ZURICH — The Swiss National Bank spoiled the party for the country’s luxury watchmakers just as they were preparing for some of the most lavish bashes of the year this week at the annual Geneva watch show.
The decision to end the minimum exchange rate between the Swiss franc and the euro means luxury timepiece makers in the Alpine country face one of their most challenging years. Shares of Richemont, the parent company of watch brands such as Vacheron Constantin and IWC, declined 16 percent Thursday in Zurich, the most in more than two decades, as the franc surged more than 15 percent against the euro.
“It’s an absolute disaster,” said Jon Cox, an analyst at Kepler Cheuvreux in Zurich. “Swiss watchmakers have a substantial cost base. It will have a negative impact on margin and translated earnings. Watchmakers either need to increase prices or cut costs.”
For an industry that derives its appeal from the “Swiss-Made” label, local production is creating a headache as costs to put together timepieces increase. Swatch Group CEO Nick Hayek said the SNB has set off a “tsunami.”
Sixteen of the world’s most expensive watch brands, of which three-quarters are produced by Richemont, will showcase new timepieces this week at the annual Salon International de la Haute Horlogerie. Watchmakers spend as much as $35 million combined on marketing at the event, estimates Rene Weber, an analyst at Bank Vontobel AG.
One of the biggest highlights after sundown is IWC’s red-carpet gala dinner, where distributors and clients get to brush elbows with celebrities such as actor Ewan McGregor and Victoria’s Secret model Adriana Lima. The 147-year-old brand has been preparing to host about 800 guests at an invitation-only evening party Tuesday.
The entertainment bill has now become more expensive. In addition, about half of Richemont’s costs of goods sold are in francs, and as much as 30 percent of its operating expenditure, estimates Thomas Chauvet, an analyst at Citigroup Inc.
Swatch, the owner of the Omega and Breguet brands, is even more exposed, with 85 percent of production costs in francs, he said.
“It’s certainly not good news when your currency becomes so strong when you’re in export,” said Jean-Claude Biver, head of LVMH Moet Hennessy Louis Vuitton SA’s timepiece unit.
All but a fraction of Swiss watches are exported, almost a third to the euro zone, Biver said.
“When one-third of your business is hit by a weak currency, you have to either increase prices or … reduce your margins,” he said. However, Biver said he can’t raise prices by 10 percent to 15 percent. “I’m shocked. It was unexpected.”
Patek Philippe announced plans this week to spend $525 million to expand its facilities in Geneva to have enough space for the next 20 to 30 years.
Swiss watch exports may now decline this year, said Patrik Schwendimann, an analyst at Zuercher Kantonalbank, who previously expected a slight increase.
The Swiss watch industry is exiting from what probably will rank as its second-worst annual performance since 2009. Full- year data isn’t out yet, but exports of Swiss watches rose 2.3 percent in the first 11 months of 2014, a far cry from growth rates that reached as much as 22 percent in 2010. Richemont’s Cartier brand last year started putting 230 employees on shorter work weeks to adjust to weaker demand.
