What is your general review of 2016? Was it as bad as expected, better, or worse?
2016 was weaker than expected. Whereas the weakness in Hong Kong was expected, the decline in Europe and the US was not in our estimates at the beginning of the year. The situation in Europe was very much driven by fewer Chinese tourists, which was due to terror attacks and the new passport regulations. The weak demand in the US can partly be explained by the strength of the USD but also the local demand was below expectations.
Has the impact on the big groups been disproportionately large compared with other brands?
We believe the brands with the highest exposure to Hong Kong felt the decline most; some of the Richemont brands like Piaget and Vacheron Constantin have a high exposure to this region. Family-owned businesses had less of an issue with inventories at the retailer level. In Hong Kong the retailers have started to reduce their inventories but the sales decline was even greater than the reduction in inventories and therefore inventories increased further as a percentage of sales.
How have the big groups reacted to the market situation? Has this already helped?
The inventory buybacks were very much welcomed by the retailers especially at some brands which were suffering. Richemont was very active with buybacks (worth more than 200 million euros between April and September) and the focus was on Hong Kong. We believe it helped to clean part of the inventory overhang but as mentioned inventories are still at a high level.
Do you see any signs of improvement in 2017? If so, where?
We expect for 2017 a flat year in terms of Swiss watch exports. For Hong Kong we still expect a decline but no longer at the same level as in 2016 (-28%), but we especially assume that Chinese tourists will return to Europe and we therefore estimate an increase in Europe. For Mainland China we believe the stabilization seen in the second half of 2016 will continue into 2017. We also expect the US to return to growth.
What effect do you think elections in France and Germany, two big European markets, could have on the industry?
Usually elections in Europe do not have a big impact, but of course if the outlook for the economy turns more positive this would help. But for Europe tourism plays an important role and therefore security (no terror attacks!) is the main driver.
One CEO of a watch brand recently mentioned the move from “planning” in the 1990s to “reacting” in the 2000s. We seem to see this more and more: markets react to Brexit, they react to Trump’s victory, yet nobody seemed to anticipate it or plan for it. Do you think this is a fair statement?
The events we have seen in 2016 could not have been anticipated, especially the impact from a terror attack but also the currency fluctuations led to an immediate change in consumer demand. The example of Brexit shows how fast tourists are reacting and using attractive prices for purchases. Luxury/watch brands have to react to this with price adjustments but this cannot be done immediately and therefore it will become a continuing challenge.
