Luxury in the recession

Here’s a possible downside to limiting bankers’ bonuses: More pain for Swiss watchmakers.  That’s the storyline in a recent Wall Street Journal piece (Swiss Watchmakers Await Uptick, Dec 23).  Apparently nothing is better for Rolex than flush bankers.  Luxury watches — like most luxury goods — have had a tough go of it the last few years:

During the boom, the industry, which has annual revenue of roughly 17 billion Swiss francs ($16.4 billion), ramped up production, and retailers loaded up on classic brands, as well as flashy new names, only to be caught out when sales plummeted. The result is the toughest market for Swiss watchmakers since the 1970s, when cheap Japanese quartz watches threatened their franchise. While consumers in Asia, particularly China, are still hungry for luxury timepieces, Switzerland’s watch exports to the U.S. were down 40% for the year through November. Sales of Rolex, the powerhouse of Swiss watchmaking, probably will fall to about $3 billion this year from around $4 billion at the peak of the boom, according to Jon Cox, analyst with Kepler Capital Markets. Rolex, owned by a Swiss foundation, doesn’t release sales or profit figures.

More interesting than whether Goldman Sachs et al.  can save the Swiss watch industry are issues firms are facing in terms of managing resources and their supply chains. On the first point, we have:

On top of a sharp drop in demand, Swiss watchmakers have been struggling with other pressures, including high costs, particularly for personnel. Big brands typically take two to four years to train skilled craftsmen before they let them hand-assemble the hundreds of components that go into a luxury watch, and so are reluctant to lay them off during a down turn. As a result, their profits have plunged. …

In response to falling margins, Cartier put some of its workers on a short workweek this year, while independent watchmaker Franck Muller announced it would roughly halve its staff, cutting 200 jobs.

This is a challenging issue and goes beyond just luxury goods.  Some firms can always make do with new hires.  Many fast food firms, for example, assume that turnover will always be high and structure processes so that a new hire can get up to speed quickly.  (Aside: My neighbors run NogginLabs, which has won awards for the training program it has developed for McDonald’s. See here.)  But many firms require experienced personnel to execute key processes and cannot get by with a warm body off the street.  That can be true for experienced machinists or software programmers (see Saving Jobs to Stay Ahead, Wall Street Journal, Dec 24) as well expert watchmakers.  The question then is how long you can hold on to your people.  Certainly, if you knew that a slow down will only last a quarter, you suck it up and absorb the loss for a bit.  The current downturn is certainly different.  It takes significant resources to weather the storm and a lot of optimism that the market will recovery quickly when the upturn comes.

The supply chain question has to do with how the watchmakers treat their retailers.

Many struggling jewelry and watch retailers, meanwhile, have added to the pressure on prices by been dumping excess inventory for as little as 30% of the retail price, selling them to dealers who sell the watches at big markdowns on the Internet or from their homes.

That has made watchmakers more lenient in insisting that retailers take a full range of their models. Rolex, which traditionally exerts a powerful hold over its authorized dealers, hasn’t pushed as much stock on the shops. “They didn’t have the same requirements for what we buy this year,” said one Rolex dealer. “They weren’t as strict.”

A strong market in Asia is good for Rolex but doesn’t buy a retailer in New York or Miami very much. Hence, it makes some sense that the watchmakers bear a greater share of the burden.  It will be interesting to see, however, whether Rolex can again tighten the screws once the economy rebounds.