By Robin Swithinbank
Talk of a slowdown in Chinese luxury consumption has been well documented. On the face of it, exports of Swiss watches to China have fallen significantly in recent years. But while the figures are technically accurate, there is mounting evidence that they tell only one side of the story.
When the Fédération de l’Industrie Horlogère Suisse (FH) published its annual report detailing world distribution of Swiss watches in 2013, it confirmed that exports to China were down 12.5 per cent on 2012. But closer analysis of the figures – and the results of a new report into Chinese interest in luxury watches – suggest China is still driving watch industry growth and will continue to lead the way for years to come.
Analysts say exports to mainland China have decreased because Chinese consumers are more aware that domestic prices are pushed sky-high by VAT, import duties and China’s 20 per cent consumption tax on watches costing more than Rmb10,000 ($1,600). Another reason is that Chinese people are travelling more, visiting countries where watches are considerably cheaper.
According to research published in BusinessWeek in January, Chinese outbound tourists made 97m overseas trips in 2013, up from 83m in 2012. The number of passport holders is also rising rapidly. A report published in China Youth Daily last month indicates buying luxury products is “one of the major reasons” Chinese nationals travel abroad.
“You used to be able to sell in China because people didn’t know there was such a price gap,” says Erwan Rambourg, HSBC’s Hong Kong-based global co-head of consumer and retail research.
“Now, you’ll find it very difficult to find a single Chinese consumer who doesn’t know that they should not be buying local, but buying while they’re travelling.”
While exports of Swiss watches to China have gone down, exports to destinations popular with Chinese tourists have risen steeply.
The FH’s report shows exports to the US up 12.8 per cent over the past two years, with the UK increase at 44.5 per cent. Exports to South Korea, considered an upmarket destination for sophisticated Chinese travellers, were up 35.6 per cent over the same period.
“People assume luxury equals China, but it doesn’t – luxury equals Chinese,” says Mr Rambourg. “China accounts for 8-10 per cent of sales through the luxury sector, whereas Chinese account for around 35 per cent.”
The World Watch Report 2014, published yesterday by the Geneva-based strategy and research company Digital Luxury Group (DLG), backs up suggestions that Chinese appetite for luxury watches is rising sharply. The report indicates that 23 per cent of all global searches for luxury watches last year originated in China, an increase of 59 per cent over 2013 and more than in any other territory.
The report also shows a rise in interest of 145 per cent in the ladies’ watch category.
Based on these findings and assuming that crippling Chinese domestic taxes remain at today’s levels, some experts believe the current trend will continue.
“We don’t think the main challenge will be developing the demand for luxury products in China, but boosting local consumption,” says Pablo Mauron, DLG’s general manager for China.
“That said, we remain optimistic for future growth because tier two and three cities are still largely unexploited [compared with China’s tier one cities – usually defined as Beijing, Shanghai, Guangzhou and Shenzhen], and because of the increasing number of Chinese luxury travellers.”
Others feel the disparity between exports and domestic interest may not be long-term. “As in all markets, there can be a lag effect between interest and acquisition or repeat purchase,” says Zahra Kassim-Lakha, Jaeger-LeCoultre’s global head of strategy.
The drop in exports means some brands have overspent in China. Few seem concerned, though – part of their strategy is to drive awareness of products among the travelling elite. It appears to be working.
“We have overspent in China,” says Jean-Marc Pontroué, chief executive of Roger Dubuis, the Geneva haute horlogerie brand. “Our communication budget in China is by far higher in ratio to sales compared to the rest of the world, because we believe we need to be exposing ourselves to the travellers who buy our products when they travel. We don’t consider China a territory, but at least 40 per cent of our standard business is addressed to Chinese.”
Another factor contributing to the decline in exports to China is the impact of President Xi Jinping’s campaign to curb corruption. The gifting of luxury watches in deals is believed to have been sharply reduced since the campaign was introduced in 2012.
“Watches at lower price points aren’t used for gifting”, says Mr Rambourg. “And if you look at the higher-end brands, the risk you take if you offer those is that the person you’re offering them to might not know the brand.”
Juan-Carlos Torres, chief executive of high-end watch brand Vacheron Constantin, confirms this. “We are not a brand used in the corruption business,” he says.
“To understand our brand, you have to have a certain level of knowledge. Most of our Chinese customers are individuals, and if they are gifting, it is to a partner, not as part of a business or political transaction.”
Mr Torres, whose brand has 15 boutiques and 12 further points of sale in China, says the global Chinese community accounts for more than 50 per cent of Vacheron Constantin’s sales. “There’s no slowdown worldwide of Chinese customers,” he says.
According to the World Watch Report, growth in interest in haute horlogerie brands was up 13.16 per cent year on year in China, higher than any other country. For Vacheron Constantin, the increase was 34.59 per cent. Much of this growth can be attributed to the explosion of mobile phones in China.
Baidu, China’s dominant search engine, reports that mobile searches for haute horlogerie brands in 2013 were up 120 per cent.
The report shows the most searched-for haute horlogerie brand on mobile was Patek Philippe. For Thierry Stern, the brand’s chief executive, this is cause for optimism. “There is a very strong interest in haute horlogerie coming from Chinese customers and it is the sign of future long-term market potential,” he says.
DLG’s research suggests the luxury watch industry’s growing reliance on China – or rather Chinese consumers – may not be misjudged.
CLSA, Asia’s leading independent brokerage and investment group, estimates that by 2020 Chinese will make 200m overseas trips a year, double the current figure. Luxury brands will be banking on it.
Findings: World Watch Report 2014
● Global consumer interest in luxury watches grew 5.7 per cent in 2013.
● China led the way with 23.25 per cent of all search, after a domestic rise of 59.43 per cent year on year.
● The US and the UK came in second and third, with 20.69 per cent and 10.04 per cent of global search respectively.
● Bric markets performed well, with China, Russia and India returning the highest year-on-year increases. Brazil, however, saw a 2.9 per cent drop, which is likely to be a concern going into the year it hosts the World Cup.
● Rolex, Cartier and Omega are the most searched-for brands in China.
● Interest in women’s watches is led by China (up 145.50 per cent), India (up 27.65 per cent) and Russia (up 11.67 per cent).
– Compiled by Digital Luxury Group, Geneva