- and mid-price segments. It’s interesting that Swatch is reporting growth in all of these price segments in these major markets, showing that there is not just demand for high-end luxury timepieces, at least in the major markets.
The Grey Market
Additionally, Swatch Group reported that it’s been engaged in “uncompromising action against grey market dealers, especially in Europe, the Middle East, Eastern Europe and South America, at the expense of a short-term negative impact on sales in the first half year in the triple-digit millions. In the long term, this will lead to positive effects, especially in the major markets.”
Swatch Group is choosing to clamp down on supply, even closing accounts to combat dealers dumping unsold inventory onto the grey market. When Richemont dealt with the same issue recently, it instead decided to buy back inventory (and then destroying that inventory), spending some half a billion euros in the process. Listen, artificially restricting the supply of goods is part of the luxury business that has gotten a ton of press over the last few years (Louis Vuitton burning its bags, etc.) and Swatch Group is figuring out how to address the “problem.” With the rise of secondary markets and resellers, people are more interested than ever in buying things pre-owned and at prices that are significantly discounted from MSRP, and the internet enables consumers to shop around the world for the best price. Depending on who you ask, it’s a moral, environmental, or simply an economical issue. No matter who you ask though, it’s a problem that’s not going anywhere, and brands will have to be honest with themselves about their brand’s value (i.e. how much should that Tissot really cost at retail?) if they want to capture consumers buying new products. Sure, you can sue The RealReal, alleging its selling fake Chanel bags, but that’s not a business model, that’s reactionary. Brands will have to think of interesting, innovative ways to get people to buy new products (e.g. “drop culture”, something streetwear brands have mastered), or find ways to partner with these ecommerce companies and marketplaces for the benefit of all.
Second Half Outlook
Even with the slow first half (which was in part due to comparison against a strong first half of 2018, Swatch said), Swatch continues to anticipated strong growth for the second half of 2019. It attributes the optimism to solid demand in the most important markets (mainland China, U.S., Japan) and a comparison against a weak second half of 2018. The Group is additionally looking to continued ecommerce growth, especially in the middle- and entry-level segments, to drive revenue. In total, Swatch Group still expects positive overall growth in 2019 compared to 2018.
Additionally, if Swatch Group’s approach to the grey market is more about playing the long game — clamping down on supply as opposed to a one-time buyback — the benefits may be more difficult to point to and spread out over a longer time horizon.
Swatch Group’s stock price jumped slightly higher after its earnings report.
