Unraveling China's luxury watch decline: high-end consumption is diverging

China's luxury consumption is undergoing a dramatic transformation.

As property prices decline, stock values shrink, and consumer confidence indices hover at low levels, terms like "consumption downgrade" and "deflation" have entered mainstream discourse. High-end consumption is facing significant challenges. This year, we have witnessed a collapse in the piano market dominated by the middle class, a wave of closures in high-end Western restaurants, and a sharp decline in Swiss luxury watch sales.

However, the ongoing transformation is not a uniform decline but a structural shift characterized by rises and falls in different sectors. We've also seen luxury brands prioritize VIC customers with larger stores and exclusive spaces, high consumer demand for value-retaining second-hand luxury goods on China's e-commerce platforms, and robust quality consumption, shown by the expansion of ultra-prestige cosmetics in China.

In today's article, we discuss the rise and popularity of Swiss luxury watches in the Chinese market, followed by this year's sharp downturn. This trend reflects changes in consumer demographics, the advent of the cost-effectiveness era, and the evolution of consumer preferences in China.

Below is Baiguan's translation of the original article (some paragraphs are abbreviated or redacted) from the renowned WeChat self-media "Juchao Wave" focusing on business analysis and secondary market analysis.

The landscape of Swiss luxury watches is shifting

According to the latest data released by the Federation of the Swiss Watch Industry, Swiss watch exports in March 2024 fell by 16% YoY to 2 billion Swiss francs, with the volume of watch shipments dropping by 25% to 1.1 million units.

This decline did not come without warning. In 2023, Swiss watch exports grew by 7.6% YoY, reaching a record total of 26.7 billion Swiss francs, only to be followed by a rapid cooling off. In January 2024, the Swiss watch industry saw exports of 1.9 billion Swiss francs, a mere 3.1% YoY increase. By February 2024, exports had slipped to 2.155 billion Swiss francs, down 3.8% YoY.

China’s market is particularly significant in this downward trend. In March, exports to the largest market, the United States, fell by 6.5% YoY. However, exports to the second-largest market, mainland China, and the third-largest market, Hong Kong, plummeted by 42% and 44% YoY, respectively. In February, exports to mainland China and Hong Kong also declined by 25% and 19% YoY.

This clearly represents a dramatic downturn.

There was a time when watches evolved from mere timekeeping tools to quasi-jewelry luxury items, gaining global acclaim through price hikes and luxurious designs.

However, this so-called jewelry and luxury attribute has rapidly disintegrated amid changing consumer habits in China and the evolution of global political, economic, and cultural landscapes.

The rise of Swiss luxury watches: ascending to luxury status against the odds

Swiss watches are renowned worldwide for their luxury and craftsmanship.

Following the 19th century, the Industrial Revolution brought about the advent of the wristwatch. Due to its complex manufacturing process, the wristwatch was initially a luxury item exclusive to the aristocracy.

In the 20th century, with the acceleration of industrial production, watches became household items, diluting their luxury status. The industry developed differentiated market positions—China became the primary producer of lower-end watches, at one point accounting for 80% of global production. Shenzhen's watch industry gained significant attention, producing 53% of China's watches and 42% of the global total, earning a reputation where "Shenzhen watches are sold by the kilogram."

In contrast, Swiss watches maintained a consistently high-end market position.

At their core, whether a $20 Chinese watch or a $20,000 Swiss luxury watch, their primary function remains timekeeping. However, the 21st century saw the widespread adoption of mobile phones and the rise of smartwatches, providing ample alternatives to traditional timekeeping. This development has significantly disrupted the watch industry.

The most noticeable impact has been the decline in sales.

According to the National Bureau of Statistics, the quantity of Chinese watch exports has been on a clear downward trend since 2004. The export value peaked in 2015 and has been in decline since. In 2020, both the export quantity and value hit rock bottom, with a slight rebound afterward, but still remain at historically low levels.

However, Swiss watches, which target the high-end market, have charted a different course.

Publicly available data shows that in 2011, Swiss wristwatch exports peaked at 29.75 million units, but began to decline thereafter. By 2020, the number had plummeted to 13.78 million units, marking a drop of over 50%. Despite a rebound in subsequent years, the figures remain at only half of the peak level.

In contrast, the export value of Swiss watches has shown a steady upward trend, rising from 16.2 billion Swiss francs in 2010 to 26.7 billion Swiss francs in 2023.

This divergence between quantity and value is attributed to the Swiss watch industry's steadfast belief that only by maintaining a high-end market positioning can traditional mechanical watches distinguish themselves from smartwatches.

Swiss manufacturers have achieved this by continuously raising prices, transforming what was once a consumer product into a luxury item.

For instance, when Rolex introduced the Submariner watch for sale in 1954, its official price was just a few hundred dollars. After numerous price hikes, today, the starting price for a Submariner is almost around 100,000 CNY (13831.64 USD). Adjusting prices globally on the first day of the new year has almost become a tradition for Rolex.

In 2023, luxury watch brands such as Patek Philippe, Omega, and Longines all implemented price hikes exceeding 10%. Morgan Stanley's report reveals that over the past five years, Swiss watch brands have increasingly focused on the luxury segment.

The immediate impact of these price increases is evident. In 2023, Rolex alone achieved sales of approximately $11.5 billion. During the same period, six Swiss watch brands achieved sales exceeding 10 billion CNY (1.383 billion USD).

The price hikes have made luxury watches one of the most sought-after luxury items worldwide, especially in China.

Enthusiastic support from China

Chinese consumers have a notable affinity for luxury goods, encapsulated by the saying "people respect you for your fine clothes before they respect you for yourself." Even Bernard Arnault, the world’s richest man and CEO of LVMH, makes considerable efforts to visit China to court its consumers.

As watches evolved into luxury items, this affinity for luxury combined with a growing passion for timepieces made China a highly competitive market for watchmakers. This fervor began in Hong Kong and extended into mainland China.

Hong Kong is a crucial market for Swiss luxury watches.

Hong Kong, during its "Pearl of the Orient" era, was the largest export market for Swiss watches for many consecutive years. In various Hong Kong films, luxury watches, particularly Rolex, have always been the hallmark of the elite and a symbol of wealth.

In "Infernal Affairs II," Louis Koo, Shawn Yue, Edison Chen, and several other gang leaders all sport Rolex watches. In "Legend of the Dragon," Stephen Chow's character's uncle says, "In the underworld, you should wear a Rolex." In the "Young and Dangerous" film series, Chan Ho-Nam gifts a Rolex to his friend Chicken as a means of escape currency.

Infernal Affairs II

Infernal Affairs II

Legend of the Dragon

The Hong Kong populace's love for luxury watches has been conveyed to mainland consumers through various media. Consequently, the value of Swiss watch exports to mainland China has steadily increased. After 2000, Swiss watch brands expanded aggressively into the mainland market. Initially, they established their Asian offices or branches in Hong Kong. However, as the mainland market boomed, these offices and branches relocated to Shanghai.

In 2020, with international travel restrictions in place, the spending power of mainland luxury watch enthusiasts surged domestically. Deloitte's "2020 Swiss Watch Industry Study" indicated that from June to September 2020, Swiss watch exports to mainland China saw year-on-year growth rates of 48%, 59%, 45%, and 79%, respectively.

This surge led mainland China to surpass Hong Kong and the United States, becoming the largest export market for Swiss watches in 2020.

This consumer power allowed luxury watch brands to reap substantial benefits from the Chinese market.

Take Rolex, the most recognizable brand among Chinese consumers, as an example. According to the "2020 China Luxury Report," Rolex ranked first in both brand awareness and sales volume in China. The survey showed that 61% of Hong Kong consumers and 34% of mainland consumers preferred Rolex, far outpacing other brands.

Market research data reveals that Rolex's sales in China constitute a significant portion of its global revenue. Furthermore, Rolex’s sales in China have consistently grown over the past few years, outpacing other luxury watch brands.

Other brands follow a similar trend: Omega operates around 200 stores in mainland China, accounting for approximately 30% of its global sales. Longines has deeply integrated into the mainland market with over 500 stores across major cities, making up 35%-40% of its global sales.

However, this wave of prosperity has shown signs of tapering off as price increases reach a certain threshold.

The boom and bust cycle

Chinese consumers are becoming increasingly sensitive to the prices of luxury goods.

The significant decline in Swiss watch exports to Greater China might have been foreshadowed in 2023. According to statistics from the Federation of the Swiss Watch Industry, there were several instances of monthly declines in exports to mainland China during 2023, with November seeing a year-on-year drop of 3.7%.

Moreover, 51% of executives in the Swiss watch industry expect the Chinese watch market to either decline or stagnate in 2024.

Data from China Customs shows that in the first three months of 2024, the import value of Swiss watches has quickly reverted to pre-2021 levels.

Reason 1: the generational shift in consumer demographics

One of the primary factors driving this decline is the generational shift among luxury watch consumers. As Generation Z becomes the primary consumer demographic, and even Millennials begin to form a new wave of consumers, the luxury watch market faces new challenges. Bain & Company predicts that by 2030, Generation Z will account for 25-30% of global luxury market consumption, while Millennials will make up 50-55%.

With this generational shift, the cultural appeal of luxury watches is waning among those who have grown up with electronic devices. This generation might remember every iteration of the Apple Watch but won't grasp the iconic status of Rolex as portrayed in old Hong Kong films. Their future joy might come from cutting-edge technologies like robots and autonomous driving, or even from premium liquor like Moutai, but they are less likely to use antique watches to signify their status.

Reason 2: the dawn of a value-for-money consumption era

China has entered an era of value-for-money consumption. Swatch Group CEO Nick Hayek recently remarked that Chinese consumers are increasingly price-sensitive when it comes to luxury goods.

In the article written by Amber Zhang from Baiguan, she found that Chinese middle-class young consumers, although impacted by the slow salary increase outlook, still desire luxury items, only with a more manageable budget; they also value the asset preservation qualities of luxury goods, viewing them as assets to preserve value rather than one-off consumptions.

On social media, the percentage of posts mentioning "second-hand listings" for luxury brands started to soar at the beginning of 2024. This indicates that middle-class consumers still want luxury bags, even though they have clearly shifted towards more responsible spending.

Hermes, Gucci, and Chanel, brands perceived by Chinese consumers to better retain their value, became the most popular. Middle-class consumers are seeking handbags that not only satisfy their desire for a luxury brand logo but also serve as an "asset" to preserve value. The "affordable" luxury brands are the most impacted, as some consumers would rather spend more to buy a second-hand Chanel that retains 90% of its value in the secondary market, than purchase a brand new Loewe, Michael Kors, or Tory Burch, for instance.

Moreover, we discovered that the wealthy in China are seeking for a quiet-luxury consumption style.

One noticeable shift is that the wealthy are opting for "logoless" and more understated fashion statements. "Quiet luxury" has gained traction in China, and you see brands like Loro Piana, which is a good example of "quiet fashion," emerging as the new favorite among the wealthy Chinese. In Beijing (where I am based), many half-jokingly say things like, "If you wear clothes and bags with recognizable logos from top to bottom, I won't necessarily consider you from a wealthy background. Those who wear Uniqlo and go casual may be the secret tycoons who own 10 real estates in Beijing."

Luxury watches, having lost their practical timekeeping function and continually increased in price, have moved far from the concept of "value for money." In a country that values practicality, this means more people are likely to forgo purchasing these items. Even in the highly optimistic year of 2023, luxury watch performances lagged behind other luxury segments. According to Bain's report, luxury watch sales growth in mainland China in 2023 was the weakest among all luxury categories, significantly trailing behind fashion, jewelry, leather goods, and beauty products.

Reason 3: low-value retention and practicality of luxury watches

Luxury watches, in terms of their intrinsic characteristics, do not match the high usage frequency of handbags, the practicality of fashion and beauty products, or the investment value of jewelry.

According to a report by the National Business Daily, a Richard Mille watch that was once valued at over RMB 2 million in the secondary market has now dropped to RMB 1.5 million — a depreciation equivalent to the cost of a Porsche.

A report by Morgan Stanley and WatchCharts published in January showed that prices in the luxury watch secondary market peaked in May 2022 and have since declined, marking the seventh consecutive quarterly decline by the fourth quarter of 2023.

At the recent Watches & Wonders Geneva exhibition in April, Rolex CEO Jean-Frederic Dufour stated in an interview with a Swiss newspaper that "viewing luxury watches as an investment has become a highly risky endeavor."

In contrast, the resale value of second-hand luxury handbags remains strong. According to data from Baiguan, the GMV of second-hand luxury goods on Douyin has been rising continuously, with some second-hand luxury handbags even selling at a premium over new items due to their scarcity. Premiums in luxury handbag resale reflect consumer pursuit of scarcity, trust in brand power, and investment goals.

Note: Data collected and curated by BigOne Lab

Our take

We are amidst a whirlwind of change, navigating through a dynamic and ever-evolving consumer landscape. The saga of Swiss luxury watches rising and waning imparts a crucial lesson to brand owners:

1) Demographics: the key factor

• As Gen Z ages and their purchasing power increases, their importance in the consumer market is growing and cannot be ignored;

• This also reminds me of an interesting classification of Chinese cities regarding operating luxury retail shopping malls, as mentioned in the 2023 annual report of Hang Lung Properties by Chairman Mr. Ronnie C. Chan in his letter to shareholders.