Friday, July 13, 2012

The Swatch Group

Largest watchmaker in the world.  Provides a 'ladder of brands', from low end to high end:
  • Swatch and Flick Flak: $30 to $100+
  • Hamilton and Tissot: Around $300 to $1500
  • Longines: 1.5 to 3.5K per steel watch
  • Omega: 3K to 8K: per steel watch
  • Breguet, Blancpain, Glashuette Original: starting at 15K
Competes with Citizen/Seiko/Casio and many others at the low end, Rolex and Richemont in the luxury range, Richemont, LVMH and Independents in high end luxury.

Segment breakdown

How much of their sales are from high end watches vs low end?  Swatch gives no breakdown: 70 color pages of rubbish in their Annual Report without a single number!  Have to guess from online snippets.  Out of 2011 revenue of CHF 1.27b, from high end to low:
Estimated 2010 revenue (from HSBC Research) is:

Revenue accounted for seems to be spread between low, mid and high end.  Based on the above, and the list of Swatch brands, my guess is: 15% high end luxury (Blancpain, Breguet, Glashuette Original), 30% luxury (Omega), 15% high end (Longines, Rado), 25% basic watches (Hamilton, Tissot, Certina), 5% for kids (swatch, flick flak).  Remainder for ETA and electronics.

Swatch Branding

All swatch brands are neatly categorized into a specific price range with certain characteristics.  For example, a Hamilton or Tissot will never release a watch at a Longines price range.  Only Rado will make ceramic watches.  It follows 100% a textbook strategy on price segmentation by branding.

This is a different approach from Richemont, whose brands compete a little, and do sometimes their own thing by releasing watches that are 'out of character'.  For example, up-market JLC released a Navy Seal watch.  Panerai, a sports brand with large luminous dials, made a  torbillion watch.


Has a rich history and tradition. After dying and being resurrected by The Swatch Group, is now a shell of its former self.

Gained fame in the 19th century as a railroad watch.  Official watch of the American Expeditionary Forces in WWI.  In the 20s and 30s, was used by explorers: Commander Richard E. Byrd f;ying over the North Pole in 1926,  Roy Chapman Andrews  in three years' exploration of the Gobi Desert, First Byrd Antarctic Expedition to the South Pole.  Produced a maritime chronometer in WWII: from zero they produced 10,000+ pieces by the end of the war - considered the 'most accurate portable mechanical timepiece ever made'.  Produced the worlds first electric watch in 1957, the Ventura, worn by Elvis Presley in 'Blue Hawaii'.  Went out of business in 1964.

Brand sold to Swatch Group in 1974; production moved to Switzerland in 2003.  Hamilton watches feature in many Hollywood movies.  Still marketed as an 'American' brand, is pigeon-holed at the lower end of the swatch range (U$300 onwards).

Profit breakdown

Personnel costs usually increase steadily (1% down in 03, 4% down in 04, increased all other years).  'Rent, maintenance and Energy' is also probably fixed.  The other costs seem variable, especially Materials, and Marketing/Sales/Admin:

Profit margin (before tax) recently is between 15% in bad years and 23% in good years, similar to Richemont.  But if we look further back:

Richemont is far more cyclical than swatch - Richemont's profit margins are lower in bad times and higher in good times.  As expected, since Swatch also sells lower end products.

Balance Sheet

Quite clean, 1.6bn CHF net cash.

600m contingent liabilities.  700m leases over the next 5 years. 

Comparison to Richemont

Transcripts: In 2011, Swatch tried to sue Bloomberg for secretly recording a conference call with Securities Analysts and selling it to their clients.  Apparently Swatch has never heard of immediate disclosure of public information.  Switzerland is ranked 3 out of 10 in the world bank ranking for investor protection, on par with countries such as Mali, Chad and Iraq.

Richemont has the potential to branch out into other luxury products (leather goods, jewellery).  Swatch will forever sell watches.

Swatch has many competitors in the sub USD 1000 range.   Some of them make excellent watches (e.g.: Seiko), but have not been able to brand their products to successfully move above that range.  Richemont has fewer potential competitors: in the luxury segment (e.g.: Omega/Rolex/Cartier), branding builds most of the product's value, and only large companies can bankroll this.  LVMH is a threat to both companies (Tag Heur competes directly with Omega....I don't think it has the same type of image as Cartier...achievement vs luxury).

Cannot fault the numbers from Swatch, they are profitable in good times and bad, and less cyclical that Richemont.  They are also financially conservative and don't like debt.

But it seems easier to get a feel for how Richemont develops its businesses, and they have greater potential to expand.  Subjectively, I would choose Richemont.

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