Ever since the Chinese government cracked down on “gift giving” as part of its anti-corruption campaign, Swiss watch exports have taking a beating.
Here’s the trend, courtesy of a UBS European luxury note out Wednesday:
As the analysts note, that slump follows a more than 100 per cent rise in the value of Swiss watch exports over 2010 and 2011.
Ground zero for the demand destruction, meanwhile, is Hong Kong. And it’s there that UBS got some insight on the scale of the downturn from three major retailers:
We recently met three Hong Kong/ China watch retailers: Hengdeli, Oriental and Emperor Watch & Jewellery. All three companies commented that current trading remains tough, and there is not expected to be any significant recovery this year. Destocking continues as retailers reduce replenishment rates on weaker brands and adjust inventory price mix. More store closures are also ahead with the only silver lining that there appears to be a little more room for rent reductions in Hong Kong of ~10%-40%.
Recent company commentary has continued to be weak: Swatch reported H1 results on 21st July. Organic sales declined -12.5%, with multi-brand retailers cautious to re-order or cancelling orders. CEO Hayek commented that own retail was better than wholesale and retail in Hong Kong has potentially bottomed out with sales between +10% and -10% depending on the stores. Local Hong Kong retailers, however, do not see the same trends. These results again confirm the difficult market conditions, and follow Richemont reporting April sales -15%.
Unsurprisingly, for a market where the perception of scarcity underpins all value, the likes of Richemont have even taken to buying back inventory. According to UBS, the new Cartier CEO has specifically looked to clean out high end inventory from the Hong Kong market. This, we’d argue, is quite something. (Or at the very least a new asset purchase idea for QE?) From UBS:
We estimate that Cartier watches declined -25% in H2 to March 2016 (~€240m) decelerating from closer to a -10% decline in H1. How much of this was “negative sales” due to the buy in is unclear. A rebasing of stock levels in the channel remains key for a medium term reacceleration. Stock levels have been high in the channel in the industry notably in Greater China.
Hong Kong retail sales figures for watches, jewellery and clocks, meanwhile, registered a 26 per cent year-on-year decline in July following a 20 per cent decline in June:
A comparable trend can also be seen in the diminishing number of visitor arrivals to Hong Kong from the Chinese mainland:
The situation seems to be desperate enough for some Chinese luxury retailers to be breaking lease agreements and closing up shops, says UBS. On the up side, however, mainland sales seem more robust of late than Hong Kong, with Cartier watches seeing growth in the last quarter. Nevertheless, since luxury spending in mainland China is a small portion of the total of Chinese sales (about 25-30 per cent), the improved sales picture there is not necessarily offsetting the slowdown in other areas.