Timing is everything. The 25th Salon International de la Haute Horlogerie – the annual Geneva watch show – concluded last Monday but the mood was a little subdued despite the Salon’s silver anniversary.
On Thursday 15 January, the Swiss National Bank (SNB) abandoned its three-year peg of the Switzerland’s currency, the franc, at a rate of 1.2 Swiss francs to the Euro. This led to one of the largest currency swings in modern history, with the franc initially appreciating an astonishing 30% against the Euro in just a couple of hours. The franc’s value later ‘stabilised’ and it has been trading for between 1.02 and 0.98 to the Euro during the last week. Christine Lagarde, Managing Director of the International Monetary Fund, described the move from the SNB as “a bit of a surprise”.
When the Swiss abandoned the cap this meant the franc was free to ‘float’ against other currencies and consequently the market was allowed to determine its value. This effectively meant that prices of Swiss luxury goods sold abroad jumped between 16 and 22%, depending on the currency.
An expensive franc is so detrimental to Switzerland because its economy is so dependent on the export of high-ticket items, such as watches and jewellery from iconic brands such as Rolex, Cartier and Swatch. Swiss exports of goods and services are worth over 70% of its GDP
Nick Hayek, Chief Executive of the Swatch Group (which also comprises Omega, Longines, Tissot, Breguet and Calvin Klein watches and jewellery), commented immediately after the move, “Today’s SNB action is a tsunami; for the export industry and for tourism, and finally for the entire country.” – a stern pronouncement for the landlocked nation.
Currency pegging is a practice whereby central banks ensure their currency trades at a set rate to another currency on foreign exchange markets. There are many theoretical reasons to do so, not least because it provides stability for businesses in smaller countries during periods of volatility on global financial markets by making costs and revenue more predictable. In Switzerland’s case, this was certainly a key motivation. After all, the European Union is overwhelmingly Switzerland’s main trading partner, accounting for 73.1% of its imports and 54.9% of its exports in 2013.
The SNB also pegged the franc to the Euro in 2011 because it was felt it was being over-valued by markets, harming the competitiveness of the country’s exporters, and it wished to ward off a prolonged period of deflation: the irony, of course, is that both negative effects now look certain to occur.
It had not been a good December for most watch and jewellery makers anyway, partially explained by disruptions caused by protests in its largest market, Hong Kong.
Conglomerate Richemont reported that sales in the Far East were down 12% to €1.07bn in the final three months of 2014, as a result of what the company euphemistically described as a “difficult trading environment in most markets, primarily in Hong Kong and Macau.”
The rest of 2014 was also unspectacular: exports of Swiss watches rose just 2.3% in the first 11 months of 2014, compared to growth of over 20% during 2010.
At the Salon International de la Haute Horlogerie, executives at Richemont, which makes around 25% of its revenue in the Eurozone, said it would be raising prices in the Eurozone of both watches and jewellery by 5-7%.
The issue is not merely that a stronger franc will reduce demand for manufacturers of their luxury goods overseas. The importance of the ‘Swiss-made’ label cannot be overstated and many watchmakers in particular pay a large proportion of their operating costs in francs. Thomas Chauvet, an analyst at Citigroup, estimates that 30% of Richemont’s operating expenditure is in francs and a staggering 85% of the production costs of Swatch.
Some within Swiss luxury goods industry, however, remained nonchalant in the face of rising costs and unfavourable trade conditions. “It will not be a difficult year,” said Jean-Marc Jacot, head of privately owned ultra-lux watch brand Parmigiani Fleurier, “but a more complicated year than we expected in December.”
The SNB’s Chairman, Thomas Jordan, commented after abandoning the cap, “This exceptional and temporary measure protected the Swiss economy from serious harm.” Whether ‘protected’ or ‘delayed’ will prove the more appropriate verb, only time will tell.