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Step Inside the Inner Workings of Swiss Watch King Swatch

Stocks in this article: FOSLMJCPKATEAAPLGOOG

NEW YORK (TheStreet) -- The traditional watch industry is a crowded one indeed. I make it a point to note traditional as the wearables market dominated by Samsung, Jawbone, and Fitbit offers a person the ability to tell time via a wrist-worn device. Best believe that Apple (AAPL).

That said, take a random walk by the display cases at Macy's (M).

From churning out eye-catching, affordable wrist candy seemingly every season to its unique-looking retail stores and host of upper-tier brands in Omega, Tissot, and Harry Winston, to owning its manufacturing capabilities (huge competitive advantage) Swatch is THE industry gold standard. Believe me, from December 2019 onward Swatch being relieved from its obligation to sell watch parts to rivals (has been going on for years given restrictions) via its ETA division will only widen the company's competitive gap. The ripple effect of this transition will be significant, and probably bring with it a host of mergers to free up costs to invest in manufacturing capabilities.

Consider these facts that separate Swatch (which controls its business end to end) from other names found in crowded department store displays:

  • Michael Kors: Has a license agreement with Fossil dating back to 2004 to produce its watches. Fossil...
  • Fossil: 60% of its watches are procured from Asia through two majority owned entities, the remaining from 45 unrelated factories in China. Fossil has no ownership interest in these factories.
  • Coach: Has a license agreement with Movado since 1998 (expires in 2015...) to produce its watches. Movado...
  • Movado: Does not manufacture any of the products it sells, and buys Swiss watch movements from two suppliers.

3 Things About Swatch You Didn't Even Know

  • A new Harry Winston store format is being implemented. By year end, there will be 38 Harry Winston sores, up from 32 currently.
  • Swatch's operating margin in 2013 clocked in at 27.4%, compared to 25.4% in 2012 and 17.6% in 2009.
  • There are 300 Omega boutiques in operation.

To shed light on the inner workings of Swatch, I chatted with Swatch Creative Director Carlo Giordanetti who is based in the company's home market of Switzerland. I won't look at a Swatch the same way ever again after reading, and re-reading, this interview.

One thing that has always impressed me regarding Swatch is its knack for setting trends in the watch industry to the point where people build their entire outfits around the watch. Walk us through the process of how these great designs consistently come to life.

"The Swatch creative process is almost a seamless journey in the world of contemporary culture - I think we have a quite unique gift for catching and representing the Zeitgeist. Of course there is that magic moment when we feel that a story is the right one - so we build a world of images and keywords, materials and colors around it! These stories become the themes I give to the internal and external designers to develop. As we start working with about 18 months advance time to the market launch, it's always a mix of sensibility, attention to soft signals, rational and irrational. A cocktail that lives and breathes from the world around us and evolves with it. A real expression of pop culture."

Okay, regarding a Swatch store's unique appearance, which is clearly not presenting product to the consumer like your run of the mill apparel retailer. What is some of the science behind the store's interior layout?

"Swatch lives by its ability to move emotions. So what is different is that every choice is made to make you 'fall in love' with one aspect of the brand. Swatch is a lifestyle statement, a style signifier, not a high street fashion brand: therefore our presentation in stores revolves around a few stories to tell, which change every six weeks - and every watch is either a character or an expression of those stories. So the shop is like the stage against which the products express themselves and play their seduction game for you."

Flagship stores are flagship stores because they attract a huge volume of traffic, diverse traffic that is. What are a few of the differences in watch purchases (for example: metal vs. rubber strap by men/women), and how the stores are shopped, between a Swatch in NYC and some of those in international locations, notably in China?

"Flagship stores are those remarkable locations where the brand brings the 'bells and whistles' out to make sure its outstanding products are presented at their best. They are the lucky ones that live out of a generous and creative customized program and attract therefore the creme de la creme of shoppers. For Swatch, in flagship locations we develop special visual programs, we create window decorations, we animate and we romance in unique ways - as a result the purchasing pattern changes according to the hot item of the day. But a Swatch flagship store is also the one where loyal customers know they will always find our classics, so it becomes a beacon to refer to when in need of specific items."

"When looking at customer behavior around the world, I can't say we notice major differences, but of course U.S. customers take a relatively classic approach and a watch that tells time is more important than in Italy, for example, where color, pattern and strong statements rule, and differently from China, where the latest trend is more what people search for in the big cities such as Shanghai, while the second-tier cities look for the safe, Swiss made, statement."

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