Baselworld 2011 – Sale of Bulgari augurs well for luxury goods market

By Haig Simonian, Financial Times

Flush with cash big names see new dealmaking in the sector and rising demand from Asian heavyweights to power growth this year

Basel: Amid the good cheer among the world’s watch and jewellery makers at Baselworld, and depending on geopolitical events in Japan and north Africa, one subject will come before the likely back-slapping.

How much does the sale of Bulgari to Moet Hennessey Louis Vuitton point to new dealmaking in the luxury goods sector, and to what extent, if at all, will watch and jewellery makers benefit?

For Nick Hayek, the deal was good news. The chief executive of Swatch Group, which dominates the annual show, says he is delighted he will no longer have to answer questions about buying the Italian company.

“I’m almost happy the story with Bulgari is over; we’ve never tried to buy anybody,” he says.

In fact, Swatch and archrival Richemont almost certainly cast an eye over an asset believed to have been on the blocks for months. Both Swiss groups also had more than enough money to stump up the price.

But, apart from a tab that would have made both Hayek and Richemont’s Johann Rupert blanch, analysts say Swatch and Richemont had good strategic reasons to turn Bulgari down. For Richemont, strong in jewellery through Cartier and Van Cleef & Arpels and dominant in top watches, Bulgari was an unnecessary expansion.

Even for Swatch, which has expressed enthusiasm for expanding into jewellery, the argument was not compelling. Although the group held net cash of SFr1.1 billion ($1.2 billion, Dh4.41 billion) at the end of last year — a figure likely to near SFr2bn by December — it has resisted big takeovers.

Moreover, while quoted, its strategy has always been deeply influenced by the distaste of the controlling Hayek family for borrowing — a predilection unlikely to have changed after last year’s death of founder Nicolas Hayek. And jewellery remains largely a non-branded business, relatively unfamiliar for a marque-conscious group such as Swatch.

“It was never a subject for us to concern ourselves with,” says Hayek. Indeed, as an important supplier to Bulgari through its ETA movements subsidiary and other specialist companies, Swatch already had an indirect stake in the Italian group’s future.

Dominant subject

So once the gossip about Bulgari subsides, what will occupy Baselworld? “The recovery would have been the dominant subject, as even optimistic predictions about growth this year were being revised upwards,” says Jon Cox, analyst at Kepler Capital Markets. “But the situation in the Middle East and Japan has somewhat overshadowed all that.”

The political upheavals in north Africa, let alone the troubles in Japan, have clouded the optimism evident in January at the SIHH show, dominated by Richemont. Not only the latter’s brands, such as Jaeger-LeCoultre and IWC, but also prestigious independent marques such as Girard-Perregaux and Parmigiani showed far greater confidence than in 2010. This year has certainly opened well. In 2010, exports of Swiss watches and movements jumped by more than 22 per cent, making the annual total of SFr16.2 billion the second best on record, ahead of 2007, and not that far behind the SFr17bn zenith of 2008.

Even that peak may now be about to be conquered. Analysts are forecasting growth of at least 10 per cent this year as Asian — especially Chinese — buying remains strong, and the US in particular continues slowly to recover.

Data for Swiss watch exports, the only aggregate industry figures available, showed February sales climbed by almost 18 per cent year on year to SFr1.4 billion — the best February on record — and against an increasingly tough comparison. Most reassuringly of all for Switzerland’s upmarket watchmakers, exports of timepieces costing more than SFr3,000 remained strong.

For Swatch Group, January 2011 was the best January on record, and the fourth best month ever for sales. That prompted Hayek to predict revenues would hit SFr7 billion this year after for the first time breaching SFr6n in 2010. By 2013 or 2014, he envisages turnover of SFr10 billion.

The upturn has already had a visible impact on earnings. Swatch made more than SFr1 billion last year. Richemont, which reports 2010-11 results in May, should exhibit similar dynamism.

Analysts expect their surging profits and swelling cash piles to prompt further share buy-backs, special dividends, or both — further boosting both groups’ shares. But there remain challenges for watch and jewellery makers, in spite of their current ebullience.

Passing on price rises

Soaring raw material prices, notably gold, are the most obvious. Swatch Group buys 10 tonnes of gold a year, while Cox estimates Richemont purchases about 12 tonnes. At $1,400 an ounce, that puts Swatch’s tab at about $450 million and Richemont’s at $550 million.

How severely profitability will be affected depends on the ability to pass on price rises to the consumer — presumably relatively easily in an increasingly tight market.

Currency factors are another big issue, especially for the Switzerland-based manufacturers. The franc’s strength has brought benefits, attenuating rising precious metal and diamond prices, measured mostly in dollars.

But the overall impact remains difficult: Hayek has disclosed that Swatch Group’s sales climbed in double-digit percentage points in the first two months of this year, against 2010, but the surging franc trimmed them by SFr100 million.

Meeting demand is the other conundrum. During the downturn Richemont and Swatch Group avoided sackings. Nevertheless, Swatch, the industry’s main supplier, admits it is struggling to meet demand.

The core Swatch brand needs two additional production lines. This month, management agreed to spend SFr65 million to almost double production at Breguet. And SFr85 million has been earmarked for a new Omega assembly line.

Swatch’s growth plans include hiring up to 1,500 workers — or 6 per cent of the workforce — in Switzerland alone. But Hayek acknowledges such ambitions may yet be stymied by a dearth of qualified labour. ETA alone needs 500 more people.




Filed under Luxury acquisition

3 responses to “Baselworld 2011 – Sale of Bulgari augurs well for luxury goods market

  1. Pingback: Luxury God » Blog Archive » Baselworld 2011 – Sale of Bulgari augurs well for luxury goods …

  2. Ma Jus El Suborionne

    Very luxuriant thoughts… This article is enchanting.

    Indeed, the market’s hale and well, robust, and the “sale of Bulgari [to Moet Hennessey Louis Vuitton] augurs well for luxury goods”!

    Bonne journee et VIVE, pour toujours

  3. Always so interesting to monitor the acquisitions, and changes in this specific market.
    Thanks for your remark Ma

    All the best

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