Coronavirus: Swatch's first ever loss does not bode well for the luxury goods sector
The Swiss watch giant is seen as one of the strongest luxury brands and its chief executive thinks 2020 will still be profitable.
Tuesday 14 July 2020 19:05, UK
It has never reported a loss in its 37-year history, but today Swatch Group - the world's biggest watch maker - declared itself to be the latest corporate victim of COVID-19.
The Swiss giant, owner of famous watchmaking brands including Tissot, Longines and Omega as well as the eponymous Swatch name, reported a net loss of 308 million Swiss francs (£262.4m) for the first six months of 2020.
That compared with a profit of 415m Swiss francs (£347m) in the same period last year and was on the back of a 46% fall in half year sales to 2.2 billion Swiss francs (£1.8bn).
Swatch said that, after a strong January, it had suffered a "massive decline" due to closures of shops around the world.
It said that, at times, up to 80% of outlets through which it sells watches and jewellery had been closed, with only online sales possible.
It added that production of watches, jewellery and watch components had been "reduced to a minimum" during the height of the crisis, with a "significant number of employees" put on shorter hours.
The company added: "The COVID-19 measures have left deep marks on the half-year figures of the group, which resulted in a half-year loss for the first time."
The scars will be lasting. Swatch has closed about 260 outlets for good, while around 2,300 employees out of a total headcount of 36,000 have lost their jobs.
The company, which was formed in 1983 from the merger of rival Swiss watchmakers ASUAG and SSIH, said that customer demand continued to be strong, both at the prestige and luxury end of the market as well as the middle and lower-priced ends of the market, but it could not be satisfied during the period.
Chief executive Nick Hayek said the strength of the Swiss franc during the half had also created a headwind. He insisted, though, that Swatch Group would still be profitable for the year as a whole.
Mr Hayek, whose father Nicholas oversaw the merger that created Swatch Group, added: "The group's management is convinced that the sales and profit situation will improve quickly in the coming months, parallel to the further easing of COVID-19 measures.
"We are really looking forward to a very good second half of the year that will bring the group again into profitability."
Swatch's update offers an insight into how trading will have been during the first half of 2020 for other luxury goods groups, in particular rival Swiss watchmakers like Hublot - which is owned by the French luxury goods titan Louis Vuitton Moet Hennessey - Patek Philippe and Rolex.
Shares of luxury goods companies have been particularly heavily hit this year following the collapse in air travel, because a significant proportion of sales come from air travellers and airport duty free outlets.
But today's update also provides some grounds for optimism. Mr Hayek highlighted how its sales in China, Swatch's most important global market, had fallen by 83% in February when lockdown measures were introduced in the country, with sales in March and April down 22% and 3% respectively on the same months last year.
However, once shops were allowed to reopen, there was an immediate recovery - with sales in May and June up 73% and 60% respectively on the same months last year. More than a third of Swatch Group's global sales come from China, Hong Kong, Macau and Taiwan.
In South Korea, another important market and where there was only a partial lockdown, retail sales had fallen by 16% in March but risen by 1%, 23% and 34% in the following three months.
Swatch's experience may not be so easily replicated by other luxury goods companies, though, for a very specific reason.
Unlike a lot of manufacturers, it sources most of its components from within Switzerland itself, meaning that it will not have experienced supply chain bottlenecks as deliveries of parts from Asian suppliers were held up by COVID-19.
It also had other advantages going into the pandemic. Unlike many other businesses, this most conservatively-run of companies is not only debt-free, but entered the crisis with more than 1bn Swiss francs (£849m) in the bank.
That meant, even though it was forced to reduce production in some cases, Swatch could use the downtime by redeploying workers to upgrade and maintain machinery and equipment.
Research and development departments continued with their work and marketing budgets were only cut in countries where shops were closed.
Mr Hayek has also, strikingly, used the crisis to make other big changes. More than a third of the company's brand managers, including some who have been with Swatch and its predecessors for half a century, have been replaced.
Incredibly, the company only made about 5% of global sales from the internet prior to the crisis, which has highlighted a need to build more of a presence online.
Moreover, Swatch is operating in a market that has been upended during the last decade, with Apple now selling more watches than the entire Swiss watchmaking industry combined.
Mr Hayek argues that Apple's presence is not the threat that some may see.
"Apple has made sure that those who don't like watches are wearing something on their wrists again. This is a huge opportunity for us," he told German newspaper Die Welt last weekend.
He can also point out that the industry has been through tough times before.
Swatch was born in the aftermath of the so-called "quartz crisis" in the late 1970s and early 1980s in which digital timepieces made by Japanese manufacturers like Seiko and Casio threatened to eliminate mechanical watches of the kind made in Switzerland.
However, as it grappled with the threat of smartwatches, COVID-19 was the last thing either Swatch or the wider Swiss watchmaking industry needed.