As the Swiss National Bank removed a three-year cap on its national currency, the Swiss franc rose significantly against both the euro and the US dollar on 15 January. With four out of the top five global watch players being based in Switzerland, the decision is likely to have a negative impact on the industry’s growth in 2015.

Key markets already facing slowdown

High watches* accounted for 45% of global However, growth rates in several key markets such as China, Japan, Hong Kong and Russia slowed considerably in 2014. While austerity measures continue to hamper high watch sales in China, increased sales tax and the depreciating yen led to slowing sales in Japan. Sales growth in Hong Kong was affected by public protests, while that in Russia dropped due to military developments and currency fluctuations. None of the aforementioned markets are expected to return to double-digit growth rates in 2015 or 2016, signalling a slow recovery for global sales.

New concepts threaten high mechanical watches

Swatch launched its affordable mechanical watch, SISTEM51, in 2014. Being one of the few contemporary global brands to venture into basic mechanical watches, Swatch’s new model provides the option of exploring the mechanical movement to quartz watch consumers unwilling to invest thousands of dollars on a wristwatch.

On the other hand, smartwatches have garnered attention from mechanical watch manufacturers. Expecting competition from the Apple Watch Edition to be launched in 2015, several high watch players, including Tag Heuer and Swatch Group, are researching the possibilities of a smartwatch. 2015 will represent a race to product launches, and has already been kicked off by Guess Connect and Montblanc e-Strap, which were both unveiled in January 2015.

Short-term impact of the rising franc

At its peak, the Swiss franc had risen over 20% in value against both the euro and the US dollar since 15 January 2015. The immediate impact of the rising franc was seen in the share prices for Swatch Group and Richemont, both of which fell by double-digit percentage rates. Consumers in Singapore invested heavily in Rolex watches during January as they expect an imminent rise in prices.

Although the appreciation of a settled Swiss franc is likely to be less than the 20% quoted above, Swiss manufacturers will have to raise unit prices by 5-10%, even if they do not pass on all of the rising cost of production and exports to the consumer. Owing to rising product prices, demand from distributors across the world is expected to decline. Although they might raise prices selectively in various markets, growth rates for leading brands such as Rolex, Omega and Cartier will, in turn, decline in 2015.

Opportunity for Japanese and American brands

As mid watches** are expected to outpace high watches in terms of value , Japanese and American manufacturers are positioned well to challenge the dominance of Swiss manufacturers. Appreciation of the Swiss franc in 2015 is likely to further limit growth for high watch brands from Switzerland and thus presents a promising scenario for high watch collections from Citizen, Seiko and Movado Group.

However, the heritage and art of Swiss watchmaking associated with leading global brands is likely to ensure a slow recovery for Swiss manufacturers. Leading players Swatch Group, Richemont and Rolex have a substantial lead in high watches, ensuring their global positions for the near future. Singapore, Taiwan and South Korea are expected to be key value growth drivers over 2014-2019, and should feature prominently in the Swiss players’ future initiatives to diversify market presence.

*Note: high watches are watches priced above US$1,000; **mid watches are watches priced between US$150 and US$1,000

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