Two days ago, the Swatch Group published its 2024 half-year results and the numbers do not look good. Revenue for sales is down by -14.3% (at current exchange rates) and -10.7% (at constant fx rates) to CHF 3,45B which is more than the industry’s average where the total exports are down 2.5% in value. I would rather compare with constant exchange rates as exports are measured in CHF, but it’s still ~8 percentage points higher than the industry average.

But where it gets worse is with operating margin, which fell 70% to 5.9%. To illustrate the negative performance, you have to compare last year’s margin which was at 17.1% and already quite modest compared with the best in class of the watch industry, but explainable with Swatch Group’s high degree of verticalization. A good operating margin would be around 25% and the best in class in our industry are rather above the 30% threshold with a few exceptions around 45-50% such as Richard Mille.

The net margin comes in at -70% YoY comparison at CHF 147m for the first half of the year. And the last negative financial indicator is the cash-burn with a net liquidity which went down by CHF 554m or -28%.

Ok that’s enough on the figures for now. Let’s try to understand how the Swatch Group arrived at this juncture and consider some possibilities on how it can do better.

When you fly with an obliterated route plan

The Swatch Group was set up by a visionary man, Mr. Nicolas Hayek Sen., who set up a vision and a strategy which was accurate back then and until his death in 2010. The problem is that the industry’s environment has since then dramatically changed with the high-end growing at a substantially faster pace than the middle-range and the entry price levels. This is by no means surprising or new phenomena, but an ongoing shift of the market since at least one decade. The two key words now are polarization and premiumisation, just similar to what is happening in any other luxury category. The high-end brands dominate the market, because they’re helped by a virtuous dynamic in which the higher you go in terms of prices, the more margin you are making.

And it’s not linear but exponential, meaning that your bottom line (your margin) grows a lot faster than your top line (the sales). Of course, there are exceptions to this rule and the Swatch Group is mastering the exceptions quite well with the extraordinary successes of the MoonSwatch — which generates an estimated ~80% gross margin — and the PRX at Tissot. The challenge is that you have to manage volumes at all levels and that is a huge challenge for the manufacturing and the sales of your products.

The bad news is not that the Swatch Group carries a majority of its 16 brands in the mid-range and entry price levels, but that even the six brands assimilated to luxury — Breguet, Blancpain, Harry Winston, Jaquet Droz, Glashütte Original and Omega — are underperforming the market with the exception of Harry Winston, which is helped by its jewelry business, as it makes only ~16% of its sales with watches.

Historically, the Swatch Group has an approach which is rather more comparable to FMCG (fast moving consumer goods) than luxury where “less is more.” Even though restricting access to your bestselling products increases the desirability of your brand, the Swatch Group would rather push on product diversification and volumes. More references and more quantities on each. While that can be a good way to use your available production capacities, it does have a negative impact on your brand equity or brand desirability. When you keep Rolex customers hungry and on waiting lists, you promise your clients at Swatch, Tissot and Omega that whatever happens they will get their hands on your latest novelties.

The Swatch Group is an industrial company, but the stock market regards it as a luxury group

Even though the group is stock listed, it is being managed as if it were a private, family-owned company. In fact the Hayek pool (mainly the family) owns less than one-quarter of the equity and just 43% of the voting rights. But no matter. Mr. Hayek told an investor during a conference call last year that if he wasn’t happy with the group’s performance, then he would just have to sell his stocks. Well, if you did that in the USA for example you would probably get sued immediately by a class action of investors in defense of their co-owners’ rights. But in Switzerland nothing happens, apart from some negative publicity with a very few articles.

So back to the obsolete route plan that was left more than 20 years ago. CEO of the group Nick Hayek Jr. was told that the first and premiere goal of the Swatch Group is to have its industrial capacities running at full speed — whereas the stock market thinks he should be optimizing the business units where the margins are the highest, which are those 16 brands. And again 75% of the company’s equity is owned by the market, not the family. But again, it matters not. So basically, you apply a push strategy rather than a pull strategy. In other words, the production pushes the market and not vice-versa, which to me is a very strange way to look at things the primary objective is that everyone has work to do.

And there is another rule I learned once upon a time as a supply chain manager. When you try to optimize each part rather than the sum of all parts, you will suboptimize the result. Given the aforementioned points, I think it is fair to say that Swatch Group is delivering proof of this case.

When you try to optimize each part rather than the sum of all parts, you will suboptimize the result.

Also, beyond question, the Swatch Group owns the most efficient industrial facilities and produces at cost — something that no one can compete with on the Swiss made level. But trying to gain market shares by pushing on the volumes when the market requests exclusivity might be the wrong bet.

To restrategize or not to restrategize? That is the question for the Swatch Group

Let’s start with the positive and honor the fact that the Hayeks are not greedy. Why? Because they could substantially improve the group’s results by firing people and hence increase their margins. And if there is but one aspect, I trust Mr. Hayek’s word on the fact that preserving jobs is on top of the family’s goals. Where other listed companies would just lay off hundreds of people to cut costs, the Swatch Group always talks of preserving know-hows and loyalty.

However, the problem arises when your total production capacity was laid out for an annual volume of 20m+ units for the group’s own brands, plus the third-party clients which were forced out after the Swatch Group was green lighted by the COMCO (Switzerland’s anti-trust authority) to choose its clients. Last year the group sold ~11.2m units which is about half of what it once used to sell. The Swatch Group’s volume in units is still considerable and represents 70% of the Swiss watch industry’s total output, but certainly not enough to keep all factories running at full speed.

Apart from Tissot with 3.1m units sold last year and foremost Swatch with another 5.8m, of which 2m were MoonSwatch, the other brands are rather on stable or even declining volumes.

Structural issues versus macro-economics

When the market starts moving towards one direction, you can be either visionary and walk in the other direction or start analyzing why all your competitors are going that way. For instance, when the upper price segments start overperforming against all others below, there might be a good reason to it. Or when you consider that since the year 2000, production volumes of the Swiss watch industry have halved from 30m to 15.9m last year, you might conclude that the volume business is left mainly to connected and entry level watches.

Last year Apple sold 37m watches which is almost 2.5x the total annual volume of the Swiss watch industry. And Apple represents only a part of the 76m units of smart wearables. My point here is not that the Swatch Group should abandon all of its entry and mid-level brands, but it might be useful to consider pushing more on the luxury segment. Omega has demonstrated that it had been able to more or less triple its average selling price, thus become a lot more profitable and enabling a much more DTC centric brand.

Rather than talking about China’s decline, maybe the Swatch Group should try to diversify geographically, following – again – Omega’s path which depends today “only” ~35-38% on Greater China, whereas Longines or Tissot are still ~50%+ China centric.

Consequences which might impact the whole industry

The whole of Swatch Group employs 33,000 people worldwide of which 17,000 are working in Switzerland which represents more or less one-quarter of the industry’s total headcount. Mr. Hayek reiterated during an analyst conference call that the goal was to preserve as many jobs as possible, but at some point, the moment of truth will come and tough decisions will have to be taken.

This could be a game changer for an industry in which you have two systemic players, the Swatch Group and Rolex. I hope I will be proven wrong, but no one in Switzerland believed that one day such monuments as Swissair or Credit Suisse could go belly-up, and the Swatch Group is today in a much more difficult position than its anchor shareholder and CEO wants to admit.