BUSINESS INTELLIGENCE (free access)
Luca Solca: "The winning brands from before the crisis will continue to win”
Ten questions on the way out of the crisis asked to Bernstein's star analyst, who remains one of the most relevant of all those who monitor the luxury market. With ten answers that sparkle with intelligence, moderation, and optimism. French version to be published later...
❑❑❑❑ BUSINESS MONTRES & JOAILLERIE : Do you believe in the concept of "revenge shopping" applied to traditional watches?
Luca Solca (below) : — I frankly don’t think much of the concept of revenge shopping – neither in watches nor in the rest of the luxury goods market. The reality is that luxury – and watch sales within it – will suffer from the recession and from a significant reduction in international travel. At one point – once an effective therapy or vaccine was found and made available to all – we may see a sort of post-war consumer euphoria. It will be great to see a consumer confidence improvement at that point – but sales will have to reckon with likely lower discretionary spend capacity too, no matter the feelgood.
❑❑❑❑ BUSINESS MONTRES & JOAILLERIE : What could be the impact of the price increases envisaged (and already practiced) by some watch brands?
Luca Solca : — Luxury brands are trying to cushion the bottom line impact of lower volumes with material price increases. We are seeing this in other areas too – the manicure store close to where we live has added CHF 10 to any service they provide. An espresso in Italy is going from EUR 1.10 to EUR 1.30. We will see price inflation all across the board.
❑❑❑❑ BUSINESS MONTRES & JOAILLERIE : Do you really believe that there is a rush to watch boutiques in China at the moment ?
Luca Solca : — Two factors are pushing sales in China:
1. Customer service initiated sales during the lockdown: consumers are coming in to pick up products they had ordered over the phone or the internet; 2. Chinese consumers are not travelling abroad, so all of the demand that used to be surfacing outside of China is now appearing in China itself. The question we should ask is whether sales to Chinese consumers globally – not sales in China – are increasing year on year. And the answer to this question I am afraid is no. Or at least not for the moment.
❑❑❑❑ BUSINESS MONTRES & JOAILLERIE : Do you think that Chinese watch consumers will show an even greater appetite for traditional watches or will they calm down?
Luca Solca : — Consumers become more conservative during a recession. They cut the number of brands on their shopping lists and they shift their spend to iconic products. I expect the polarization we had seen in the watch industry prior to Covid-19 to persist: winners will continue to win.
❑❑❑❑ BUSINESS MONTRES & JOAILLERIE : Do you think traditional watches (non smartwatches) will perform better, or worse, than other luxury goods ?
Luca Solca : — If we exclude the entry price Swiss made watches – which are structurally under pressure from smart watches and in a secular decline – I would expect traditional watches to perform just below the luxury market average. The handicap comes from the need to recapture significant volumes in Hong Kong, which I expect will continue to be on the back foot for the foreseeable future.
❑❑❑❑ BUSINESS MONTRES & JOAILLERIE : What will be the impact on the watchmaking business of the measures restricting travel for Chinese people from the interior: will they consume more in China or will they wait to go back to tourist shopping to buy cheaper watches?
Luca Solca : — That is very much the question – both for watches and for luxury goods in general. Given the higher fiscal burden on purchases in China – especially on higher price products – it is possible that lower taxation will be necessary to fully recapture demand in the Mainland. More likely, we will see only a partial recapture in China in this segment, with demand pushed forward into FY21E.
❑❑❑❑ BUSINESS MONTRES & JOAILLERIE : Do you believe that this crisis can definitively change the mentality of watch consumers by directing them towards less statutory and less ostentatious purchases?
Luca Solca : — I believe the crisis will make consumers on average more demanding and more discerning.
❑❑❑❑ BUSINESS MONTRES & JOAILLERIE : If we admit that this health crisis will increase the concentration of sales on a handful of brands, what do you think the winning brands could be? And the losers (why)?
Luca Solca : — I don’t see many reasons to expect Rolex, Audemars Piguet and Patek Philippe to descend in consumer preferences. Smaller brands with a less clear consumer niche focus will likely suffer – as well as big brands that have over time lost their cachet and identity. In this light, I see the higher end brands at Swatch Group having more work to do.
❑❑❑❑ BUSINESS MONTRES & JOAILLERIE : Which watch market segments are most likely to do well? And which ones will suffer the most?
Luca Solca : — I think Chinese middle class demand will be easier to recapture in the Mainland. In this light, strong brands with products from CHF 2,000 to CHF 8,000 will probably be the ones more likely to do well.
❑❑❑❑ BUSINESS MONTRES & JOAILLERIE : During this crisis, will connected watches end up, according to you, crushing traditional watches (we know that in the first quarter of 2020 Apple sold twice as many Apple Watches as all the Swiss brands combined sold watches)?
Luca Solca : — This is a relevant trend primarily for products with a retail price lower than CHF 500. Even if the problem seems to be spreading to products with a retail price of CHF 500-1000.
