Tiffany & Co. has high hopes for Swatch watch deal
Tiffany & Co. has high hopes for Swatch watch deal
By Andria Cheng, MarketWatch
NEW YORK (MarketWatch) -- About 30 years after deciding to develop its jewelry line over its watch business, Tiffany & Co. said it's finally paying attention to the long-neglected segment. The luxury retailer announced this past weekend it will partner with Swatch Group, its biggest partnership in its 170-year history.
The Swiss watchmaker will help the retailer produce and sell a line of Tiffany & Co. (TIF:
Tiffany & Co. TIF40.75, +0.29, +0.7%) branded watches to help significantly catapult watch sales, which represented about 2% to 3% of the company's $2.6 billion in total revenue last year, Tiffany Chief Executive Michael Kowalski said in an interview on Wednesday. That compares to 20% to 40% of sales for some of the other larger luxury brand companies, he said.
"There's a potential to grow significantly above that" of where Tiffany's watch business is, said Kowalski. "Watch has always been an underdeveloped business at Tiffany. It can be a substantial business for Tiffany. We expect it to grow dramatically."
The first line of watches may be unveiled as early as the second half of 2008 with a full collection expected to be introduced in 2009, according to the companies. They will sell for prices similar to Tiffany's existing collections, which range from $1,600 to $10,000, Tiffany spokesman Mark Aaron said.
The deal is equally significant for Swatch, the Swiss watchmaker (CH:001225515: news, chart, profile) said. Swatch, with about $5 billion in sales, will add Tiffany to its 18-brand portfolio that includes luxury lines Omega, Longines or Breguet.
The business can eventually grow to "several hundred million" in sales and be as large as Tiffany rivals Bulgari or Cartier's watch businesses, said Nick Hayek Jr., chief executive of the Swatch Group, in a separate interview on Wednesday.
Swatch will create a new subsidiary in Switzerland devoted to making Tiffany-branded watches, headed by Nayla Hayek, daughter of Swatch founder Nick Hayek Sr.
"This is a clear signal that it's important to us," said Nick Hayek Jr. at a news conference at Tiffany's flagship store in New York on Wednesday.
Swatch and Tiffany's 20-year partnership will help Tiffany devote more resources to "significant" advertising of its watches, Kowalski said.
The agreement also will help Tiffany tap into Swatch's "substantially larger" network to expand its namesake watches to where Swatch sells its luxury lines or where Tiffany rivals Bulgari and Cartier sell their timepieces, executives said at the news conference.
Tiffany's watches are sold in its 180 stores, on its Web site and about 100 independently operated locations that represent a "very small" percentage of sales, Tiffany spokesman Aaron said. The two companies also will collaborate on marketing and design. Tiffany first began making watches in 1846.
"This is better than anything than we could have achieved on our own," Kowalski said in the interview. "Fundamental economics of this partnership is certainly very attractive. Vertical integration ultimately is margin accretive."
Tiffany will get an undisclosed percentage of pre-tax profit from Swatch. Swatch also will take over production of the existing collections including Atlas, Tiffany Grand and Tiffany Mark. Swatch said it'll significantly ramp up capacity to meet the production demands of Tiffany watches.
Tiffany announced Monday it will take about $20 million in pre-tax charge to discontinue some of the watches and related inventory.
Andria Cheng is a MarketWatch reporter based in New York.
Comments
I thought this was a good example of a strategic alliance, and to be more precise, it's actually a joint venture. Swatch and Tiffany will create a new, Swiss based subsidiary to create new luxury watches.
Each company will benefit from the alliance. Tiffany & Co. will finally enter the luxury watch market, which in turn will help to greatly expand their already profitable business. Swatch will be able to add the uber luxury brand of Tiffany & Co. to their growing line of high-end watches, which includes Omega and Longines, among others.
In addition, the two companies should benefit from a sharing of synergies. Swatch has a very well established in-roads into the watch industry, and even better they are established in the luxury watch market. They can share this knowledge with Tiffany, whereas Tiffany will be able to provide synergies related to their respected name in the jewelery industry. Having the Tiffany name attached to their product will automatically open some doors that were previously closed to Swatch.
The deal is for 20 years, and they will be splitting an undisclosed percentage of pre-tax profit. Both companies are already well established, and extremely well respected, so it seems to be a natural fit and one that should be lucrative for years to come.
Posted by: Ian Iverson | February 27, 2008 7:08 AM