Business in China is not going well for the Swatch Group at the moment. Negative news is also on the rise among other luxury brands.
The watch company Swatch has had a difficult few months.
For many years, the Swatch Group was a piece of Switzerland that was easy to brag about. Its founder, Nicolas Hayek, deserves no less credit than saving the Swiss watch industry from its decline. And the Swatch watch, which revolutionized both watch technology and marketing more than forty years ago, became a symbol of this success.
Those days are over. Today, the voices that are cautious about the Swatch Group are the biggest. CEO Nick Hayek is said to not listen to critics and anger investors. The impact this could have on the stock markets was shown on Monday.
Swatch stock fell about 11 percent to 167 francs 35 in the morning and closed at 170 francs 70 in the afternoon The share has lost about a quarter of its value since the beginning of the year, and the shares are at their lowest level in 15 years .
The reason for the slump in the markets was the previously presented half-year figures: The net sales of the Swatch Group fell by 14 percent to 3.45 billion francs compared to the same period last year. The operating profit (EBIT) fell from 686 to 204 million francs. The bottom line is that Swatch Group had a consolidated profit of 147 million francs after the first half of the year. In the first half of 2023 it was half a billion francs. This corresponds to a reduction of almost 71 percent.
Fewer watches stretch
The Swatch Group explained its poor figures with the sharp drop in demand for luxury goods in China, Hong Kong, Macau and Southeast Asian markets that are heavily dependent on Chinese tourists. Although people saved enough money to spend generously shortly after the pandemic, demand has been declining for some time. Chinese consumers in particular are suffering because of the sluggish economy. China’s economy grew more slowly in the spring than at the start of 2023.
This situation is not new, and other brands in the upper price segment also have to deal with it. French luxury goods group Kering, for example, declared in March that low demand from China was causing major problems for its Gucci brand. Now the Swatch Group is also being hit, and particularly hard: its brands, including Omega, Longines and Tissot, are strongly represented in the area around China. Recently, the region accounted for a third of the group’s total sales.
Only the Swatch brand bucked the negative trend and was even able to increase its sales in China by 10 percent, the company said. And sales outside China were also at a record year level in 2023, with some regional fluctuations. Although the US, for example, achieved record sales the previous year, the geopolitical conflicts affected many European retailers. As they feared excessive inventory levels, repeat orders declined.
The decline in orders from China led to significantly lower sales and “very negative operating results in the production area”. The Swatch Group accepts this consciously, however, because it wants to maintain its production capacity and not lay off employees. This strategy is intended to enable the group to recover more quickly in the next surge.
Confidence in luxury stocks is waning
The analysts received clear words about this on Monday. An analyst at Bank Vontobel said the Swatch Group had had an “ugly six months in every way”. China is not the main cause of the company’s problems, but the dangerous strategy of continuing to produce at a high level in the hope that sales growth will return. And the Zürcher Kantonalbank writes in a comment that the rating reflects the disappointing development of the last ten years, the low return on capital and the lack of friendliness for investors.
But it wasn’t just the Swatch Group that made negative headlines on Monday, other luxury brands are also struggling at the moment. At Burberry, for example, sales fell by a fifth in the past quarter. The London-based company canceled its dividend and announced that it would miss its profit forecast for the current year if business continued as before.
The stock market reacted to this news more violently than the Swatch Group: Burberry’s stock lost 18 percent of its value on Monday morning. This also brought the big luxury goods groups Kering, LVMH and Richemont. Their shares lost between 2 and 5 percent.
The hope for the Olympic Games
The Swatch Group accepts that the Chinese market will not recover anytime soon. However, China’s potential remains “secure,” the report says. The current situation offers “great opportunities for further growth”, especially for brands in the lower price segment.
Due to the positive development of the markets in Japan and the United States as well as the Olympic Games, which the Swatch Group hopes to attract the attention of the media as a sponsor, the group says that it expects “a situation that has improved significantly big” for the second half of the program. year.
Sure: The Swatch Group has seen better times. The extent to which the current price fluctuations relate to CEO Nick Hayek is still in doubt. In an interview with the NZZ at the end of March, he said: “The share price does not affect us at all. We are and have never been dependent on the capital market.” Only time will tell if Hayek is right.