Wednesday, August 26, 2015

Big Trouble in Big China

"I'm a reasonable guy. But, I've just experienced some very unreasonable things."
Jack Burton, "Big Trouble in Little China".

The big three (SWATCH Group, LVMH and Richemont) have had what could probably be fairly described as one of their worst months in recent memory.

How bad has it been?  Remember that we just had the worst first sales quarter in memory?  Well that cheery news was followed by the reports this past week from the Federation of the Swiss Watch Industry - exports to China were down at least 40% (versus July 2014) and Hong Kong (also known as the carpet under which over-production is swept) were down by 29%.  This resulted in a drop in share prices - in some instances as much as 10%.  There has been a small improvement, but whether or not that will hold remains to be seen.

The Swiss watch industry is perhaps going to finally have no other alternative than to face the reality that they couldn't keep on the way they were going.  Insanely inflated sales targets predicated by  unrealistic sales targets, necessitating deep discounts, ensuring undeserved promotions and bonuses.  In the past, you could just sweep the excess over to Hong Kong and China.  Well, it would seem that just like cat's litter box, if you don't scoop out the poop and the pee, the cat will start going on the carpet.

It would seem that at least one person did see some of the writing on the wall.  As is often the case, Jean-Claude Biver was perhaps one step ahead of the crowd.  Was it a popular decision to cut staff at Tag Heuer a year ago?  Of course not - but just imagine what things would be like now if they had not made the cuts?  Those cuts would be significantly more numerous (and painful) had they not taken place then.

Here's the thing, it was unrealistic to assume that China's economy would continue to grow and grow.  But with the most recent "adjustments" it has created an urgency that the big three (and several other smaller players) simply can't ignore.  

A few things are going to happen:

Deeply discounted watches are going to be available on an even greater scale.

Smaller brands, or those badly leveraged are going to either die, or be bought up for pennies on the Swiss Franc.

Retailers left with "aging" watches in the safe are going to have to "churn and burn" in the hopes of staying afloat.  

A lot of good (and frankly mediocre) brand managers and reps are going to be punching up their resumes in the coming weeks.  And some newly minted brand managers are going to have a great opportunity to prove themselves and write their own tickets.

and lastly -

The brands that tighten their belts and adjust their sails to accommodate the changing winds will not only survive, but emerge stronger than they were a year ago.

And another prediction?  
Swiss brands are going to become reacquainted with the importance of the North American market.  

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