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Hermes says luxury watch oversupply an ‘illness’ for industry

Swiss watch exports fell 22% in 2020.
Image: Bloomberg

Swiss watchmakers are still churning out too many timepieces despite production cuts following a Covid-induced sales slump, according to the head of Hermes International’s horology unit.

Brands including Hermes, Rolex and Audemars Piguet temporarily halted production last year amid the pandemic, which helped ease a supply glut somewhat. Still, some producers are failing to address the issue, Laurent Dordet, chief executive officer of Hermes’s watch unit, said in an interview.

After Switzerland exported more than 1 billion watches over the past four decades, luxury watchmakers are struggling with the paradox that they need to sell more yet make their products even more exclusive. Some Swiss watchmakers reward sales managers too much for pushing too many products out into the market, according to Hermes’s watch chief.

“This remains a key illness of that business, at least with some brands,” Dordet said. “It may be less now, but as long as you have commercial people incentivized by key performance indicators, you will have overstock on the market.”

A slew of websites hawking second-hand watches has popped up as consumers trim their collections and interest in vintage pieces increases. Meanwhile Apple now produces more than twice as many watches as the whole of Switzerland exports, eroding demand for lower-end timepieces.

Swiss watch exports fell 22% in 2020 as tourism ground to a halt and Covid-19 snuffed out the social occasions where big spenders could show off their latest purchases. Demand is increasingly concentrated on the biggest brands: Rolex, Patek Philippe, Audemars Piguet, Cartier and Omega, according to Dordet.

“It’s difficult if you’re not among the five leaders,” he said. “The watch industry is very much polarising. We’ll have more and more winners and losers.”

Hermes Watches had a 2% gain in revenue last year, surpassing all its main rivals in luxury timepieces, according to Bank Vontobel analyst Rene Weber. Meanwhile sales slumped 40% at Swatch Group AG’s namesake label, which sells for $50 and less, the analyst estimates.

Last year, RJ Watches, a small independent brand known for pieces featuring Pac-Man and Spider-Man, filed for bankruptcy.

The healthiest segment has been the most expensive end. While Hermes’s cost around $6,000 on average, some price tags exceed $800,000.

“For us, there is absolutely no overproduction of watches, no waste at the end of the year,” Dordet said. Hermes limits distribution via third-parties and hence has better control over sales, he added. “The advantage is that it’s more profitable and you have less inventory.”

© 2021 Bloomberg

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