The Swiss franc's rapid appreciation could dent Asian sales for Switzerland's luxury watchmakers, analysts say, exacerbating the fallout from China's anti-corruption drive.
"With currency appreciation denting export margins, Swiss watch manufacturers could well start increasing prices on overseas markets," said Yu Okazaki, a Nomura analyst.
The outlook for Swiss exporters worsened last week after Swiss National Bank (SNB) removed its over-three-year-old peg of the Swiss franc's value to the euro. The franc surged immediately after the decision and was up around 13 percent against the euro and 12 percent against the U.S. dollar after markets digested the news, making Swiss exports more expensive.
Switzerland is among the world's leading exporters of high-end watches. For a watch to be labeled 'Swiss made', it must be assembled and inspected in the country, according to Okazaki.
Consumers are rushing to buy watches in Japan – the seventh-largest market for Swiss watch exports, according to the Federation of the Swiss Watch Industry (FH). Sales jumped 18 percent on-year since last Thursday, a spokesperson at Mitsukoshi Isetan Holdings, Japan's biggest department store group said.
"The number of pieces being sold is lower," she said, suggesting that high-end luxury brands are selling well.
China anti-graft campaign stifles sales
Sales were soft even before the SNB's surprise policy move last week.
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"The mainland Chinese have been the biggest spending tourists for years," said James Roy, associate principal at China Market Research Group (CMRG). But the anti-corruption drive that started in 2012 has put conspicuous consumption out of fashion, forcing the Chinese to "keep a low profile," he said.
The value of Swiss watch exports to China, the world's third-largest market for Swiss watches, was down 0.5 percent on-year for the January-to-November period, and down 15.3 percent compared with the same period in 2012.
By comparison, the value of exports to the U.S., the second largest market, jumped 6.7 percent on-year in 2013, and 9.4 percent in 2012.
Even at constant exchange rates sales at Switzerland-based Richemont, which owns premium time piece brands such as Cartier, IWC and Jaeger-LeCoultre, fell by four percent across the Asia Pacific region, including Japan in the second quarter to the fourth quarter of 2014. Combined, the region accounts for a little under half of Richemont's global sales.
Softer demand ahead
When the Swiss Franc finds its equilibrium and exporters adjust to the currency's "new normal", analysts say the inevitable increase in watch prices will hurt sales in Asia.
"A price increase will put Swiss watches out of reach for many Asians," said Nomura's Okazaki.
However, while price increases won't be good for retailers, CMRG's Roy still only expects a mild sales decline. Given that demand in mainland China weathered the anti-graft campaign, the impact from higher price will probably be limited, he said.