WWD|Nov 18, 2015

China’s Watch-Buying Habits Are Changing

from WWD issue 11/04/2015 By Casey Hall

This story first appeared in the November 4, 2015 issue of WWD.

Internally, the luxury watch sector has been hit particularly hard by the Chinese government’s ongoing crackdown on corruption and conspicuous consumption.

President Xi Jinping’s crusade, which shows no sign of abating, certainly has had an impact. Government officials photographed wearing luxury watches immediately come under suspicion and the formerly entrenched culture of “gift giving” has become a much lower-key affair.

But the corruption crackdown is only one factor of many impacting sales of luxury watches in China and Hong Kong, with a slowing economy, currency fluctuations, the consolidation of a maturing luxury market, changing travel preferences and new competition all playing a role.

Swiss watch imports to Hong Kong and mainland China are down from 1.1 billion Swiss francs (for the mainland) and 2.9 billion francs (for Hong Kong) in the first nine months of 2014, to 899 million francs and 2.2 billion francs, respectively (Switzerland’s currency is at near-parity with the U.S. dollar) over the same period this year, according to figures from the Federation of the Swiss Watch Industry.

In comparison, back in 2012 (the year President Xi came to power), after years of double-digit growth, Hong Kong imported Swiss watches valued at a total of 4.4 billion francs ($4.7 billion at average exchange).

Despite this data, there are still positives for luxury watch brands looking to capture Chinese consumers, especially when they are traveling.

“Chinese luxury consumers have not stopped buying watches. The yuan’s strength against a weak euro has definitely created an incentive to shop for higher-end items abroad. In the long term, a 2014 trade agreement with Switzerland will help standardize price discrepancies across regions, but it has a 10-year implementation timeline,” said Colin Gilbert, vice president of research at Digital IQ Products.

Philip Guarino, a Paris-based director of China Luxury Advisors, agrees that it’s not a matter of consumers not buying watches, but where they are buying them.

“Chinese aren’t really keen on buying in Hong Kong anymore. Japan has overtaken it [as a shopping destination] and China is certainly not where they want to buy in the context of a corruption crackdown. So while they have been clobbered in Hong Kong and mainland China, they are seeing strong growth in Europe, the Middle East and the U.S.,” he said.

According to Franklin Yao, the chief executive officer of Shanghai-based consultancy SmithStreetSolutions, there has been a slowdown at the pointy end of the luxury pyramid, but plenty of growth in the middle- and upper-middle-class segment, which is made up of more price-conscious consumers who are still interested in buying luxury watches to signal their status.

“These consumers aren’t going to be spending $50,000 on a watch, but they may spend $5,000,” he said. “A lot of things in China boil down to trust. Having a nice watch is a signifier of wealth and a signifier of trust. For that $5,000 watch market, these middle-class consumers are going to be faster to buy into that category than [middle-class] consumers in other markets because of what it signifies.”

They won’t be as fast to enter the luxury watch sector as their luxury-consuming forebears. Whereas Chinese consumers used to save up and buy the most expensive watch they could, today’s aspirational consumers have more choices and more ways in which they can signify their success.

“It doesn’t necessarily make sense for them to save up to buy a watch if it comes at the expense of buying an iPhone, watching Imax movies, traveling or eating out more often. In today’s China, there’s a delay in when you start buying luxury watches, compared with five years ago, when luxury was the only thing you could buy to demonstrate status,” Yao said.

Another factor with the potential to impact luxury watch sales both in China and among Chinese consumers worldwide is the Apple Watch, which has already caused a stir here.

According to the Hurun Research Institute’s annual survey of 347 ultrawealthy individuals (those whose net worth exceeded 10 million yuan, or $1.6 million at current exchange), Apple now ranks as China’s most coveted luxury brand, coming out ahead of Louis Vuitton, Cartier and the last year’s winner, Hermès.

“Initial estimates going into September suggested that around 22 percent of Apple Watch sales were driven by China,” Gilbert said. “Unfortunately, estimates do not break out how the Apple Watch Edi- tion is performing in the market yet — arguably the market for which the $10,000 model was designed. The stat that should keep Geneva up at night is that 79 percent of luxury watch consumers in China indicate an interest in buying a smartwatch.”

About SmithStreet

SmithStreet is a Shanghai-based, boutique consulting firm focused on China growth strategies. By understanding China and solving business challenges through a holistic and innovative approach, we provide clients with deep insight into China’s consumer, B-B and healthcare industries. Since our founding in 2007, we have served Fortune 500 companies as well as global 2000 companies in a variety industries to achieve China goals. We are your bridge into China.

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