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Swatch Group 2016 Net Income Declined By Half But Optimistic For 2017

Swatch Group 2016 Net Income Declined By Half But Optimistic For 2017 Watch Industry News

Amid much discussion of the watch industry's ongoing challenges, Swiss watch and jewelry manufacturer the Swatch Group helps quantify the situation with some hard numbers. The Swatch Group has announced Key Figures for the year ended December 31, 2016, ahead of more details to follow in its Annual Report in March. The announcement mostly shows falling numbers for 2016 but "anticipates healthy growth in 2017..." Headline-grabbing figures include a decline in net income of 47% from the previous year, from CHF 1.119 billion in 2015 to CHF 593 million for 2016.

Swatch Group 2016 Net Income Declined By Half But Optimistic For 2017 Watch Industry News

With 18 Watch & Jewelry brands representing a broad range of price segments from brands like Breguet and Harry Winston at the very high end to inexpensive plastic Flik Flak watches, the health of the Swatch Group is linked to that of the Swiss watch industry in numerous, symbiotic ways. We know the industry overall is currently struggling, but here are a few more Swatch Group figures: Net sales for the Watches & Jewelry segment (including Production) were CHF 7.305 billion, representing a decrease of 10.7% from the previous year, a performance reflected across the group that overall reported net sales down 10.6%.

The operating result (aka operating income, meaning profit after deducting operating expenses) of CHF 805 million represents a sobering 44.5% decrease from the previous year. Swatch Group specifically refers to "massive shortfalls" in third-party purchase and order volumes for things like watch movements and components - even though the group's movement super supplier ETA was once confidently moving to cut off supply (as David Bredan fully explains here) to companies outside the Swatch Group.

Swatch Group 2016 Net Income Declined By Half But Optimistic For 2017 Watch Industry News

Swatch Group Chairman Nick Hayek (Photo: KEYSTONE/Martial Trezzini)

We get a sense of scrambling amid the industry-wide "crisis" at the other big Swiss luxury conglomerates as well. At Richemont, a major management shakeup announced in November last year recently continued with CEOs replaced at a number of top brands. At LVMH, the indefatigable Jean-Claude Biver recently added interim CEO at Zenith to his broad-ranging responsibilities and mission to make Swiss watches great again in any and every way possible. LVMH actually reported 5% growth in revenue for the year ended December 31, 2016. Seeing Richemont and LVMH's frantic activity, followed by Swatch Groups notably poor 2016 results, one may reasonably ask what actions Swatch Group is taking in order to keep it together.

Swatch Group 2016 Net Income Declined By Half But Optimistic For 2017 Watch Industry News

As mentioned above, the Swatch Group's announcement attempts to give shareholders cause for optimism. The operating margin (basically, a ratio of how much profit a company is making from each dollar of sales) was down (now 12.2% from the previous year's 18.8%) for the year. The Swatch Group, however, points to an improvement of 2 percentage points in its operating margin for the second half of the year over the first half. (For more in-depth business and finance analysis on this subject, also check out this article on the site Watch Ponder by aBlogtoWatch contributor Aaron Stark.)

There's more good(-ish) news. Just as Richemont noted back in November, the Swatch Group also confirms that some regions, like the Middle East and, particularly, Mainland China, saw strong sales growth in Watches & Jewelry at the end of 2016 and into 2017 - apparently being the main basis for 2017's overall positive outlook. "Healthy growth" is also forecasted for the USA and Europe. That is a good portion of the globe and some bold optimism considering the numbers just released. Their Electronic Systems segment is also cited as an area of potential growth. Swatch Group Chairman Nick Hayek says that a 7-10% rise in revenue in 2017 can be expected in local currencies, while growth for the company will depend a lot on exchange rates, according to Bloomberg.

Swatch Group 2016 Net Income Declined By Half But Optimistic For 2017 Watch Industry News

The Swatch Group agrees with our assessment that the industry's problems are not due to a lack of interest in Swiss watches. They seem to offer reassurances to employees and say that their e-commerce and extensive production chain is in a strong position to take advantage of consumer enthusiasm - but not so much why it failed to do so in recent years. You don't need an MBA or even to know all the finance terminology to get the picture that the industry has been treading water, but after the recent SIHH 2017 watch industry trade show, we concluded that the Swiss are indeed "holding on tight."

Swatch Group 2016 Net Income Declined By Half But Optimistic For 2017 Watch Industry News

Swatch Group also gives enthusiasts something to look forward to by promising that "the year 2017 will be marked by many new product launches by our brands." Specifically, the 60th anniversary of the Omega Speedmaster is cited as a "strong stimulus," further praising their recent successful #SpeedyTuesday limited edition watch. Also, Swatch has promised to launch a "unique new very slim Skin collection," as well as the second generation of the Swatch Bellamy as a contactless payment device. We'll keep you posted...

For now, we can say that we hope for a healthy industry, more great products, with more realistic value propositions. swatchgroup.com

About the Author

Zen Love is a watch enthusiast originally from Philadelphia, PA, USA, but has been living abroad in Asia for many years, and is currently based in Bangkok, Thailand. Zen (yes, it's his real name) enjoys the outdoors, learning languages, and wearing watches of all kinds. He also wears many hats at aBlogtoWatch, including News Editor. Wrist size: 6.5" (17cm).

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Disqus Debug thread_id: 5517909179

  • OK – I am running a competition: Can you guess the watch that contains the mechanism illustrated in that last picture “Fig.4”?

    Clue: It is indeed from the Swatch Group, but this rare watch was made before Swatch acquired them.

    The winner receives a free “well done”

    • Jason

      Harry Winston Opus 11

      • For the win

        • Word Merchant

          shortest competition evah!

    • Windawsinnit

      Seiko Blumo.

  • So profits down 47% on revenue which declined by a bit less than 11%. Seems like the high profit items (precious metal cases and uber expensive watches) did not sell well last year. And why do they expect things to dramatically improve om 2017? Are watch buyers doing a 180 and now rushing to buy gold and platinum cased $50K and up watches? I hope the recent improvement in operating margins means that Swatch is getting a better handle on (bloated) inventory and scaling back production to meet demand. Outside of management challenges (to put it nicely), it seems like unpredictable currency exchange rates are another driver in the sales volume picture. Aaron, what are your thoughts?

    • Richard Baptist

      Amen, covered everything I was going to say.

    • @mark, you are a very smart man. Exchange rates do affect this, but not as much in the short run. You mention commodity prices on precious metals but these can actually be hedged so with a good hedging program, these can be more or less canceled out. The main problem is high fixed costs and growing inventories. Keep an eye on https://watchponder.com tomorrow for a detailed analysis of this financial release.

      • Not smart, but I have been reading your series on what is going on with the Swiss watch industry from a financial analysis approach.

        • Windawsinnit

          You two should get a room, seriously. Aaron, what are your thoughts?

          • Well, we did have lunch together back in December. But did not “get a room”, ha ha.

    • @markcarson:disqus here is the article I published today on the financial analysis of the Swatch release: https://watchponder.com/2017/02/04/swatch-group-dreaded-two-words-growth-and-inventories/

  • BRIAN

    When do they realize they simply can’t charge these outrageous prices for a watch without precious metals or elaborate labor required to mfg.

    Reverse engineering and modern machining has ruined many a high end product. I hate to use the counterfeit market as an example as I find it applying to steal someones designs.

    With that said one has to see a high end replica to appreciate how they are producing a watch for say $300 vs $9k that isn’t that far off. Then add the repetitive and corrected mfg techniques on some of these watches that haven’t changed a style for 20 years and the profit has to be staggering.

    Younger generations do not care about handcrafted items they just want the item and cheap. Salvage BMW, fake Rolex, Counterfeit Versaci and you are ready to go. They do not see the difference and honestly I am starting not to either.

    • JF Schnell

      Most of the big brands are not really bringing new designs. They still busy with their past glory as lots of rich (and many famous) put a lot of money on their iterations. What makes them more appealing is they exclusive club. We are making just this limited amount and then some guys go to YouTube brag about it (when we know they got the timepiece in the grey market). That is what still binging money to them. Newer generations seems not to care too much exclusivity unless they are socialite.

  • IanE

    Maybe I’m wrong (oddly, not the first time!), I certainly hope so, but there does seem to be a touch (at least) of complacency from watch executives. I am reminded of the end of the UK motorcycle industry.

    • The Deplorable Boogur T. Wang

      And I am reminded of the adage about “Re-Arranging the deck chairs on the Titanic.”

  • Lawrence

    The New Omega Planet Ocean are too expensive and not nice looking.

  • SuperStrapper

    WTF is a Balmain.

  • Svetoslav Popov

    Yep, I am sure 2017 will be better, because another 50% decline compared to 2016 is very extreme and probably not happening 🙂

  • Dan Finch

    Damn, wish I knew this before I just upped my Swatch Stock a couple weeks ago. It has been going up modestly, so I hope it doesn’t fall too much! My Richemonte stock has done well going up 10% this year.

    • Sheez Gagoo

      Have you ever considered to lend them to shortsellers?

  • Yanko

    Extreme optimism is written all over the face of the “Chairman.”

  • @Zen great write up. I’ve just published an analysis of this from the business outlook that readers might be interested in: “Swatch Group is suffering from decreased sales and profits while accruing massive inventory levels. The company has recently identified non-specific opportunities for growth in 2017 that seem to have little chance of loosening the quickly tightening belt. While Swatch Group’s self-projected sales growth would be nice, growing inventory levels are something that cannot be ignored. This should leave all of us wondering Is Swatch Group being realistic?” https://watchponder.com/2017/02/04/swatch-group-dreaded-two-words-growth-and-inventories/

    • ZL

      Thanks Aaron, I was specifically looking forward to your feedback and knew you’d have some insights I missed!

    • And the answer is both obvious and not likely to happen. Lower prices to generate far greater sales. Keep prices safely above variable costs but allow greater unit sales to generate more contribution to fixed costs overall. This will result in more watches on more wrists and lower prices. Everyone should be happy. But this assumes that if watches cost half as much that twice as many would be sold (to put it simply). Perhaps the big watch groups don’t believe that the watch market is elastic enough to absorb far greater unit sales (at lower prices). Or maybe they just hate the idea that their watches cost too much and their image would suffer for selling yesterday’s $3K watch again for $3k instead of the currently inflated $6K retail prices. Aaron’s linked article (in the above comment) explains why Swatch feels compelled to maintain production units. So assuming that as a fact, the reality is they need to sell off the stock. Either official price reductions or gray market madness will reign.

      • Kuroji

        I’m sure the phantom warehousing schemes are already well developed.

        • I really don’t know but I suspect that the way Swatch Group is carrying assets on their books plus their not wanting to lay off workers gives them fewer options. If they lowered prices I think that would create a huge asset value write down on their books which would make their situation look (to investors) to even worse – even though it would be the start of the real solution. So again, not likely to happen. Cheers.

  • Ross Diljohn

    Swatch getting what it deserves.

    • SuperStrapper

      Ok, I’ll bite. How to you back up this little nugget of wisdom?

  • John William Salevurakis

    That awkward moment when you realize you have cut off a group of customers providing a near guaranteed revenue stream at the precise moment your primary business is shrinking by roughly 50%.

  • Word Merchant

    I looked at Swatch’s brand list in the article and realized two things:

    1. I don’t really like many of the ones I’ve actually heard of. So I probably will never own a Swatch Group brand watch.
    2. There seems to be no rhyme or reason to the collection at all; if a friend of yours collected watches and had one watch from each of these brands, the collection would be very unbalanced, and very odd. You’d surely think they wasted most of their money.

    If Swatch Group just shut down everything tomorrow except Swatch, Omega and Breguet (at a pinch), and perhaps a couple of others for sentimental non-profit reasons, that’d be a start. But on paper, they do look a bit of a mess.

    • They have a brand heirarchy and try to cover every watch buyer from a plastic Swatch up through Hamilton and Tissot and on to Omega and G.O. on their way to Blancpain, Jaquet Droz and Breguet. Sure it may look random, but its just like car makers back in the 50s and 60s. Entry brands and apirational ones. I’m not going to defend them on this, but I’ve heard that this is their thinking (and it effects how brands are allowed price and innovate within the Swatch world). But some brands like Mido and Certina seem to have little traction that I can see. Like GM with with Oldsmobile and Saturn, sometimes its wise to prune the bush a bit. Cheers.

      • The Deplorable Boogur T. Wang

        Mido and Certina have some ‘traction’ in the PAC Rim area.

        • Interesting. They don’t seem to have much presence in the U.S. (from what little I see) and their booths at BaselWorld never seem to be beehives of activity.

      • Joel Schumann

        I see lots of Certina over here in northern Europe.

      • Word Merchant

        Ah ok. Interesting. I still think it’s a wrong-headed approach because to me there’s no natural path between the brands. If I own a (say) Tissot and want to step up, why would I pick another Swatch Group brand over anything else?

        • IG

          Tissot ? Omega ? Breguet, what’s wrong with this “step up”?

          • Word Merchant

            There’s nothing wrong with it, but there’s nothing particularly right either. That’s my point.

          • Works for me – except for having the money of course, ha ha. But I think Word Merchant’s point is that they seem unrelated so there is no apparent reason to “stay in the family”.

          • Word Merchant

            Just so!

        • I agree. Unlike the car analogy, buying a Chevrolet might make one lust (50 years ago) for a Cadillac but you’re right, having a Hamilton may not make you a future Breguet customer since one does not seem to be a stripped down model of the other.

          • commentator bob

            We hardly need to go back to 1950s GM, VW owns VW, Seat, Skoda, Audi, Bentley, Lamborghini and Bugatti.

          • My point wast that back in the 50s, people who bought a Chevy really wanted to drive a Cadillac someday. And perhaps worked their way up to it via a Pontiac, Olds, or Buick. And GM encouraged that sort of upgrade path. I don’t know that the VW group plants the seed in the mind of a new Skoda owner to progress through the other VW brands on their way to a Bugatti. Cheers.

  • The Deplorable Boogur T. Wang

    Good piece ZL.

  • Shinytoys

    That is a huge piece of cheese in the loss department. 2017 won’t be a lot better than 2016 for the watch industry, buckle up boys, it’s going to be a bumpy ride…

  • cg

    Everything’s fine and dandy! Don’t look behind that curtain. This industry is in severe denial. They’re relying on “exchange rates” for growth in ’17? EU is gonna crash and burn and Swatch will still claim they are positioned for growth. Sounds like a recently defeated delusional U.S. gov’t administration. Obviously they have a hard time at self assessment

  • commentator bob

    Swatch has to have more brand boutiques than any other company selling Swiss automatic watches in the US. That alone is great for the higher level Swatch group brands and the industry in general.

    • @commentator bob, I’m not sure the brand boutiques have been a blessing and they definitely have not resulted in profitability. The boutiques are a strategic move to stem gray markets but have not been able to do so and resulted in huge costs to establish and operate the boutiques. They also eliminate the possibility to be “sold” on something else. For example, when you go into an Omega boutique, you can only buy an Omega. A brand like Omega or Rolex benefit from the inability of the customer to discover some new brand and change their mind before purchase. However, outside the main sellers (Omega or Rolex), other brands benefit by being present for the opportunity of a cross sell. The non-Omega/Rolex boutiques are puzzling while the Omega/Rolex boutiques are very costly. I think boutiques in general have yet to prove their long term value for brands despite the rosey portrayal.

      • commentator bob

        I am referring to Swatch brand boutiques specifically, not Swatch Group. Swatch brand boutiques both raise brand awareness and offer anyone off the street a plastic or steel Sistem51 for $150 – $200. And their sales people are fairly good. Mechanical watches need that kind of exposure.

  • JF Schnell

    Crisis, what crisis? None of them closed doors. They are just making less money. Is that a crisis? They are making less but still making money. Some arrogant Swiss watchmakers will have it in their faces. But please don’t call it a crisis. Crisis is when you can’t put food on the table or something similar. If what they face is a crisis I wouldn’t mind to have a crisis like they are having now… and still making money.

    • Rupert Muller

      I guess those watchmakers/employees that were fired in the last 18 months would probably call you arrogant. Or something else.
      You are right that none of the Swatch Group companies closed its doors and no employees were fired (that’s Hayeks general philosophy). However, when talking about a crisis of the Swiss watch industry, there are numerous examples of closed doors or layoffs:
      – Breva
      – Antoine Martin
      – C. H. Wolf
      – Parmigiani Fleurier
      – De Grisogono
      – Ernest Borel
      – and not to forget the mass layoffs at Vacheron Constantin and Piaget

      For sure, the list is not complete as many suppliers also cut down their personnel. For those people, it most probably IS about food on the table…

  • Yojimbo

    I feel like we can number in DAYS how long ago a certain writer of ABTW was talking about Hayek’s last spring pronouncements of a 2016 upswing being supported by experts

  • abbacabba

    What are the major watch groupings? Swatch, Richemont, LVMH sort of…. Are there some others?

  • Millennial2020

    Nick Hayek is too optimistic. He should learn to not shoot off his mouth and be more like his late father. Otherwise nobody in the industry will take him seriously.

    As it stands, he looks like a clown whenever his statements turned out to be completely untrue.

  • Dan Finch

    You really have to wonder about the leadership over at Swatch… They lost a major part of their revenue by cutting off movement and parts sales to other brands. To make it even worse, they did this at a time when their patents expired, allowing competitors step in with identical clones. Swatch claims to have done this for the good of the industry… to force other matchmakers to produce their own movements, thereby increasing diversity in the industry. However, Swatch themselves do not even make unique movements for their own brands in the lower and middle ranges. Instead, they simply continue to slap generic ETAs into Tissot, Hamilton, Mido, Rado, Longines, Certina and Balmain watches! They have even had problems trying to come up with their own in house Movements for flagship Omega! So they are fooling no one. Rolex now makes everything in house except watch hands and crystals. Even the Tudor brand is now making in house movements. Ditto other hi end brands like Cartier, Bulgari. No one wants any reliance upon ETA with everyone going to Selitta instead. Think of all the volume Swatch has thrown away!
    You would expect Swatch to make some innovations in response to their stated intention to bring more into the industry. But sadly, they seem to be concentrating on figuring out ways to cut production costs. Merely making incremental changes to their ETA movements, like elimination of the balance adjustment to save on labor intensive hand calibration. The only “new” movement they’ve produced, the sistem 51, is a robot made piece of junk!