Sunday, July 29, 2018

Elvis Has Left The Building... Maybe

Boy, you go to sleep the night before, you wake up and the world has gone crazy!

Unless you have spent the last several hours in an isolation chamber, you now know that Nick Hayek dropped the SWATCH bomb, and went with what American politicos term the "nuclear option".  As per too many news outlets to credit, SWATCH Group has announced that they will not be rolling out the red carpet for their retail partners, the press and the general public at BaselWorld 2019.

Now if we look at this on the surface, we can totally appreciate all of Mr. Hayek's reasoning.  The fair is way too expensive to participate in - tell me about it!  The returns don't justify the outlay, the watch making and buying world has become more transparent, yada, yada, yada...  

But there are a few things that, upon reflection, don't ring true to me.  First and foremost, harping about the cost of the building itself is nonsense.  Essentially, and I am paraphrasing here - that it is not up to the SWATCH group to help recover the cost of building the BaselWorld Halls in the first place.  Well, based on that logic, it should not be up to me, the customer, to help recoup the expenses of "maintaining" the Gerber-Crawford relationship, the massive construction project going on in Biel/Bienne, and the exorbitant rent for the New York City boutique/s with the purchase of a rather steeply priced Omega that I will likely find in the grey market at an equally steep discount a little later down the road.  So in fairness, to me this is a bit of the pot calling the kettle "less than shiny".

But if we go a little deeper, there are some other considerations.  Now on the one hand, SWATCH group posted fairly significant gains in their half year report recently.  On the front page of their half year report, SWATCH stated that "growth" in "America" had been particularly good.  Well, I can't really speak to that with anything specific, because I do not have access to the sales ledgers.  But I would point out a few key points.  For starters, SWATCH has a fully owned subsidiary in the US.  So what that means is that actual sales are a bit dicier to quantify from the outside.  The single biggest problem with trying to gain anything "knowable" from the Swiss export numbers is the realities of the new Swissness regulations - SWATCH Group and all of the other big (and small) dogs still have a shit-ton of components that were manufactured under the old standards, and they need to assemble and export them by the end of the year.  It is July 29th, which when you factor in the holidays (which essentially start in the second week of December) it's essentially four months.  Because when the clock strikes midnight, quite a few watches will turn into wrist-bound pumpkins.  So if you are running these brands, you know that by that date everything must be out of Switzerland as any of the remaining stuff can't be used anymore.  It's safe to say that this definitely leads to higher export volumes which (if we are being honest about it) don't really match up with what the real market demand is.  As a friend who knows about these things pointed out to me, Hong Kong‘s wholesale is dead but the export figures to Hong Kong continue to explode.  
Un petit mystere, nes pas?

So let me venture a few theories -

Paul is Dead

Borrowed from the world-wide infoweb
People of a certain vintage will remember this one.  It got their  attention, people were talking, until...
Courtesy of Life Magazine
So, maybe this is a lot of bluster.  Essentially, make the announcement, and make the BaselWorld organizers jump to the height you are requiring.  Simply put?  With the current state of the watch business, I do not think that there are sufficient numbers of deep pocketed brands to fill the vacuum that will be created by the SWATCH group's absence.  So it is possible that a spirit of d├ętente will be reached by both sides.  Keep in mind, we still aren't even to September, if Hayek can go from a yes to no for BaselWorld, he can go back to yes again.  Stranger things have happened.

But let's say that, in Hayek's mind, to quote the Dude (The Big Lebowski) quoting President Bush (the first):

"This aggression will not stand, man."

And maybe, just maybe, he feels that there truly has been a seismic shift in the watch business.   Well, maybe yes.  But given the vast amounts of cash thrown into pr and media things for SWATCH group brands, I don't completely buy everything he is selling.  Because after everything has been said and done, while Omega can certainly manage without BaselWorld, the less glamorous brands in the group actually really need to be seen. 

My gut tells me something different (and in fairness, it is possible that my gut has shit for brains) but let me air it out for you -
I think that the reality is somewhere in the middle.  BaselWorld is crazy expensive.  If the feeling was that the fair was failing and that it's expenses couldn't be justified?  Well they would have walked away a few years ago.  But more than just the fees for participation, a big component of BaselWorld is the cost of the actual booth itself.  You budget for them, and the cost is amortized over time.  And every several years?  You build a new one (or in the case of SWATCH group - several).  Now I do not know this as gospel, but just a theory - what if the cost of the booths (yes, that is plural) has been amortized and it can go off of the books?  Well, then you have a perfect opportunity to walk away.  At least for one year ; )

Why might that be important?  Well, let's get back to that whole export / Swissness bugaboo.  The analysts would have you believe that the watch industry is experiencing a comeback of heroic proportions.  But the truth is far muddier than that.  Exports are up, but that is not necessarily a corollary to strong sales.  In many cases, this is just products being shunted out of the Swiss borders and over to subsidiaries overseas.  If and when retail stores start crowing about their record breaking sales (which in fairness, all of us would be happy to see), it is a dubious notion to talk about recovery.  So keeping that in mind, it also stands to reason that the actual number of watches departing Switzerland after December 31st might be, well, smaller.  Meaning that in order to keep shareholders and the analysts sweet, you need to find savings.  And although numbers like CHF 50 million are bandied about for expenditures during BaselWeek, I suspect that they could, in fact, be higher.  So if your sales numbers slump due to smaller production and export, you might want to find money wherever you can.

On the other hand -
You could cut some of your budgets, don't spend the amounts of money to fly people in and out, close the cafe, etc.  Savings could be found.  But that might not really be the point of all of this.

So whether this is hard hearted pragmatism, or Kabuki theater for the goofy, time will tell.

1 comment:

  1. I told my wife a few hours ago when I first read about it on Google-news....Mr Hayek is a wise negotiator. He cannot lose with this gambit. As a Basel-goer (and distributor) (and exhibitor) (through
    my Swiss and German partners) since the 80's, yes, the fair is stupid-expensive. Yes, the fair overplayed their hand. Yes, "the need" is not their anymore. So Hayek can not lose. He saves hundreds of millions if he DOES actually pull out. He saves several million if he re-negotiates and stays in. WIN/WIN! SWATCH, ROLEX, PATEK and Breitling have muscled their way around Basel for years. Time to pull the plug on the old-dog Basel Fair? In this incarnation yes. But a re-brandingand re-marketing would do wonders. And a Watch-Week-NewYork or WATCHWORLDUSA held in New Jersey or Connecticut or even Chicago (with care given to the smaller brands...and less slobbering over the big boys.. )would be amazing. and cost-effective. The "correction" continues. The love of horology has to get back in the front of the bus with the marketing boys. Jeffrey Hess