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ZURICH -- Swiss watchmakers hope recession-weary holiday shoppers will regain some of their taste for self-indulgence, giving the luxury-watch business its first spark of life since the financial crisis set in. But it may take the return of big bank bonuses, possibly early next year, to produce any significant uptick in sales of Rolexes, Patek Philippes and Piagets.
In recent years, the banking industry's bonus payments to top employees helped fuel a global splurge on luxury goods, including handcrafted watches priced at thousands of dollars.
But those payouts, which can total hundreds of thousands or even millions of dollars -- fell substantially over the past year as banks struggled with soured investments and tight credit conditions, leaving Swiss watches among the hardest-hit luxury items.
During the boom, the industry, which has annual revenue of roughly 17 billion Swiss francs ($16.4 billion), ramped up production, and retailers loaded up on classic brands, as well as flashy new names, only to be caught out when sales plummeted.
The result is the toughest market for Swiss watchmakers since the 1970s, when cheap Japanese quartz watches threatened their franchise. While consumers in Asia, particularly China, are still hungry for luxury timepieces, Switzerland's watch exports to the U.S. were down 40% for the year through November.
Sales of Rolex, the powerhouse of Swiss watchmaking, probably will fall to about $3 billion this year from around $4 billion at the peak of the boom, according to Jon Cox, analyst with Kepler Capital Markets. Rolex, owned by a Swiss foundation, doesn't release sales or profit figures.
Watch dealers are seeing some pickup in the Christmas market. "It's definitely better than last year," says Mark Udell, owner of London Jeweler in Manhasset, N.Y., "although I don't want to get overly positive yet."
Many watch dealers have higher hopes for January, when banks are expected to pay their first bonuses for 2009 performance. Industry watchers say bonus recipients are more likely than Christmas shoppers to splurge on the highest-end timepieces that cost $100,000 or more.
There are limits, however, to how much bank bonuses can boost the market.
Banks around the world are generally under pressure from their regulators to defer large chunks of their bonuses and to pay much of them in equity, rather than cash. It isn't clear how much that will leave for watch splurges.
On top of a sharp drop in demand, Swiss watchmakers have been struggling with other pressures, including high costs, particularly for personnel.
Big brands typically take two to four years to train skilled craftsmen before they let them hand-assemble the hundreds of components that go into a luxury watch, and so are reluctant to lay them off during a down turn. As a result, their profits have plunged.
Operating profit margins at the watch division of Compagnie Financiere Richemont SA, maker of the Cartier brand, are likely to fall sharply to 14% next year from 27% last year, according to UBS Equity Research.
In response to falling margins, Cartier put some of its workers on a short workweek this year, while independent watchmaker Franck Muller announced it would roughly halve its staff, cutting 200 jobs.
Richemont didn't respond to requests for comment.
At the same time, the strength of the Swiss franc and rising gold prices have forced brands to raise prices, particularly in dollar-denominated markets.
This fall, privately held Parmigiani Fleurier and Audemars Piguet both raised the suggested retail prices of their brands by about 10% for the U.S. market, dealers say. Audemar Piguet declined to comment.
"You have to be careful," says Jean-Marc Jacot, chief executive of Parmigiani Fleurier, which makes models that sell for more than $100,000 and expects a small loss this year. "You raise prices because of the currency, because of gold, because of the costs, and you end up doubling the price of your product."
Even as prices rise, shoppers are demanding discounts. "Many customers came in asking for deep discounts, and when I wouldn't do it, they went elsewhere," says Al Armstrong, a collector and retailer in Hartford, Conn. "I lost so many sales."
Many struggling jewelry and watch retailers, meanwhile, have added to the pressure on prices by been dumping excess inventory for as little as 30% of the retail price, selling them to dealers who sell the watches at big markdowns on the Internet or from their homes.
That has made watchmakers more lenient in insisting that retailers take a full range of their models. Rolex, which traditionally exerts a powerful hold over its authorized dealers, hasn't pushed as much stock on the shops. "They didn't have the same requirements for what we buy this year," said one Rolex dealer. "They weren't as strict."
Rolex declined to comment.
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Martin Gelnar contributed to this article.
Credit: By Deborah Ball
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