Swatch Profits Hit by Slowdown in Greater China
The Swatch Group is the biggest vertically integrated Swiss watch manufacturer with 18 brands covering all price ranges, from entry to ultraluxury. Swatch-owned brands account for around 35% of Swiss watch exports, and the company supplies competitors with watch movements. Swatch Group’s luxury brands boast 100- 200-year histories, iconic collections, and deep cultural heritage. Most of Swatch's brands (at price points below $10,000) benefit from a cost advantage through scale and a higher degree of production automation. Swatch’s diversification in terms of brands and price points helps it to avoid the pitfalls that come with extending brands into categories where they don’t strategically belong, and to potentially capture positive mix as consumers trade up. However, we see a lack of control over distribution (a little less than 60% of sales are wholesale) as a weak spot for the company. Distributors are more likely to engage in discounting to maintain cash flows when demand sours, which we believe can be damaging for brands with long-shelf-life products. We believe that the demand for high-end watches is not structurally impaired (around 50% of revenue), branded jewelry offers attractive upside for growth (around 9% of revenue from Harry Winston brand), while lower-priced watches (less than 20% of sales) are stabilizing and growing from a low base as the smartwatch category matures and innovation provides a boost. The company is increasingly taking action to tackle costs in the low-end brands and limit grey market channels for high-end brands while investments in automation should help achieve higher profitability even with lower volumes. We expect Swatch Group’s sales to grow at a 4% pace over the long term (versus low-single-digit growth over the prior decade) with mid-single-digit growth for its higher-priced watch brands such as Omega, Longines, Breguet, and Blancpain, high-single-digit growth for jewelry brand Harry Winston and low-single-digit growth for low-end watches (Tissot, Swatch, Mido, Hamilton, and so on).
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