The Strategist

Weak sales pulled Swatch shares down

07/15/2016 - 15:36

Shares of Swatch watches fell by 14% at the opening of trading on Friday. It happened after the company warned that profits in the first half of the year will be 50-60% less than a year ago.

In fact, the true reason is quite simple: sales of luxury watches are falling. In 2015, exports from Switzerland fell for the first time since 2009, dropping by 11.1% compared to last year in April, according to the Federation of the Swiss Watch Industry.

The main reasons for this situation is extreme insecurity in Europe after the Brexit referendum’s results, reduced demand from Chinese consumers thanks to the government’s policy against officials using luxury goods, low oil prices and strengthening of the Swiss Franc.

"Of course, we should not expect too big discounts. Discounts may be about 5-7%, and yet it is not necessary to wait for prices to fall even more. After all, the high price of this watch is  justified. They must maintain their attractiveness as a symbol of luxury, while remaining out of reach for a large segment of consumers ", - said Michael Clerizo.

According to Bain Luxury Study 2016 Spring Update, the luxury market in 2016 will grow by only 1%, to 258 billion euros. Meanwhile, risk that this market would shrink has increased significantly.

Such weak growth is caused by global challenges, such as slowdown of the Chinese economy, tourism downturn throughout Europe, a weak holiday season in the US, and instability in the Middle East.

Signs of slowing down noted in 2015, according to Bain, preserved in the I quarter of 2016, and this trend is reflected in the forecast for the entire year.

Up to 2020, the luxury market expects moderate annual growth of 2-3%, the study said. By that date, its scope should reach 280-295 billion euros.

To a large extent, these figures depend on growth in mainland China. Buyers from this country will account for approximately 34% of global consumption of luxury goods in the next 4 years.

In the States, a decline in this market is obliged to the uneven domestic demand and tourism downturn. At the same time, Latin America is making a positive contribution: since the tourism industry is reviving there spending for luxury goods are growing.