China, a trap for luxury watchmakers

After opening hundreds of stores in China in recent years, some watch companies are facing an inventory glut and cutting back their retailing presence there.  The downsizing comes as shipments of timepieces to China from Switzerland, the world’s dominant luxury watch production center, have fallen below the levels of two years ago, after setting a record in 2012.

“The gold rush in China is over,” said François-Henry Bennahmias, chief executive of Audemars Piguet, which is closing 6 of its 22 stores in China. “We are going to slow down in China and take every step there much more carefully.”

Swiss watch exports to mainland China dropped 26 percent in the first quarter from a year earlier, to 323 million Swiss francs, or $343 million, according to data released in the past week by the Swiss Federation of the Watch Industry. Exports to Hong Kong fell 9 percent, to 910 million francs.

Over all, however, Swiss watch exports rose 2.3 percent in the first quarter, to 4.73 billion francs, buoyed by Middle Eastern and some European markets, particularly Germany and Britain.

“People simply went overboard about China, thinking that there could be no issue with suddenly opening 40 or 50 stores,” said John Simonian, a watch distributor and owner of Westime, a watch retailer based in Los Angeles. “The stores in China are now full of inventories, with no guarantee that they can all get sold.”

Rather than focusing solely on China’s purchasing power, luxury goods companies should have paid closer attention to changes in Chinese travel and consumer habits, according to some executives.

“I think some people went too hard into China and simply didn’t take into account how keen the Chinese are to buy elsewhere — also to avoid paying high duties,” said Michel Parmigiani, founder of Parmigiani Fleurier, another Swiss watchmaker.

Taxes on luxury goods acquired within mainland China range from 20 percent to 70 percent, depending on the product category. But another important factor has been Beijing’s efforts to clamp down on the giving of expensive gifts as part of the government’s broader fight against corruption.

Nick Hayek, the chief executive of Swatch Group, the world’s largest watch company, said that some sort of cooling in the Chinese market was inevitable. “You cannot grow 30 percent in a market every year,” he said. But he drew a distinction between the situation now faced by the most expensive brands and “the real growth opportunities that still exist in the lower- and middle-market segments.”

“The business in China is going badly, and to be honest there is a contraction of the watch business in China,” said Francesco Trapani, the president of LVMH’s watches and jewelry division. “The government is doing moral suasion to limit expenses and the show of luxury products.” But, Mr. Trapani added, “what is also true is that what we sell to the Chinese outside is now much higher.”

But the challenge goes beyond managing excess inventory.  “The rents have shot up to crazy levels in many Chinese cities, which means that a lot of stores have simply become unprofitable,” said Emil Klingelfuss, based in Hong Kong and founder of Swiss Prestige, which distributes Swiss watch brands in the region.

Some watch companies are pursuing unabated their expansion into a Chinese market that, including Hong Kong, still accounted for 26 percent of Swiss exports in the first quarter.

“We have opened a lot of points of sale in China, perhaps a bit too much, but you must disconnect the store from its performance, because having a boutique is a communications tool that is irreplaceable,” said Philippe Léopold-Metzger, CEO of Piaget, which is owned by Richemont and has 20 of its 90 stores in China. “We strongly believe that it is a market in which you must invest.”

adapted from The New York Times

Piaget store Hong Kong