Every year for the past seven years, the Deloitte study on the development of the Swiss watch industry has provided some very useful insights. The study is based on an online survey and interviews conducted with 55 senior executives in the watch industry, as well as an online survey of 5,800 consumers in China, France, Germany, Hong Kong, Italy, Japan, Singapore, Switzerland, the United Arab Emirates, the United Kingdom and the United States. One of its authors, Jules Boudrand, Director Financial Advisory and Watch Industry lead at Deloitte, kindly agreed to answer our questions.
Based on your expertise, how are entry-level and mid-range brands going to be able to recover from this crisis, which has hit them particularly hard? Are they the direct victims of the success of the smartwatch?
Quartz watches, and to a lesser extent entry-level/mid-range mechanical watches, were already suffering before this crisis. The pandemic has only accentuated certain trends, including the industry’s ever greater concentration on the high-end mechanical segment. In recent years, we’ve also seen growth in the sector concentrated heavily on a few major brands and large leading groups as well as a few small or large independent brands that stand out from the rest. The entry level has been particularly hard hit by the success of smartwatches and this trend is expected to continue.
Doesn’t the decline in entry-level watchmaking risk damaging the capacity for innovation of high-end brands in the medium to long term (no league A without league B, risk of highly innovative subcontractors going under due to lack of business)?
Indeed, this is a risk that the industry is increasingly worried about. Annual production of quartz watches by the Swiss watch industry has fallen by over 10 million units since 2011 and this decline was further accentuated in 2020. There’s also been a drop, albeit less significant, in the production of entry-level and mid-range mechanical watches. Over 60% of the executives surveyed for our study see this decline as a threat. After the quartz crisis in the early 1980s, the industry rebuilt itself by producing large quantities of entry-level to mid-range quartz watches. This provided a strong foundation for developing the mechanical watch segment and moving into the luxury industry. If the decline continues, it could weaken the industry, lead to job losses and a loss of know-how, and inevitably hold back innovation.
In this difficult environment, what should watch industry subcontractors expect in 2021?
Although a recovery is expected in 2021, its pace will largely depend on the duration and extent of the new lockdowns that have been in place since January as well as the progress of the global vaccination campaign. However, industry growth is likely to continue to rely on leading brands (whether independent or part of groups) and be driven mainly by high-end mechanical watches. Suppliers working for big brands or working on specific components in the high-end segment have generally fared better than those working for volume brands in the low to medium range price point in recent years. These suppliers entered the COVID-19 crisis with stronger balance sheets and, despite seeing a decrease in activity, were least affected by the pandemic and are likely to be most bolstered by a recovery in 2021. Already facing a challenging 2019, higher volume brands operating in the low to medium range segments were hardest hit. The suppliers working with these brands entered the pandemic with lower liquidity levels and had little buffer to navigate these difficult times. These suppliers could continue to suffer from the fallout from the pandemic in the months ahead.
Will salvation come from subcontractors’ capacity for innovation or that of the brands themselves?
The industry is in a phase of accelerated transformation, with increasingly demanding and informed consumers as well as a whole new generation whose consumption patterns are different. Consumers are looking for personalised, authentic and consistent experiences with brands in both the online and offline spaces. They are also seeking increasingly customisable products, and sustainability is becoming a significant factor. It will be important for brands to continue to adapt to these new trends and subcontractors will also play a key role in terms of both materials innovation and adapting to more frequent product upgrades and customisable products.
Is the pressure placed on suppliers by brands to deliver more sustainable and traceable products set to increase? In which areas in particular?
In the fashion and luxury sector in general, there is an accelerating shift towards sustainability, with designers and jewellers focusing on eco-friendly materials and upcycling. Consumers are increasingly looking at a brand’s green credentials to inform their purchasing decisions. This trend is set to increase, and with it the demands placed by brands on their suppliers. The specific areas concerned are the traceability of materials to guarantee responsible sourcing (precious metals, gemstones, etc.), looking into animal product alternatives, and bio-sourced, recycled or upcycled materials.
When you say in the conclusion of your study that consumers are shifting to quality over quantity, what are you referring to?
We’re referring to the behaviour of consumers in general, who are increasingly tending to favour quality products and local and/or artisanal manufacturing, and also placing a greater value on know-how. Quality, tradition and sustainability should therefore remain a key focus of watch brands’ communication and sales activities.
Does the growth of the pre-owned market only apply to high-end watchmaking? Is this second-hand market controlled by brands or by individual owners? What impact will it have on production in the medium term? Will it create a new market for brands, while subcontractors lose out?
The growth in the pre-owned market mainly stems from high-end mechanical watches and from brands that are also the top performers in new watch sales. That said, the low to medium range segments also have a presence here, and are likely to grow as well. Brands have long stayed away from the pre-owned watch market. Within the past three years, however, large groups and brands, as well as distributors, have started to enter this important and potentially lucrative segment in several ways: by launching their own certified pre-owned (‘CPO’) offering or by acquiring or forming partnerships with distributors specialising in pre-owned watches. The aim of the large groups and brands is twofold: to grab a share of this growing market to counter the cyclical effects of the industry, and to grow sales of new watches via trade-in programmes. This strategy, long used by the car industry, could help trigger additional sales of new watches if properly implemented and allow brands and subcontractors to keep growing.
Has the growth of the smartwatch market come at the expense of traditional watchmaking and mechanical watches? Do you think that a fine mechanical watch still holds an appeal for young people?
It is mainly quartz watches that have suffered from this competition. Smartwatches continue to be seen as a threat by the industry, but it depends on the price category. For companies that only manufacture or distribute high-end mechanical watches, smartwatches are less of a concern. In our survey of consumers in 11 countries, we asked which they would prefer to buy if they had CHF 5,000 to spend – a new luxury watch or the latest release of a smartwatch every year for 10 years. The majority of respondents opted for a luxury watch, and this was also true for millennials (born 1981 to 1996) and Generation Z (born after 1997). This is an encouraging sign that fine mechanical watches still retain their appeal among young people.
You seem convinced that the Swiss watch industry will adapt and recover: what makes you so optimistic and what conditions are needed for such a recovery?
The unique position of the Swiss watch industry, its capacity for innovation and the exceptional brand image and tradition of its main players have enabled it to remain resilient despite changing market conditions and crises. The transition to e-commerce and social selling channels and the adaptation to new consumption patterns and customer demands will continue to be key issues in the years ahead. The industry’s recovery is also contingent on external factors and will depend greatly on the duration and extent of the new lockdowns that have been in place since January as well as the progress of the global vaccination campaign allowing a revival of global consumption.
Ultimately, then, the 2020 crisis has merely accelerated an inevitable transformation of the Swiss watch industry?
Indeed, the 2020 crisis has had the effect of reinforcing/accelerating a number of underlying trends such as the concentration of industry growth on certain brands and on high-end mechanical watches, as well as the digital transition and a refocusing on customer needs.