Luxury & Fashion Biz News: March 16th, 2012 (The Swiss Watch Industry, and the Difference Between Independent and Artisan)

When the economic recession first kicked into gear in 2008, high-end Swiss watch companies were badly hit. The collapse of major investment banks and a curtailing of big cash bonuses cut into discretionary spending, and suddenly a prized status symbol to wear on the wrist just didn’t posses the same urgency.

But as banks and too-big-to-fail corporations were bailed out by governments, and stock markets became flush with taxpayer-funded stimulus cash, the sales of Swiss watches picked back up in a big way, with the biggest spike in demand coming from emerging economies like China and India.

Basel Watch Fair 2012 — “Customers coming from across the globe”

But if there are economic clouds on the Swiss Watch horizon, as a Richemont CEO suggested back in November of 2011, then are we now seeing the initial skirmishes between companies positioning themselves to best grab their slice of what they see as the potentially shrinking pie?

Take this article as an example: Watch-Making Industry Consolidates, Independents Left Out In the Cold: “Specialist suppliers are being snapped up by larger players, leaving smaller independent watch companies with fewer options as Swatch, the world’s largest watchmaker and for decades the main supplier of movements to the industry, cuts deliveries to focus on its own brands . . . Independent watchmakers are the most under pressure from the Swatch Group delivery cuts, having fewer resources to invest in their own production or to buy up the factories they need . . . ‘They lack the financial strength to develop movements and probably can’t afford to pay double the price they pay now – which will ultimately happen,’ (analyst Jon Cox) told Reuters.”

Big luxury conglomerates (PPR, LVMH, Richemont), plus large luxury houses like Hermes, have been aggressively buying up suppliers of watch parts, cases and internal movements in order to keep their own supplies steady, much like Hermes and LVMH have been recently wrestling for control of crocodile skin suppliers.

*NOTE 1: Singapore crocodile skin supplier Heng Long was a major supplier of skins to brands like Prada and Hermes before LVMH purchased a controlling stake in the company, while Hermes has spent the past several years snapping up once independent tanneries and crocodile farms to ensure a steady supply of exotic skins for its bag production.

But this kind of jostling on the part of the big boys shoves the little guy right out of the picture. Because if a small watchmaker (or handbag producer) can no longer access much needed supplies, then they can no longer put product out onto the market — which, really, is a boon for the big players, as that’s even less competition for them to deal with.

Because how can consumers choose to support “independent” companies if there aren’t any independent companies left to support?

Which brings us to a discussion of what independent truly means. Is a small watch company really independent if it needs to purchase its main parts from large global companies like Swatch and Rolex? And I have to wonder if this is the point where we start to see a strict line drawn between types of producers — between the global corporation and the artisan.

Because while economic conditions appear not to be tightening for the wealthiest of the world’s citizens, the tightening is happening for everyone else.

*Cases in Point: A.) Even China’s own data say its economy is troubled; B.) Polish Jobs, Wage Growth Slow as European Demand Weakens; C.) Spain Debt Reaches Record High; D.) Cost of living in the U.S. rose in February by the most in 10 months; E.) Brazil job creation plummets on abrupt slowdown; F.) India inflation accelerates to near 7% as economy slows; and so on.

Luxury companies obviously see the writing on the wall — even if politicians and talking heads won’t — and that writing spells out a future where there’s a small, stable group of big spenders large enough to keep a luxury, fashion or accessories brand fat and happy, but not large enough to keep *all* the luxury, fashion and accessories brands fat and happy.

Especially not when the bottom has dropped out of the aspirational markets (see: “Retired cop shoots wife over cash woes after buying her Louis Vuitton bag for Christmas“) — so we’re presently witnessing a fight to lock up important supply chains before the sh*t hits the fan.

How a traditional watch is made

*NOTE 2: It’s not just about handbags and watches, either. Flavor & Fragrance giant Givaudan announced last August that it was closely examining opportunities to acquire vital targets in its supply chain to offset volatile raw material prices and potential supply disruptions: Givaudan eyes acquisitions to offset higher costs

But I previously brought up how current economic conditions are primed to separate the independents from the artisans — that “independent” watch brands, for instance, have ridden the coattails of their larger competition, relying on big watch groups to supply them with necessary parts so that they function more like branded design houses than genuine watchmakers.

And there’s a big difference between the two — because when supplies get scarce, or a larger company locks down its supply chain to squeeze out the competition, then companies that design watches but don’t know how to really *make* all the complicated pieces and parts that go into a watch, those companies are the more likely to fail.

The NYTimes published an article in January of this year about the formation of the Académie Horlogère des Créateurs Indépendants, or A.H.C.I. — “a coalition of 33 watch- and clockmakers bound by a fierce commitment to artisanal watchmaking and freedom from corporate rule.” The members must be absolutely independent, able to design and entirely self-manufacture their timepieces. Independence also means these artisan watchmakers own their own studios, their own machinery and all their own inventory, freeing them from reliance on the larger companies to provide parts for them.

“I developed my own escapement,” (watchmaker Martin Braun) said, referring to a critical component of the movement, which most watchmakers obtain from the Swatch Group’s Nivarox-FAR subsidiary. “They can do whatever they want. I rely on them 0.0 percent.”

Artisan timepieces will, of course, cost more — the prices ranges for watches from A.H.C.I. members ranging from the tens of thousands to the hundreds of thousands per watch — but that could mean they need to sell under ten pieces a year to stay in business. Compare that to a company like Audemars Piguet that has to sell thousands of watches per year and relies on celebrity endorsements for consumer buzz, or Vacheron Constantin, one of the oldest Swiss watchmakers still in operation, that sold out of its entire expected output of 19,000 timepieces for 2012 by the middle of January — but can it keep its grip on quality when demand continuously pushes for quantity?

Watches top China consumer gripe list for luxury goods“The World Luxury Association, releasing a report on the consumer satisfaction of luxury goods, collected 3,756 complaints on luxury goods in China between March 15, 2011 and March 15 this year. The survey showed that 46% of the complaints are about watches . . . The luxury association’s report also shows that 57 percent of the complaints involved quality … ‘The fast expansion of luxury brands in China is one of the reasons for the low quality of luxury items,’ said Zhou Ting, executive director of the luxury research center of the University of International Business and Economics in Beijing.”

Which is not the kind of survey result a watch-loving luxury brand wants to be reading.

Right now, the Swiss watch business may be booming, but there are doubts that this kind of sales growth can continue, with executives nervous about a slowing Chinese economy and the growing public backlash against the conspicuous flaunting of expensive items like Swiss watches, glittering jewelry and designer fashion: “‘For the past few months, it seems [watch] sales in general are going down,’ said Masaki Saito, executive director at Geneva-based watch maker Montres Ludovic Ballouard Sàrl . . . ‘We believe that luxury-goods-industry growth rates will halve this year, with growth in China slowing from 50% in 2011 to [between] 20% [and] 25% in 2012.’ said Mariana Kou, research associate at Hong Kong-based CLSA.”

And while larger companies that own their own supply chains might be sitting pretty, there’s a large swath of “independent” watch brands that won’t be so fortunate.

Frankly, I see a lot of similarities between the Swiss watch industry and another luxury industry I follow — perfume. Including how big fragrance companies/brands ditched making the product themselves and now outsource the job to specialized industry players, how they collude to prevent price competition (see here for the story on watches), and how they’ve ridden a wave of huge consumer demand straight into nasty issues of quality control.

There’s still a lot of money to be made in perfume, too, judging by every Tom, Dick and Celebrity Jane rushing to jump into it (see: “Madonna’s new perfume smells like grandma“); hell, even Swiss watch brands are pumping out the smelly stuff — case in point: “Swiss Watchmakers Are Now Making Everything From Perfume To Smartphones”

Which is right about when frogs start dropping out of the sky and rivers turn to blood, if you know what I mean.

And the perfume world has its own confusion over labels like independent and artisan — over what makes a brand or producer truly independent: the first ever American Fragrance Foundation “Indie” Award was handed to a brand that hired a corporate perfumer to develop the scent, while also outsourcing the production, bottling and sales.

Odin 06 Amanu — the very model of a modern “indie” fragrance

So how “independent” is it really when you don’t own your own studio, don’t use/create your own materials, don’t know how to design and manufacture your own product, and aren’t in charge of your own sales? I would think you’d want to tick at least a couple of those boxes on the list before waving any trophies around.

*NOTE 4: What separates Odin (the winner of the 2012 FiFi “indie” award) from, say, Kim Kardashian at this point? Both are perfume brands with a point of view and an aim at the commercial market, but neither design, create, manufacture or distribute their fragrance products themselves.

Fine, Odin is smaller and with way less name recognition (and arguably a much better aesthetic) than the Kardashian brand, but “small and with less name recognition” isn’t necessarily the most helpful position to be in when larger industry players decide they want to start buying up supply chains, locking down production facilities and using their influence to kick the competition from the shelf space.


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