Apple CEO Tim Cook’s announcement last week that the Apple Watch has surpassed Rolex as the world’s best-selling watch by value inevitably spawned a new round of hand-wringing about Apple’s threat to the luxury-watch industry.
In fact, the Apple Watch has had a dramatic, some say devastating, impact on one segment of the traditional watch industry. But it’s not the luxury segment where Swiss brands reign supreme. That showdown may well come, but it hasn’t happened yet. (More on that in a minute.)
Where it has happened is in the fashion-watch segment populated by designer-label quartz watches priced between $100 and $800. By all accounts, the arrival in April 2015 of the Apple Watch priced at $349, and reduced last year to $299, has rocked the fashion-watch business, especially in the United States. (The new Apple Watch Series 3 announced last week is priced at $399 with a cellular plan and $329 without. The Series 1 watch now drops to $249.) Apple has played a disruptive role in the fashion watch category, Ricardo Quintero, president of the New-Jersey headquartered Movado Group told financial analysts in March. (Movado’s announcement two weeks later that it was eliminating Quintero’s position underscored the point.)
Arguably, the watch company most disrupted by Apple is the Fossil Group. Texas-based Fossil has been the world’s fashion-watch leader for years. Now, though, it is engaged in a bruising battle with Apple to maintain its share of the combined fashion watch and wrist device businesses. This is no undercard fight. Fossil estimates the size of that market at a staggering $45.5 billion.
In the watch world, the Fossil Group is a giant. It has 17 brands: six of its own (Fossil, Skagen, etc.) and 11 licensed brands (Michael Kors, Emporio Armani, Tory Burch, etc.) In 2014, it was on a roll, achieving a fifth consecutive year of record revenues, at $3.51 billion. Watches accounted for 78% of that.
Then along came Apple. Suddenly, Fossil was competing with a monster 67 times bigger than it was (measured by revenues). Prior to that, we were clearly positioned as the competitively advantaged leader in a growing category, Fossil CEO Kosta Kartsotis told financial analysts in February. However, with the introduction of technology into wrist devices, traditional watches came under pressure and we were disadvantaged. We didn’t have the technology capabilities to compete with smartwatches, leading to a decline in our market.
By the end of 2016, Fossil Group revenues had fallen to $3.04 billion, down 13% from 2014. Net income plummeted from $376.7 million in 2014 to $78.8 million last year, a 79% drop.
The surge in sales of Apple smartwatches was a big factor, but not the only one. The fashion-watch business has been battered by the rise of e-commerce, reduced traffic in malls and departments stores, a shift away from designer-brand watches among Millennials, the rise of new Internet watch brands like MVMT and Daniel Wellington, and a lull in a business driven by a hot design, like a pink-bracelet craze, or a hot designer name, like Fossil’s own Michael Kors. We operate in a market and retail environment experiencing unprecedented disruption, is how Kartsotis characterized the situation to financial analysts last month.
Kartsotis and his team realized that the Apple Watch was a game changer for their business. In a dramatic shift, Fossil adopted a new strategy, called New World Fossil. The top priority was to embrace wearable technology. To that end, in December 2015, the Fossil Group acquired Misfit, the maker of smartwatches and wearable fitness trackers, for $260 million. Wearable technology has quickly emerged as a meaningful segment within accessories as consumers continue to be drawn to technology-enabled products that complement their connected lifestyles, the company said in its 10K filing for 2016. We believe there is a major opportunity to combine fashion and technology, important attributes to consumers wearing these devices.
The number one trend right now in fashion is technology, Kartsotis told analysts in February, and we’re going to bring it to market. We’re going to be injecting technology into the traditional watch business and injecting fashion into the wearables business. In short, Apple had disrupted the fashion-watch business with technology. Now Fossil would return the favor. We are disrupting the (smartwatch) category with our fashion brands, Kartsotis said.
Last year, the company launched 100 new wearable products in 40 countries under eight brand names. It sold more than 1.5 million units worth $170 million, it said. This year it is introducing another 300-plus new wearable models across most of its brands.
New World Fossil is a long-term plan that involves not just new products but new marketing plans and investments designed to raise the profile of display smartwatches and hybrids. The problem is that Fossil investors want a short-term fix, and there is none. On August 8, the company reported further disappointing sales and profit results. Sales were down 13% compared to the Q2 2016. Smartwatch sales were up, but they were offset by declines in sales of traditional watches, jewelry and leathers. The company forecast a full-year decline in sales of between 4.5% and 8.5%, its third consecutive fall. It also announced that its CFO was leaving the company. All of that drove the stock price down 25% the next day to $8.87. That’s a long way from its $83.75 price on April 24, 2015, when the Apple Watch went on sale. And farther still from its all-time peak of $138.30 in April 2012. On Monday, the stock closed at $9.02.
Apple, on the other hand, says it had a great August, with watch sales up 50% compared to August 2016, although the company provided no sales data. Industry estimates put Apple sales at around 6 million units per year, with annual revenues between $5.5 billion and $6.0 billion.
Meanwhile, in Switzerland, watch producers remain sanguine about the Apple Watch. The Swiss have their problems, for sure: two years of declining exports; weakness in their two top markets, Hong Kong and the USA; fierce competition from gray marketers and other e-tailers; and more. The Swiss worry, but not about Apple. The Richemont Group’s Jrme Lambert, formerly CEO of Montblanc, now head of operations for the group, expressed the consensus view to me in January of this year. Can new entrants (in the watch industry) from California ruin the Swiss watch industry? Probably not. This came just after Montblanc announced its own smartwatch, the Summit, in November 2016.
There are, though, a few Cassandras in Switzerland who disagree and are sounding the alarm about it. One is Sren Jenry Petersen, president and CEO of Urban Jrgensen, the Bienne-based producer of high-mechanical watches. Petersen worked for Nokia for 20 years before joining the Swiss watch industry. He saw up-close and personal how new technology can disrupt an industry. He thinks the Swiss are in denial. I haven’t met with anybody [in Switzerland] yet who sees this [downturn] as anything other than a slump, he told me in March. They don’t see the threat from the smartwatch. Apple will continue to perfect the smartwatch, he says. By version 3 or 4, everyone will be thinking this is a good thing to have. Forty to 80 million people will want this.