The luxury market, once considered immune to the ebb and flow of economic fluctuations, faced its worst slump last year. The decline in global sales was steep, off 8 per cent. Tag Heuer, the Swiss watchmaker, says it was better off than others in the industry; and as the market picked up this year, it has recovered strongly. A part of one of the world’s largest luxury conglomerates, Moët Hennessy Louis Vuitton (LVMH), Tag Heuer plans to invest heavily this year — about ¤100 million — in expanding its market. India is one of its key markets. Tag Heuer President & CEO Jean-Christophe Babin, who was in Delhi recently to celebrate the company’s 150th anniversary, spoke to Amit Ranjan Rai on the key drivers of the brand, and his global and India growth strategy.
What drives the Tag Heuer brand?
The brand has been driven by the founder spirit made up of entrepreneurship, passion and innovation. Edouard Heuer was only 20 when he started a workshop in 1860. It was not common in those days for a 20-year-old to become an entrepreneur. Early on, he focused on measuring tiny fractions of time and came up with chronographs — precise systems to measure seconds, one-tenth of a second, one-hundredth of a second, and so on.
This led the company to become timekeeper for some of the most prestigious sporting events in the 1920s, 1930s and 1940s. Be it the Olympic Games, various motor races or even greyhound racing, Tag Heuer became the official timekeeper because we were the only one with the expertise. This led us to become world experts of luxury chronographs — one of the most sophisticated watch-making contraptions.
Today, Jack Heuer, the great-grandson of the founder, carries the same entrepreneurial spirit, passion and innovative drive. The brand has been proactively finding new patterns and breaking old modules. For instance, this year in Basel we presented our most path-breaking innovation, the Grand Carrera Pendulum, with the first-ever mechanical movement in a watch without hairspring. For the first time in watch-making, the movement is driven by magnets and not hairspring.
How does the company nurture innovation?
We work in a networked way. On the one hand, we have our R&D unit in Switzerland with 25 people — which, by Swiss watch-making standards, is quite a lot. These 25 are very highly-qualified experts. There are not just watchmakers but also engineers in micro-mechanics, electronics, materials, and so on. On the other hand, we also have a global network of partners that we work closely with. So while this group of 25 works internally, it also works with those in the network — universities and institutes as well as specialist partners. For instance, we work closely with McLaren, the Formula One team, for new materials development. This network of partners combined with our internal resources provides Tag Heuer a unique innovation platform. Without the networking we would not have achieved more than 30 per cent of what we have today.
Besides, we follow a make and buy component strategy, which is deliberate because we believe we have to make a certain number internally as we have the best expertise in the field. But at the same time, we don’t want to rely only on our internal resources because we want to avoid complacency. And the best way to do that is by pitching our people against external suppliers. They compete against each other to get better quality and cost. We want our business model to be such that our internal expertise is always challenged by external expertise, so that we progress faster.
How has business been for the company in the past one or two years?
Last year was pretty bumpy for all industries. Statistics from the watch-making federation show that last year the market dropped by around 20 per cent. Our company did better but still lost sales, which is quite logical as all markets were down. India was better off as it was down by only 4 or 5 per cent. In India, we grew last year, which is good news as it shows the brand’s strength, appeal and relevance in the country. But we grew here less than the years before as a consequence of the crisis. The first quarter this year has been very good not only in India but worldwide. Tag Heuer, it seems, has got out of the crisis quite strongly. This year we will be making one of our highest investments across the board — about ¤100 million — not only in marketing and retailing but also manufacturing. That’s quite a lot for a medium-sized company like us.
How do you see the luxury market, particularly the luxury watch market, globally?
In Asia, the crisis had an impact, but a pretty small impact. India is a good example. Since September-October last year, Asia has been the first to recover and to recover strongly. So for the last seven-eight months in Asia, including India, we have seen strong growth in the sale of luxury watches.
The US has also been recovering, but not as strongly as Asia. The debt issue is still quite dominant and access to credit for consumers is still limited. The real estate market is also down. So, taking into consideration all these parameters, the fact that American consumers are back in the malls, back buying luxury watches, though not yet to the levels of 2007-08, is quite encouraging.
And Europe has never really declined. Last year it was one of the few regions that grew. In Europe, the crisis has had a limited impact except for the debt burden which might in the future put a question mark on the purchasing power of some consumers.
How much did your business drop in the US and Europe?
Our business is very well-balanced because about 30 per cent of it comes from America (from Canada to Argentina), 30-35 per cent from Europe and west Asia, and about 40 per cent from Asia. I would say the company has a quite balanced portfolio in terms of geographies. Somehow, if one region is unstable or sluggish, usually another region does well to offset the sluggishness. So far this year, it has been pretty good. We have tried to be more innovative than ever, like with the introduction of the Grand Carrera Pendulum in Basel. At the same time, we are focusing hard on offering consumers more value for their money — we don’t increase the prices but we try to offer better value in terms of details and sophistication.
Has the buyer become price-sensitive?
Believe it or not, we have sold more pieces above Rs 200,000 than ever before. This means that if the product is right, and offers superior value for what it costs, it is going to sell. One of our Grand Carrera models — it costs about Rs 200,000 — was the world bestseller last year. It’s not so much that the consumer is price-sensitive; the consumer wants to make sure that he gets value for what he pays. When a consumer buys a Tag Heuer he’s not just buying a glamorous timeless design, but also a lot of substance which involves world-class craftsmanship, know-how and innovation, which has a huge cost.
How do you see the luxury goods market in India, as also the luxury watch market?
If you look at the consumer base, India should certainly become a much bigger market. It is a medium-sized market today compared to the US, China or Japan. No, it’s not very small; in retail value it is about $500 million. Of course, you can see the glass half full or half empty — it is about 10 to 12 per cent of the Chinese market, but that’s not small either. It is already big enough to be in Tag Heuer’s top 15 markets out of 120. So it’s in the leading pack and not at the back. And it is growing much faster than most other markets because the country has a booming economy, a booming upper middle-class, which is striving for more luxury products, and therefore the upside is significant. We believe that together with China, India will be the next big thing for the watch industry in the coming years.
Are your returns on investment good enough to support the operations here?
When you run a global company, what counts is your profit and cash generation globally. And obviously for 120 different countries, as a CEO, you have to assign different roles. So in some countries the role is to generate a lot of cash, for some it’s a mix of cash and growth, and for some others, growth only. Why? Because we believe that if we get to a certain size in 10 years, then the cash generation will be huge. India is part of the third group.
We don’t pretend to make profits. We don’t pretend to generate cash in the short term. And we don’t pretend to have an average growth, we just want to record high topline growth — this is all that matters. We want to be much bigger as quickly as can be, whatever it costs, because we know that once we get a certain size, then if not the market leader, we would not be very far, as we are already No. 3. We will be much more than a watch brand, we have made very strong inroads with luxury mobiles. Our competitors are running with one leg only: Watches. We are running with two legs which usually is faster, because we have watches and mobiles, and mobiles have great acceptance.
We don’t expect immediate returns from the Indian market because we have many other markets generating a lot of cash. We need to invest in markets that would make the company bigger and richer tomorrow — India, China, Russia, Brazil and Indonesia. I think we have a good balance between the profit and cash that we give to the shoulder and the profit and cash that we return to ourselves to invest in the future cash generators of 2015-20. So the only things I’m looking in India are the topline and market share. If these keep growing the way they have over the last seven years, we will generate cash. Whether it takes three, five or ten years, as long as the other countries are offsetting, I’m fine with it.
What’s your growth strategy for the country?
Our belief is that India will be in our top five markets in five to ten years from now. So we have no other option but to invest heavily in India, even more than we did in the recent past. We expect to sell three-four times more in five to ten years. This would also require adapting our product offerings to Indian tastes, for instance, more ladies products, more steel and gold products; we are still a bit narrow in our assortments in steel and gold. Ever since we started Aquaracer steel and gold advertising with Shah Rukh Khan, we have sold plenty of them. So we know there is potential, we just need more product supply.
We need more boutiques and increased presence at multi-brand outlets. We are aiming to be in at least 30 cities in India. There are 25-30 cities where you have enough consumers who can afford a Rs-100,000 watch. The challenge is to offer those consumers in their city the right point of sale to buy the watch. And if you can do that, why would they travel to Delhi or Mumbai to buy a watch? Tag Heuer has always been a consumer-driven company and we believe that if we offer the consumers the right retailing environment then they will buy locally.
