At Rolex, a Year of Challenges

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Heading into the end of a difficult year, in which it has confronted a sudden change of leadership and declining sales worldwide, Rolex, perhaps the most immediately recognized name in Swiss watchmaking, remains bullish about the future.

"Despite the present economic crisis, Rolex is actively preparing the recovery in a spirit of complete confidence," Bruno Meier, the recently appointed chief executive, said in September before a group of 200 guests invited to Bienne, Switzerland, for the laying of the foundation stone for a major new production plant.

By the time it is completed in 2012, the new building, entirely dedicated to movements, will add 230,000 cubic meters, or 8.1 million cubic feet, of new production space, as much again as the company's existing facilities in the Geneva suburbs of Chêne-Bourg and Plan-les-Ouates.

Asked at that rare public appearance about the financial health of the company, Mr. Meier said, "Rolex has zero debt."

Given the culture of silence and secrecy for which Rolex is renowned, that response qualified as verbose.

When Mr. Meier was nominated by the board of the Hans Wilsdorf Foundation, the private charitable trust that controls Rolex, to replace the former chief executive, Patrick Heiniger, in December, company confidence appeared to be less high.

Mr. Heiniger, chief executive since 1992 and only the third Rolex chief executive since the company's founding in 1905, left the company abruptly to pursue "personal interests."

Having succeeded his father André, who in turn had been at the helm of the company for 32 years, Mr. Heiniger was the public face of a business that was otherwise so private as to be impenetrable. His departure stunned the industry, and its timing, within a week of the arrest of Bernard L. Madoff, the New York asset manager now serving a 150-year jail sentence for fraud, provoked a torrent of speculation.

"Sources very close to the company say that Mr. Heiniger left because Rolex lost close to 1 billion Swiss francs," or $980 million, in the collapse of Mr. Madoff's funds, said Osvaldo Patrizzi, chairman of Patrizzi & Co., an auction house specializing in timepieces.

Rolex has denied that it had any Madoff-related losses but has made no other comment. Requests to interview Mr. Meier or his management team for this article were refused.

Mr. Meier rose to the company's top post after three years as its chief financial officer.

His rise has put in charge a former banker, ex-manager of the Geneva branch of Deutsche Bank and a member of the board of directors of the German stock exchange -- a significant choice at a time when the outlook for the industry is as daunting as at any time since the quartz crisis of the 1970s.

According to information published in September by the Federation of the Swiss Watch Industry, watch exports from Switzerland have slumped since the fourth quarter of 2008 to levels last seen in 2006.

Swiss customs data show that exports to the United States -- once Switzerland's biggest market and its second biggest behind Hong Kong in the past two years -- dropped 42.3 percent by value in the first nine months this year compared to the same period a year earlier, to 1.02 billion francs from 1.8 billion.

"Through September this year, Switzerland exported 14 million timepieces, compared to 19 million for the same period last year," said Jean-Daniel Pasche, president of the watch industry federation, in an interview by telephone.

Against that background, analysts calculate that worldwide sales of Rolex are down probably by a third this year.

Jon Cox, a watch industry analyst in Zurich with Kepler Capital Markets, a European financial services company, estimated that annual sales at Rolex were between $3 billion and $4 billion. "This year, they are closer to $3 billion," he said.

Without the benefit of official figures, Mr. Cox's estimates are based in part on data obtained from the Contrôle Officiel Suisse des Chronomètres, the Swiss institute responsible for testing Swiss-made chronometers. Not all Rolex watches are chronometers, but the institute's certification information provides a basis for ballpark estimations.

According to Mr. Cox, Rolex is particularly vulnerable to the ailing U.S. luxury market and the weakness of the dollar.

"A fourth of Rolex's production is destined for the U.S., against an industry average of 15 percent," he said. "With the U.S. market down 50 percent, Rolex has been impacted more severely than other brands."

Price increases imposed by Rolex since 2006 have added to the pressure on sales.

"Overall, 2008 was a disaster for both Rolex and the U.S. watch market," said Trent Crowley, president and chief executive of Astorlive, an online watch auctioneer based in Memphis, Tennessee that specializes in high-end wristwatches.

"Starting in 2007, Rolex put in substantial price increases, between 13 to 20 percent, that impacted middle- to upper middle-class clients already squeezed in the recession," said Mr. Crowley, who has worked closely with watch retailers since 1980.

According to Mr. Crowley, the retail price of a Rolex Steel Submariner, a best seller, went from $5,175 in October 2006 to $6,000 today, without retailers getting any part of the increase.

"Rolex has a 40 percent retail markup. Today, you can buy any Rolex watch at a 30 percent discount. The retail margin has been hammered," he said.

One consequence is that some overstocked dealers have ended their relationship with the company. "Many retailers dropped Rolex voluntarily. They were sitting on excess inventory they could not move," Mr. Crowley said. "This year, they are still selling 2008 stock. And inventory keeps pouring into the U.S. despite a weak dollar, a sign that European markets are in even worse shape."

At best, analysts expect the U.S. watch market to stabilize next year, with retailers remaining reluctant to restock.

"The U.S. market is showing signs of hitting bottom," said Mr. Cox, of Kepler. "Next year will likely be flat. We do not expect a 50 percent recovery to make up for recent losses."

On the bright side, Hong Kong and other Asian markets, which were the first to collapse, are starting to recover.

According to the industry federation's figures, exports to Hong Kong dropped 24.7 percent in the first nine months compared with the period a year earlier. But Mr. Pasche, of the watch industry federation, said "we are hearing from certain brands that exports to Asia should improve by year-end."

Mr. Cox agreed. "Asia, which receives 30 percent of Swiss production, has picked up and is expected to turn positive by year-end," he said.

Mr. Crowley, who has an important customer base in Asia, went further. "Hong Kong, Shanghai and Singapore are emerging very aggressively," he said.

"Rolex is pushing product in those markets," he added: "But the question is, 'is it sustainable?"'

While global markets slowly regain strength, Rolex may have to wait a few years before it sees a return on the domestic investment in its production apparatus, like the new Bienne facility. Still, that may not matter too much.

"Rolex, like many other Swiss watchmakers, has been renovating in the past few years," Mr. Cox said. "In terms of profitably, their operating margin is 25 percent so those expenses would not hurt them very much."

The company's investment in Mr. Meier may already be paying off, at least in terms of its relations with the rest of the industry. "Under new management, Rolex has made a complete turnaround," Mr. Patrizzi said. "Before, the company treated the outside world as leeches looking to take advantage of its brand."

When in 2006, Mr. Patrizzi, then chairman of Antiquorum, the watch auction house he founded, organized the sale of the historically important Guido Mondani Rolex collection, a single-owner sale that fetched 11 million francs, he was confronted with Rolex's indifference.

"We received no response from Rolex to requests for information about certain pieces. It was either a dry 'niet' or plain silence," Mr. Patrizzi said.

This spring, for the sale of the Davide Blei Rolex collection, a less noteworthy collection also auctioned by Mr. Patrizzi, Rolex showed a different face.

"Rolex managers came to see us and addressed our issues. Imagine our surprise," Mr. Patrizzi said. "The result of the management change is positive, even if it has happened at a time of global crisis. The image of Rolex has become more humane."

And through all the upheavals of market and management, Rolex has managed to preserve confidence in its quality.

"Rolex makes the best movements in the world," said Mr. Patrizzi, widely recognized as one of the world's foremost horological experts.

"For every 10 clients interested in other brands, we have 50 looking for Rolex watches," Aurel Bacs, international co-head of Christie's watch department, said from Geneva.

"Whether it is a sporty steel model or a fancy gold watch, Rolex is the hottest brand on a worldwide scale," Mr. Bacs said. "Collectors don't care what is going on inside the company. They just love Rolex."


This article originally appeared in The New York Times .


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