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Watches & Jewellery March 2013

Do current market conditions help or hinder watch brands in China?

Almost every day we read about the crackdown on the gift giving market among government officials and bodies in China, and how it is causing the watch sector in particular, serious heart problems. Sales are down 60% according to some sources, which is quite possible, but we have to be realistic and observe that sales in 2011 hit a record high, and wouldn’t have attained the previous level anyway. High end products have been hit the hardest unsurprisingly, and distributors were left holding large inventories in H2 of 2012, that they eventually had to move by offering discounts of up to 50% to VIP customers or in some cases their own staff.

The reduction in gift purchases across the board before the election of the new party leadership, and the subsequent application of new regulations for party officials have been big challenges, but many brands actually did reasonably well despite them, so it hasn’t been all gloom and doom as the media would have us believe. If I were to walk into a watch store now in China and say that I wanted to buy a gift for a business associate, the sales staff are more likely to show me understated choices, than those covered in diamonds or gold, as they might 12 months ago. They have adapted.

There is little watch brands can do to sell to consumers who plan to travel overseas to purchase, as many do. Their stores here often act as a shop window for this category of consumer, before they fly to Europe to save 30% on the purchase price. So they are hemorrhaging to some extent, at least as far as the local operation is concerned, if not as a brand. However, they still have great opportunities in tier two and three cities, business consumers are still buying for themselves and for others, and the predominantly male orientated sector has begun to introduce more focus on the female opportunity.

2013: lower sales and consolidation

Like the top fashion brands that have stopped opening new stores and have plans to refurbish existing ones, the watch sector is starting a period of consolidation at a time that we certainly see as an opportunity for them. Over the past five to eight years, watch brands in China have increased their footprint by combining own store expansion with that of their distribution partners that has resulted in great success in terms of both sales and brand awareness.

Now many of these brands are beginning the process of buying back their distribution for the same reasons that their counterparts in fashion did five years ago, and timing is very good for them. One might argue that with sales slowing, they need to be careful how they invest, but the reality is that their partners in tier two and three cities have established the brand name, in the past 12 months, the same distributors have had to live with excess stock that has affected their cash flow and quite possibly dampened their desire to remain in the sector. One party may be in the mood to sell out to the other at what is likely to be a far lower price than it would have been at the beginning of 2012, and they may well be happy to do so.

What is clear is that the brands would like the increased margin, and because the market has slowed, will need the direct control to keep costs down, and increase contact with the consumer, to do all they can to maintain customer loyalty and repeat business in the long term. As a result of the new found freedom they can invest in stores and improving service, whilst building sales platforms more attractive to the new and more educated luxury consumer.

Our view is that 2013 may be a relatively tough year for watch brands, but it’s the time to take stock, activate new strategies and build the correct foundations for the next stage of luxury market development in China as it continues to grow.


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