More franc fallout

January 16, 2015 10:34 AM

The franc’s record surge may prompt luxury- watch retailers in Hong Kong to absorb some of the price increase from Switzerland’s high-end timepiece makers as demand stays weak amid a slowing Chinese economy.

“For watch brands to absorb all the currency fluctuations, it would be tough for the brands,” said Karson Choi, chairman of Halewinner Watches Group that operates more than 30 stores in Hong Kong and mainland China. “As retailers, we have to be prepared to help out, and find a compromise.”

Switzerland’s currency surged as much as 41% against the euro on Jan. 15, roiling markets worldwide after the Swiss National Bank’s surprise decision to abandon the franc’s cap against the euro. The blow comes at a time watch retailers are recovering from lower sales after Hong Kong’s biggest democracy protests, and also face an anti-corruption crackdown that shows no sign of abating.

“It is a double whammy for Hong Kong sellers,” said James Roy, an analyst at China Market Research in Shanghai. “Chinese travelers are already a little bit weary of making that type of purchase. Without the extra cost advantage, it hurts retail even more.”

Importers of Swiss watches may find it difficult to raise prices enough to cover the currency appreciation, Roy said.

Watchmakers such as Richemont, parent company of brands including Vacheron Constantin and IWC, and Swatch Group AG either need to increase prices or cut costs to offset a hit on margins, according to Jon Cox, an analyst at Kepler Cheuvreux in Zurich.

Anti-Gifting Campaign

Retail watch prices may rise as much as 5% this year because of wage increases in Switzerland, said Jimmy Tang, chairman of Prince, which runs stores in Hong Kong’s popular shopping district Causeway Bay. He expects the anti-gifting campaign and a slowing Chinese economy to have a bigger effect on demand than the surge in the Swiss franc.

Hong Kong was the biggest buyer of Swiss watches in 2013, purchasing 4.12 billion francs ($4.71 billion), or about 19% of its exports, according to data from the Federation of Swiss Watch Industry. Watch exports may now decline this year, said Patrik Schwendimann, an analyst at Zuercher Kantonalbank, who had previously expected a slight increase.

Halewinner’s Choi said he’ll wait to see how the exchange rate moves and would attend Richemont’s annual Salon International de la Haute Horlogerie in Geneva next week and seek clarity from the Swiss company.

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