Swatch Group getting crushed by Apple

The disrupting forces an industry is facing

Early in 2020, I read an article, reporting that Apple sells more watches than the entire Swiss watch industry. What was particularily interesting was to see the incredible growth of just one of Apple’s products in a segment, neither investors nor competitors seemed to pay too much attention to.

For years, Apple had been the undisputed leader in a relatively new category called Smartwatches.

The Swiss watch industry focuses on a clientele that seemed to continue to prefer traditional luxury watches. Items that appeal from the point of view of durability, elegance and design. People say, that one does not buy a Rolex, Breitling, Patek Philipp etc. not for himself/herself, but for the generations to come. After all, the Swiss watch industry stands for authentic luxury brands manufactured of the finest materials.

The Swatch Group (ticker symbol UHR) not only is by far the largest player in the entire Swiss watch industry with brands like

  • Hamilton,
  • Omega,
  • Certina,
  • Rado
  • Longines
  • Brequet
  • Tissot
  • etc.,

but it is also the largest supplier of watch components for other large producers such as for companies of the Richemont group (Cartier, IWC Schaffhausen, Jaeger-LeCoultre etc.) or of the French luxury giant Louis Vuitton Moet Hennessey (LVMH) which has also prestigious Swiss watch brands like Tag Heuer, Hublot, Bulgari, etc. under its umbrella (see also our article LVMH stock is an expensive diamond).

Seemingly, the Swiss watch industry and its c”hief commanding company” Swatch Group were well protected by a strong economic moat.

But as said, everything changed must faster than most would have thought. Apple shipped around 32 Million units in 2020 and already saw a Year over Year 36 percent jump to 21 Million in 2019. Apple does not break out its sold watch units in its quarterly reports, but one can easily estimate that Apple has sales of well over 40 Million smartwatches per year which is not only a sizeable contribution to the company’s bottom line, but also is striking when put in contrast to the sales of the entire Swiss watch industry which “only” sells around 20 million units and the numbers have been in decline for some years.

In our article Most companies are not going to be disrupted we are making the case that companies in any industry are constantly challenged by the risks of new technologies, new market entrants and changing customer behavior that could potentially threaten their bottom line through pressure on their revenues and/or on their cost structure but that most businesses with strong brands and the reputation of high quality products not only will adapt to survive and even thrive.

So, the situation the Swiss watch industry in generall and the Swatch Group in particular are facing is neither new nor impossible to overcome. What’s crucial however is the willingness to learn and to adapt.

Strong and visionary leadership required in the Swiss watch industry

Business leaders and owners need to look into the future, sometimes around the corner and avoid arrogance at all costs if they want to remain sucessful over the long haul.

What’s striking here is to read articles of 2015 where Mr. Hayeck Jr., the largest Swatch Group shareholder and Chief Executive Officer (CEO) of the company dubbed the Apple Watch as “an interesting toy that can’t last more than 24 hours“. The CEO’s attitude towards new trends is intreaguing, after alle he should be perfectly suited to understand the industry dynamics and changes in the competitive landscape. The CEO didn’t see the Apple watch as a gamechanger. Just as an interesting device but not as a revolution. It’s interesting – hindsight – to read his comments on the fact that the Apple watch couldn’t last longer than 24 hours without needing to be plugged in. He also had a critical positon towards the multi-functionality of the Apple watch which of course is on the back of using and collecting data.

Now, let’s sink that a bit.

Already back in 2015, it was already more than obvious, that Apple has a unique way of combining products and servcies and connecting them. Which is the basis for an incredibly strong and sticky ecosystem. It’s what makes the great user experience. Apple is a hard- and software company. You have the i-phonei-padMacAirPodsApple watch etc., and these devices serve a purpose: to further strengthen Apple’s ecosystem. The company’s influence in various aspects of our daily lives and the way we intereact – payments for instance – is commonly underrated. Just looking at Apple Services, including a number of recurring revenue streams such as iCloudApple MusicApple TV and various paid subscriptions is breath taking. The Apple ecosystem offers so many services making it difficult to leave. Now, one would expect that an “industrial captain” such as the CEO of the Swatch Group would immediately work on a masterplan to strengthen the companies competitive advantages.  

Now, Swatch Group CEO had a point, when he told that “his” company and the Swiss watch industry needed to continue to focus on their unique brands and product quality. Of course here lies their special expertise.

But given the success of Apple with its Smartwatches its clear, that many people want functionality. And of course they don’t want the look of a gadget. But Apple has been a fantastic device designer for many years.

So, here in principle lies also a huge opportunity for the Swiss watch industry. But it requires a self-critical and visionary thinking.

In 2015, Swiss luxury brand TAG Heuer – which is owned by LVMH – introduced the “Connected”, the Swiss watch industry’s first luxury smartwatch, combining software of Google and the Swiss watchmaker traditional mechanic.

Now, was this move alone a recipe for success? Of course not, it has to be seen just as one step. But as an important one. The traditional watch industry has to transform, which is a painful and costly process. But at least Tag Heuer and LVMH back in 2015 have seen the potential and also realized their need to learn and to adapt.

What’s incredibly interesting is to read a comment of Swatch Group CEO exactly in 2015 on the strategic decision of Tag Heuer and LVMH:

Hayek Jr said that TAG Heuer’s partnership with Google and Intel for a smartwatch was a “a mystery to me” and that he regrets “that for a company with a long Swiss tradition, TAG-Heuer owner LVMH is apparently not willing to invest in Switzerland in the work place.”

Now, just let that statement sink.

And then let’s have a look at the stock price dynamics of the Swatch Group in comparison with LVMH, which quite obviously reacted faster to changing industry trends and was more open to cooperations in the technological field.

Now as we all know, the stock market over the short term is just a popularity contest. But over the long run it’s a weighing machine.

Just look at what happened to the stock price of the Swatch Group from 2014 to 2021.

In a matter of just seven years, the price of the Swatch ordinary shares came down from Swiss francs (CHF) 600 in 2014 to somewhat above CHF 200. The stock is worth only one third of what it was a few years ago.

Actually the business fundamentals of Swatch Group have not developed as dramatically as the stock price would suggest. Swatch Group still makes decent profits – after the company faced a loss of around USD 400 Mio in the pandemic-year 2020 – and I wouldn’t be surprised to see some modest growth in the years ahead.

But clearly, the market discounts the lack of forward-oriented thinking and almost inexisting visionary approach which can be seen over and over again when looking at that company’s strategic positioning. The stock market always tries to factor in the future. And obviously it currently does not see a bright future for the Swatch Group.

Now, of course things can always change to the better. Stock charts at best just give some vague information. But it’s still interesting how the Swatch Group stock price dynamic seems to be quite accurate in anticipating deteriorating growth potential of the company.

Now, let’s look at the stock price of luxury giant LVMH, which is led by one of the best and most influential “business captains” in the world, Mr Bernard Arnault (see here an interesting article on his and the LVMH success story).

Conclusion

Clearly, the Swiss watch industry has some serious issues, as it did not react fast and decisive enough to new consumer trends and new market participants such as Apple.

But it’s also clear, that there are also huge opportunities. LVMH chose an approach to cooperate with tech companies, such as Google.

Swatch Group is still a dominant player in the industry, but it is not clear whether it will be able to adapt fast enough and grow into a real leading and visionary role. The last years have been devestating and it looks as there is more pain ahead.

Disclaimer
You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

About Savy Fox

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