The Swiss Franc crisis ?

[TempoKing]

Article by Daniel Durrant
Creative and Marketing Apprentice at Xupes Limited

GENEVA, January 2015—Swatch Group CEO Nick Hayek talks “tsunami”, LVMH chief Jean-Claud Biver “doublespeak”, and other horology honchos hike prices by over five percent. But while the Swiss players are in a linguistic frenzy, a potbellied pre-owned watch market licks its chops.

Without turning this into an economics hash, I’d better skim over the current state of play. When the Swiss National Bank (SNB) decided on January 15th to abort the currency value cap it had placed three years earlier against a flagging euro, a bombshell move dubbed “francogeddon” on social media, the Swiss franc spiked a terrific 23 percent against the euro and 16 against the dollar. For the Swiss watch market, this was a minor crisis.

The cap was originally put in place to prevent the Swiss franc from rising against the euro. A good idea had the Swiss continued buying abroad. But since the ruling, more money went into Switzerland than went out, and more significantly, the Swiss started selling off foreign assets. This all led to an increasingly undervalued Swiss franc. Despite announcing in the week preceding the events that the cap was “absolutely central to stability”, news that the European Central Bank was set to start printing money—which would mean further devaluing the euro—was simply too much for the Swiss National Bank who then decided to take the plunge. Hey presto! A windfall.

But what does this mean for the watch industry? A soaring Swiss franc means their national produce costs a lot more to anyone outside of Switzerland. If you consider that an estimated 90 percent of Swiss watches are exported, and 60 percent of the total value of a “Swiss Made” product must come from within the country, then you start to understand the fuss.

In one day Swatch Group shares plummeted by 16 percent, prompting Hayek’s statement damming the actions taken by the SNB: "Words fail me! Jordan is not only the name of the SNB president, but also of a river and today's SNB action is a tsunami; for the export industry and for tourism, and finally for the entire country," he said. Meanwhile Biver spoke of his country’s newfound distrust of its central bank and its contradictory words: “We now have at least learned to take whatever our bankers promise with a pinch of salt,” he said.

So the question became, who’s going to take the hit? If the exchange rate increases then either the customer or watchmaker has to suffer. Traditionally, watch industry prices inflate by a small amount each year, but never on this scale. Biver suggested that most companies would raise their prices by three to five percent. It’s considered unlikely that companies will act until the exchange rate has balanced out, but Cartier is reportedly already increasing its European prices by five percent.

Now, perhaps at the higher end of the market—the Hublots, the rare Pateks and the Richard Milles—these changes won’t make too much difference; those willing to splash a million dollars on a wristwatch are unlikely to sweat about it being $1.05 million. But at the lower end, amongst the entry-level buyers and watch dealers, these margins can make or break a business. In such a troubled climate, heads will be turning to the pre-owned market, which has been swelling at a tremendous rate.

The reasons for this swelling are straightforward. First of all, those annual price increases in the first-hand market take time to trickle down to dealers and their pre-owned counterpart, and are relatively less severe. But that's peripheral. Take, say, a current issue Rolex Submariner stainless steel 116610LN (the latest ceramic bezel model)—at present retailing at around £5700—the pre-owned price, often with little-to-no wear, is between £4250 and £5000; or better, a Rolex Submariner 116619LB in white gold—at present retailing at £24,700—can be found between £13,500 and £18,000. That’s a serious saving. Ignore the watch collector’s adage only buy what you would wear, margins like that are too great to pass up, and a hugely inflated number of investors would suggest the same.

Over the past five years, second hand watch companies like Watchfinder, Iconic Watches and Xupes have shot up. These outfits are offering warranties and buy-back schemes that rival the high street. Meaning a buyer can be assured piece of mind in a hassle-free environment (his/her own sofa). Where's the catch?

Many top brands are fervently trying to claim back some of this market. Christies has now opened its own online watch auction and boutique, dealing mainly with vintage high-end pieces. Meanwhile companies such as Cartier have started rebuying their older models and servicing them according to archive instruction manuals. They offer restored timepieces at a higher price than the average second hand dealer, but they come with official warranty and are rebuilt to an exceptional standard.

Mr Biver followed his statements by pointing out that, although this may be a temporary clog in the works, it’s a result of a very strong Swiss economy. Indeed the Swiss watch industry’s thunderous performance in recent years appears not to be subsiding. Another recent setback, the Chinese crackdown on excessive gift giving, which resulted in Cartier cutting their workforce hours to just two days a week, appears to have been absorbed and Cartier has now resumed full production.

Still, the savvy consumers in the second hand space will be reading the news with dilated pupils, aware that a price change is on the way, albeit predictable and less destructive, like the tail end of a tsunami.


My personal Note
I am going to buy at the next Munich show - so I will see what is going on with
used Rolex prices after the European new watch increase.