Thursday, July 21, 2016

The Emperor is Less than Fully Clothed...

Okay, this is going to require a little bit of outside homework.  So I refer you to the good folks at Bloomberg for their article on the current state of affairs at SWATCH Group

Bloomberg's Coverage on the SWATCH GROUP announcement

Now part of this is what you read about before - that SWATCH group is going to miss their sales target.  In fact they are going to miss it by a pretty sobering percentage: 50 - 60%.

But what was interesting in this report from Bloomberg was what some of the feedback on Hayek the younger's lack of awareness and proactivity.  And a lot of that critique was harsh.  But it was fair.  And I think what it really spoke to (albeit not exactly directly) was that in the world that is SWATCH LAND although it is a publicly traded company, it is one that is controlled by one family.

On the positive side of this, it appears to be a somewhat benevolent one. (at least in terms of not firing it's employees).

On the negative side, it appears to be a company that is also a family dynasty.  And as we know from that paradise in Pyongyang, it is not always your best move to place all of your eggs (or egos) in one basket, or  family - whichever the case may be.

So fast forward to today and allow me to share with you (in case you haven't already seen it) SWATCH Group's half year report.  We already know what the bad news was.

And despite the facts staring everyone in the face, it appears to be a family, and group of brands that are in denial.  So here is the response from the Swatch group regarding the rest of the year.  Comments to follow -

You can find it online here -

Here are some pertinent portions -

Outlook second half-year 2016

Swatch Group anticipates clear growth in local currency in the second half of the year compared with the weaker second half of 2015, and thus an annual result closer or equivalent to the previous year. 
I'm a reasonable guy, but honestly that is a very, very vague answer as to how this very large ship is going to turn around.  Nobody wants to see SWATCH fail, but they need to wake up and smell the hairsprings.
The outlook for the Group, with its unique brand portfolio and its global retail and distribution network, remain good in all regions and segments in local currency. 
Sorry?.  Sales are down, and continue to slide as the latest report from the FHS confirms.  Period. 
In the mid to long term, there are many more opportunities than risks. In the first three weeks of July, very good growth was achieved in Mainland China compared with the previous year, especially by the luxury and prestige brands Breguet, Blancpain, Glashütte Original, Omega and Longines. Positive developments can be seen in Southeast Asia, too. Also, markets will continue to develop positively in parts of Europe, particularly in Italy, Spain and Great Britain. The situation in France and Belgium will remain difficult. Decisive growth factors in the coming months will be the normalization of tourism in parts of Europe as well as the further positive developments in China. On the other hand, third-party distributors in Hong Kong are still very uneasy, which will cause further delays in reorders. In North America and Japan, growth in local currency will be achievable.
Well, let's hope so, and I say this with respect, let's hope they are right.  But frankly I do not hold the same hopes for North American sales.  Retailers are getting their ASSES kicked by the grey market and many of them are turning to smaller, niche brands as well as pre-owned watches.  Many are not renewing/replenishing, and they are frankly sick and tired of being strong-armed.  And to be 100% clear - they are feeling this way about ALL of the big group brands - SWATCH, LVMH and RICHEMONT.

The Olympic Games in Rio de Janeiro, Brazil, will give an additional worldwide boost to the Omega brand, since the brand is the official Games timekeeper and is underway with nine watch models dedicated to the Rio de Janeiro Games. Omega will also launch the new Seamaster Planet Ocean Deep Black models and the Speedmaster Moonphase Master Chronometer in the second half of the year.
HMMM......I can only assume that the person who drafted this announcement is not a follower of current events.  Russia is starting to look less and less likely to be sending participants to the Olympics - 

One of the venues is impossibly polluted -
Guanabara Bay in Rio de Janeiro, Courtesy of the CBC
Granted that this was last year per the CBC's story, reports are that it is still pretty messed-up.  And yes, that is a dead cat floating in the flotsam.  And you know how I feel about cats.

Courtesy of Wikipedia

Mosquitoes - and full disclosure, this particular example (above) is not (to the best of my knowledge) native to Brazil in general and Rio in specific.

And mosquitoes mean...

While it is not hundreds (so far) the number of athletes opting out, and the notably reduced number of spectators coming is something else that does not bode well for a huge PR/Media coup.

And then there is the concern for safety -

‘The city should not be this way’: fears over violence in Rio with Olympics near

The Tissot brand currently accompanies the Tour de France as official timekeeper and is naturally represented by the new model Tour de France T-Race. Through the NBA, the North American professional basketball league and the WNBA, the women’s basketball league, Tissot will also achieve significantly greater international visibility, particularly with the new NBA collection and the Tissot Ballade Silicium Chronometer, the first wristwatch under one thousand francs with a silicium balance spring. 

I love the Tour de France, and basketball is amazing.  BUT - and it's a big but, so let me tell you about my big but - the NBA doesn't tip-off until October 25th.  So that leaves a little more than 2 months to get any traction out of the partnership before December 31st.  Another thing to bear in mind, NBA viewership is okay, but doesn't really tick up until near the All Star break which is February 19th, 2017.  I am not the smartest guy in the world, but February tends to come after December 31st, which is when the period closes.

Longines will further expand its position specifically in Asian markets with the new Equestrian and Symphonette collections. Swatch started selling its new Touch Zero Two with fan, fitness and timing functions on 7 July, and as of September, the new Sistem 51 Irony will be available as well as the Swatch Token launched in China.
Sales in all brands are supported through significant long-term marketing investment, the extensive retail network and also by the many new product launches in all segments. Since no structural changes were made to the production base and the entire workforce is highly motivated, the Group can rapidly meet increasing demand, also with regard to the new Swiss made. 

Which again failed to acknowledge the reality of TOO MUCH STOCK ALREADY SLOSHING AROUND.  Right now, there is no demand.  There is no demand because there is too much inventory.  And unless Mars does actually have life, and that life uses time the way we do, and just for the sake of argument, they are fans of the NBA, horse racing, the Olympics, etc., I do not expect that there is going to be a sufficient number of Martians coming down to Earth to purchase watches "duty free".  Short of that, I fail to see where the glut of over-supply is going to be absorbed quickly enough for there to suddenly be a demand again for new product.

Here's the thing, I WANT SWATCH GROUP to succeed.  But they have to start embracing the reality of the situation that they are in.  And so long as the outward message is - "everything will be fine in a few months", then it is clear that they are not fully aware of the circumstances that they are in.

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