China demand for luxury watches outshines US

Wed Mar 7, 2012 1:00am EST

* Omega, Longines ahead of Rolex in China-World Watch Report

* Global luxury market to grow 8 percent in 2012 - analysts

* Recovery in Japan, US a surprise factor - Kepler Research

By Antonella Ciancio and Nathalie Olof-Ors

BASEL, Switzerland, March 7 (Reuters) - China has overtaken the United States as the country with the biggest demand for luxury watches, giving Asia-driven brands such as Swatch Group's Omega and Longines a tailwind against a slowdown in Europe this year.

The World Watch Report, an online survey of more than one billion internet users, also said the number of online searches for watches fell in Germany and Italy, but rose in Japan.

"For the first time since the study was launched in 2004, China surpassed the USA as the country exhibiting the highest demand for luxury watches, representing 23 percent of all watch-related searches," research firm Digital Luxury Group said in its report presented at Baselworld, the world's biggest watch and jewelry fair starting on Wednesday.

The debt crisis in Europe, which accounts for around 35 percent of global luxury goods sales, has spooked consumers, who are cutting discretionary spending and trading down to less expensive brands, analysts say.

"We and the market expect top line momentum to slow this year on the back of weakening demand from local European customers and a more difficult comparison base in the coming quarters, as the sector laps an exceptional 2011 first half performance," Credit Suisse analyst Rogerio Fujimori said in a research note.

Fujimori said he expected global sales of luxury goods to grow by around 8 percent in 2012, close to the sector historical average growth, down from around 15 percent in 2011.

Kepler Research however raised its growth forecast for the watch industry to 7 percent in 2012 from a previous 5 percent, citing a stronger-than-expected comeback in Japan and in the U.S.

"Initial signs this year are of a slowing down in growth (of luxury goods sales), but still the market expects a strong year," James Lawson, director of international luxury market research specialists Ledbury Research, told Reuters.

"However, the great unknown is still China - it has the potential to surprise on the downside and cause another repeat of the unsold stock mountains in 2009," Lawson said.

THE LIONS SHARE

China is the single biggest driver for the watch industry, according to Kepler Research, which estimates Asia will account for two-thirds of the luxury watch market by 2016 from little more than 50 percent last year.

Omega, which makes around a third of sales in China, is narrowing the gap with world leader Rolex for online purchase intentions, the World Watch Report said.

World leader Rolex, which has a stronger foothold in western markets, trails Omega and Longines in China, according to the report.

The U.S. luxury goods market is still the largest in the world ahead of Japan and China but it grew at about a third of China's rate last year, according to U.S. consultancy Bain & Co.

"We believe that the Chinese luxury goods market, including Hong Kong and Macau, is going to be as a large as today's global luxury goods market," Juan Manuel Mendoza, fund manager of the $190 million Luxury Goods Equity Fund of Clariden Leu, which will be integrated into Credit Suisse as of April, told Reuters.

China's demand for counterfeit watches is also diminishing, the research said, confirming an increasing interest in quality.

However, if the overall luxury market is expected to do well this year, the jewelry and watch sector has its weaknesses.

The wholesale-oriented watch industry is also exposed to risks of destocking by third-party retailers in case of a prolonged crisis, analysts say.

Rising gold and diamond prices - a trend likely to continue this year - cooled purchases of high-end jewels and watches last year.

Swatch Group's decision to reduce its deliveries of movements to third-party brands from 2012 is also likely to affect smaller watchmakers without strong production bases.

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