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Business News/ Opinion / Views/  Finding a cheap Omega watch just got a lot harder
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Finding a cheap Omega watch just got a lot harder

The watchmaker is cracking down on so-called 'gray market' dealers who sell stock at a discount

The maker of Omega watches expects a strong recovery in the second halfPremium
The maker of Omega watches expects a strong recovery in the second half

For a watchmaker, Swatch Group AG has pretty terrible timing. The Swiss company said on Wednesday that its sales in the first half of 2019 were held back by cracking down on so-called “gray market" dealers, who sell stock at a discount.

Analysts at RBC estimate that this punitive action cost Swatch “triple-digit millions" in lost sales during the period, contributing to a worse-than-expected 3.7% decline in first-half revenue. Tackling the gray market is the right thing to do because the practice dents a watchmakers’ full-price sales and devalues its top-end brands (which in Swatch’s case include Omega and Longines). But what took it so long?

Its big Swiss rival Cie Financiere Richemont SA, which owns Cartier, has been buying back its stock for the past few years rather than letting dealers sell it for knockdown prices. While it’s largely at the end of this process, it still aims to keep supply in line with demand, or ideally below it, to boost desirability.

Swatch has taken a different approach. It is suspending deliveries to dealers rather than buying back inventory. Even so, it is a welcome attempt to clean up the market and should be beneficial in the longer term.

Watch Worries

The only problem is that the crackdown comes at an already delicate moment for the group. Swatch is heavily exposed to China and Hong Kong, with 22% of its revenue coming from the mainland and 11% from Hong Kong, according to analysts at Bryan Garnier. Yet sales in Hong Kong fell by a double-digit percentage in the first half because of the protests and political turbulence in the city, Swatch said. This echoes Chow Tai Fook Jewellery Group Ltd., whose same-store sales slipped 11% in Kong Kong and Macau in the three months to June 30.

With such a big exposure Swatch is clearly at risk from any prolonged problems in Hong Kong, and from any broader Chinese slowdown related to the U.S. price war.

At the same time, shoppers are starting to favor Apple-style smartwatches, which is bad news for Swatch’s brands at the more affordable end of the market. And while the company has eased some big bottlenecks in the production of its Omega and Longines brands, they haven’t been eliminated. Inventories rose 2.6% to 7.1 billion Swiss francs ($7.2 billion) as the company culled those gray market deliveries.

Not So Smart

Despite the setbacks, Swatch shares rose by 5% because of a positive surprise on operating profit and relief that it was tackling the gray market problem. The company also expects a strong recovery in the second half (though this will depend on whether trade tensions hold back Chinese demand).

The shares have fallen 36% over the past year, leaving it at a discount to Richemont on a price-to-earnings basis. This is justified by Swatch’s greater exposure to cheaper timepieces, as well as Richemont’s superior online operations. Swatch may well be able to navigate the challenges ahead, but don’t set your watch by it.

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Published: 18 Jul 2019, 09:24 AM IST
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