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Tue 29 Nov 2011 03:50 PM

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Watch out

Tag Heuer CEO Jean-Christophe Babin on why luxury watchmakers are bucking the downturn

Watch out
Tag Heuer CEO Jean-Christophe Babin

Not many ordinary people wear two watches at the same time.
At least if they do, they don’t have it set on the same time zone. But when you
are the CEO of one of the most famous watch brands in the world, it’s understandable
that you might want to show off every once in a while.

“This one is our masterpiece, the Carrera Calibre 1887,
which was the first mechanical chronograph produced by Tag Heuer for 35 years,”
Jean-Christophe Babin, the CEO of luxury Swiss watchmaker Tag Heuer says.

“And this one,” he adds, pulling up his sleeve, “is the
Concept Chronograph, the only mechanical chronograph to measure and display the
1/1,000th of a second.

“The Calibre we produce in large volumes and retails for
around AED18,000 ($4,900) while the other is limited to 60 pieces and is around
AED550,000,” he adds, before firmly placing them back on his wrists. 

Babin expects to sell around ten to fifteen Concept Chronograph’s
in the Middle East - hardly surprising given the region’s penchant for luxury
brands; it is currently the world’s fourth-largest market for watches and
jewellery while Saudi Arabia’s market alone is estimated to be worth $5bn
annually.

The Middle East accounts for around eight percent of Tag
Heuer’s overall business but has a disproportionately high number of sales from
its boutiques, says Babin. “We started investing massively in the region around
five to six years ago and already it’s quite impressive in the sense that close
to 40 percent of our business is from our boutiques. When it comes to the
retailing, it’s our single most advanced region.”

Tag Heuer’s business has grown significantly since it was
acquired by the French luxury giant LVMH in 1999 for around $74m. The company,
like many of its Swiss counterparts, has typically relied on department stores
and airports for the majority of sales but following the successful roll out of
several standalone boutiques in markets such as China and the Middle East,
Babin is now eying a similar approach in other emerging markets.

“We try to be a pioneering brand not only with new products
but also in our commercial approach by entering into a market as early as we
can. Perhaps you can’t say the same in China, but in Iran we are in the first
group of brands entering the country,” he explains. “But one of the keys of
luxury is to remain exclusive, you don’t want to see Tag Heuer stores
everywhere.”

Despite its growth, Babin has been careful to ensure that
the business has a diversified customer base, which not only protects it during
market turmoil but also safeguards against fluctuating currencies. Around 30
percent of its business is based in the Americas, 35 percent from Europe and
the Middle East and the rest in Asia Pacific.

“It allows us to somehow find the right forex balance.
Obviously we hedge ourselves additionally as a company but even without hedging
we have a natural currency balance, which protects the company profits,” he
explains. 

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Despite the strength of the Swiss franc - which has emerged
as something of a safe haven amid Europe’s deepening debt crisis - many Swiss
watch firms have continued to buck the global slowdown.  Exports of Swiss watches increased seventeen
percent on the year to reach a record Fr1.87bn ($2.04bn) amid increased demand
for luxury watches in Asia and Europe, the Federation of the Swiss Watch
Industry said last month.

So far Tag Heuer has managed to avoid any signs of a
slowdown. Its parent company in July posted first half revenues of $13.6bn, an
increase of thirteen percent compared to the same period the previous year.
Organic revenue for watches and jewellery division - which also includes Hublot
- increased 27 percent.

“Luxury heavily depends on consumer positive spirits so
obviously the more positive the spirits, the higher the tendency to spend in
luxury or in any kind of discretionally product. When spirits are a bit
depressed as we can see right now in the US and Europe, it’s never good,” says
Babin.

“Having said that, and to my surprise so far we haven’t see
any slowdown. Last year was the highest-ever year in Tag Heuer’s history and
this year, unless there is a major catastrophe in the next three weeks - which
I don’t foresee - we’ll beat by far our last year’s record and score another
record high but much, much higher than last year,” he adds.

A strong sales outlook means the watchmaker is open to
acquisitions. The firm acquired the Swiss dial maker ArteCad for an undisclosed
sum in November as part of an ongoing trend for watchmakers to acquire parts
providers to secure supplies and meet strong demand. The world’s largest watch
group, Swatch Group, in November threatened to cut supplies of movements to
competitors and has often complained that luxury rivals have invested too much
in large-scale campaigns and not enough in production.

“If you are a true watchmaker you need to have all the
expertise to really develop new products and secondly, strategically you need
to make sure that a competitive move into one of your suppliers won’t deprive
you from capacity,” explains Babin. “We’ll look at further integrated
companies,” he adds.

In the meantime Tag Heuer will continue to invest in high
profile advertising campaigns. The watchmaker, which boasts celebrity
endorsements from the likes of Lewis Hamilton, Maria Sharapova, Steve McQueen
and Shah Rukh Khan, to name but a few, invests around twenty percent of its net
sales in advertising. Advertising campaigns are currently being featured on
some of the biggest airlines in the world and at some of the largest airports,
says Babin.

“We are mostly catering for the business community, which is
a huge community traveling worldwide. Therefore, we try to get them in the
daily magazine, in the economic magazines and then on board when they fly, and
after immigration,” he explains. 

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Babin isn’t just wearing two Tag Heuer watches, perched on
his head is a pair of Tag Heuer reading glasses and on the table in front of
him is a Tag Heuer smartphone, both of which are a growing part of its
business, and an area that Babin is keen to talk about.

“When it comes to the net sales or the profitability [our
accessories business is marginal] because watches are so big but when it comes
to brand visibility and consumer access, it’s very important,” he says.

“Tag Heuer is the only Swiss brand selling to more than one
million people per year and from a numerical standpoint we attract more
consumers than any other Swiss brand,” he adds.

Like their watches Tag Heuer accessories don’t come cheap. A
smartphone typically retails for around $6,454 while the glasses start from
around $327 but they make the brand more accessible to consumers, explains
Babin. “Thanks to eyewear we have two other points of contact [in Dubai Mall],
which are equally qualitative but at the same time different. The glasses are a
middle premium brand but one day they may look at a watch,” he says.  “Our mobile is exactly the same approach.”

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