Tag heuer used watch values

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09.10.2017

JEAN-CLAUDE BIVER: POSITIONING TAG HEUER FOR THE FUTURE

This case was prepared by Professor Dominique Turpin, the Dentsu Professor at IMD, Research Associate Athanasios Kondis and Professor Goutam Challagalla as a basis for class discussion rather than to illustrate either effective or ineffective handling of a business situation.

In March 2017, Jean-Claude Biver, President of the Watches division of LVMH (Moët Hennessy Louis Vuitton) – the global luxury goods leader – was reflecting on the forthcoming Baselworld 2017. Baselworld was the leading annual event for the watch and jewelry industry. TAG Heuer – the largest company in LVMH’s watches division – was expected to unveil the second generation of its digital watch. With a starting retail price of CHF 1,600,i approximately four times the price of an Apple Watch, TAG Heuer Connected Modular 45 would be the most expensive digital watch on the market.

Since taking the top job at LVMH in 2014, Biver had focused on TAG Heuer and managed to revitalize what was still a performing business but a brand that was no longer fashionable, particularly among young customers. Biver had achieved this by repositioning TAG Heuer as an affordable luxury watch, catering to both the “traditionalists” and to new segments among the young generation. The digital watch was a key part of this strategy as Biver believed that there was high demand, particularly among young people, for luxury connected watches.

Two weeks before the official launch, Biver was still pondering a number of unresolved questions:

 Was the connected watch a threat or an opportunity for the Swiss watch industry and for TAG Heuer in particular?

 Did the connected watch require a rethinking of TAG Heuer’s overall marketing strategy and in particular the brand positioning, customer targeting, communications and channels?

 How could US technology affect the Swiss image of the brand? Would TAG Heuer potentially lose its independence by relying on American suppliers such as Intel and Google?

 What should his next move(s) be?

Copyright © 2017 by IMD - International Institute for Management Development, Lausanne, Switzerland (www.imd.org). No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without the prior written permission of IMD.

i Exchange rate in January 2017: CHF1 = €0.93 = US$1.01.

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The Swiss Watch Industry

Although the tradition of Swiss watch manufacturing could be traced back to the middle of the 16th century in Geneva, mass production of timepieces only began at the turn of the 20th century. Swiss watchmakers were behind many of the inventions that shaped the industry, including the wristwatch (introduced after the First World War), the first automatic or self- winding watch (1926) and the first electric wristwatch (1952).1

By 2016 and following a series of mergers and acquisitions the Swiss watch industry comprised three types of players (refer to Exhibit 1):

The Swatch Group. This was the world’s largest watchmaking group with the largest selection of brands, covering every price point in the market. It was also the top supplier of watch movements and components to third-party watchmakers in Switzerland and around the world.

The second group consisted of Richemont, LVMH and Kering. While Swatch focused on watches, these three companies also managed other luxury brands, chiefly in jewelry, fashion and leather goods.

A shrinking number of around 40 companies, which were primarily independents. The size of their businesses varied from large players like Rolex/Tudor (producing over 750,000 units per year for estimated revenues of CHF 4.5 billion) to mid-size companies like Patek Philippe (50,000 units a year) and Franck Muller (8,000 units a year), and smaller players like Parmigiani, which produced only a few hundred pieces a year.

In 2016, the global market for wristwatches was estimated at CHF 40 billion (based on export prices).2 China was the biggest exporter in volume terms (652 million units), followed by Hong Kong (241.1 million units) and Switzerland (25.4 million units). In value terms, Swiss watch exports were worth CHF 18.3 billion, representing 46% of the value of all timepieces sold globally. Swiss watchmakers produced both electronic and mechanical watches. The latter had a high number of clockwork parts (movements) and a starting price over CHF 500 (refer to Exhibit 2). Watches that were priced at CHF 3,000+ accounted for the majority of exports – around two-thirds.

Swiss companies highlighted the “Swiss made” label – a mark of high quality, reliability and precision. Premium manufacturers of mechanical watches also emphasized the history of the brand and the craftsmanship and complexity involved in creating the different watch movements. They positioned mechanical watches as luxury timepieces of the highest quality that carried a sense of heritage, prestige and timelessness.

With exports falling for the second year in succession, 2016 was a difficult one for the Swiss watch industry. Analysts cited several reasons behind this development, including the strong Swiss Franc (since 2010 it had appreciated more than 20% against the Euro and the USD), uncertainty associated with the upcoming US election, tumbling oil prices and weaker demand in important markets such as China and Russia.3 The Swatch Group and Richemont issued profit warnings, and watch executives were preparing for another turbulent year ahead.

However, there was one company that outperformed the market and stunned analysts by reporting growth in 2016. This was LVMH’s watch division – with Biver at its helm.

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Jean-Claude Biver: Entrepreneur and Visionary

Biver was a celebrated icon of the Swiss watch industry. Greatly esteemed by his peers at home and abroad, he was considered to be both an extraordinary entrepreneur and a visionary. Born in Luxembourg, the son of a shoemaker, Biver moved to Switzerland when he was in his teens to study in Lausanne and had remained in the country ever since. After graduating from HEC Lausanne, he joined Audemars Piguet, a premium watch company located in the Vallée de Joux – a key watchmaking area of Western Switzerland.

In 1981, watchmakers from Japan and Hong Kong were conducting a ferocious attack on the Swiss watch industry with their inexpensive electric quartz watches. To compete against them, many Swiss watchmakers began abandoning mechanical watches in favor of the quartz movement. The reeling Swiss watch industry had to lay off about 50,000 employees and retool in microelectronics to compete with Japanese firms.4 At that time, Biver and his friend Jacques Piguet bought the rights to the brand Blancpain, which had been out of business for about 20 years, for CHF 22,500.ii In essence, Biver and his partner purchased a defunct company with no physical assets and a brand that had diminished in stature.

Blancpain had the unique distinction of being the oldest watch company in Switzerland (founded in 1735). Many suggested the logical way to position Blancpain would be to emphasize it was the “oldest” Swiss watch. Could that be a powerful differentiator? Biver was not convinced. He dug into the history of the brand and discovered that Blancpain was traditionally looked upon by other craftsmen as “the patriarch of the art of watchmaking.” He was faced with a dilemma; the industry was migrating to electronic quartz watches, but the Blancpain brand history was inconsistent with chasing other companies or trends. Instead, Blancpain had served as the “reference” to others in the art of watchmaking. A big believer in staying true to a brand’s history and positioning, Biver decided to buck the trend of quartz watches. He was convinced that mechanical watches and craftsmanship still carried an emotional appeal with consumers. He relaunched the company with the slogan “Since 1735 there has never been a Blancpain quartz watch and there never will be!” and positioned it as the ultimate reference in fine watchmaking. A luxury watch was inheritantly an emotional purchase and Biver believed that this message was unique and would give luxury watch buyers a rationale for standing out from the crowd.

The company bought a former farmhouse surrounded by forest and pastureland and designed it not as a factory but as a workplace of craftsmen. Each watchmaker worked at his workbench and assembled by hand all the components of a watch from A to Z. A flexible working schedule was introduced and watchmakers were allowed to work any day and time of the week. “Watchmakers are artists so I had to create the conditions for artists to flourish,” Biver remembered. Blancpain enjoyed phenomenal success and 10 years later (1992), Biver and Piguet sold the company to the Swatch Group (then called SMH) for CHF 60 million.5

Nicolas Hayek, then CEO of the Swatch Group, asked Biver to stay and revive its struggling Omega brand. Omega, as the first watch worn by astronauts on the moon, had a rich heritage. However, chasing the mass market through lower prices and multiple product lines – perhaps a consequence of belonging to the Swatch Group – had weakened the brand’s identity.6 Fixing this was one of Biver’s first tasks as CEO. He would often draw a wheel with the spokes converging in the center and remark, “The center of the wheel is our brand message – it is the promise, it is the vision. It guides the actions of everyone from the receptionist to the CEO.”

ii Exchange rate in December 2014: CHF1 = €0.83 = US$1.00.

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In addition to redefining the brand identity and introducing new products, Biver pioneered original product placement in movies such as the James Bond series, and secured endorsements by celebrities such as actor Pierce Brosnan, fashion model Cindy Crawford and Formula 1 driver Michael Schumacher. By 2003, when Biver decided to leave the Swatch Group in search of a new challenge, Omega’s revenues had almost tripled.7

In 2004, Biver met Italian entrepreneur Carlo Crocco, owner of another luxury brand, Hublot. Launched in 1980, Hublot was named after the French word for porthole – the circular window used on the hull of ships to let in light and air. Known for their unique combination of rubber and gold, Hublot watches were popular among marine sports enthusiasts and sold for around CHF 4,000. But, the brand was in trouble. Competition had started imitating some of its unique design features (such as the black rubber strap), staff morale was low and the best people had already left the company. In 2004 it recorded a loss of CHF 2.6 million.iii Biver was undeterred:

I felt the exceptional potential of this brand. It was a mono-product brand, but transformable. The original concept has not taken on a single wrinkle since its creation.8

Biver recognized that by using rubber and gold in a watch for the first time, Hublot had created a fusion of materials that are normally separate in nature. Building on the concept of fusion, he introduced the “Big Bang” chronograph, which combined materials such as cermet (combination of metallic and ceramic components with increased strength), Kevlar, gold and tantalum with precious metals, diamonds and rubber. These were unique combinations of materials that stood out from the competition. Once again, Biver gave potential customers a compelling reason to purchase the watch. It turned out to be a big hit!

At the same time, Biver revamped the distribution network by focusing on fewer retailers, in prestigious locations in major cities around the world. He also pursued an aggressive pricing strategy and increased the average retail price of Hublot from CHF 4,000 to CHF 16,000.

In the following three years, Hublot recorded rapid growth and its net revenue increased from CHF 29.4 million (2004) to more than CHF 150 million (2007) with excellent profitability.9 Biver had done it again! He had resurrected another brand by crafting its identity and executing the strategy skillfully.

Hublot’s performance enticed LVMH, who acquired it in 2008. At that time LVMH’s luxury watch division comprised TAG Heuer, a leader in sport watches and chronographs, the Swiss watch manufacturer Zenith, Dior and LVMH watches. Bernard Arnault, LVMH’s CEO, recognized Biver’s competence and stature, and offered him the position of CEO of Hublot. Biver accepted the offer and led Hublot to uninterrupted revenue and profit growth.

During the next five years, Hublot introduced several models with unique designs and materials, and repositioned itself as a high-end, innovative sports watch that symbolized “the fusion of tradition and the future.” Its communications strategy was a key ingredient of its success. Biver himself did not miss a single opportunity to promote Hublot on the radio and TV, and at speaking engagements and events. Adhering to the motto of “being present where current and future customers are,” Hublot decided not to associate itself with a single sport – a common practice among luxury watchmakers – and instead sponsored different sports such as polo, yachting and car racing. Furthermore, a staunch advocate of challenging conventional

iii For more information on the turnaround of Hublot, see Turpin, Dominique. Jean-Claude Biver & the Relaunch of Hublot (A) and (B). IMD case no. IMD-5-0740 and IMD-5-0739, 2008.

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wisdom, it was the first Swiss watchmaker to invest in football (soccer), sponsoring events such as the World Cup, the UEFA Euro and the Champions League. The entry into football raised many eyebrows since it was a “mass” sport and considered to be inconsistent with the image of luxury watches. In all these activities there was a significant focus on the young generation and the company invested 25% to 30% of its promotion budget in this group.

In 2013, Hublot’s revenue was estimated at CHF 350 million.10 The Big Bang chronograph, which accounted for the majority of its sales, and the accompanying tagline “The Art of Fusion” became a phenomenon in luxury watchmaking. In January 2014, Arnault met with Biver in Paris and asked him to oversee the strategy of the company’s three dedicated watchmaking brands; TAG Heuer, Zenith and Hublot. In addition to managing the watchmaking division, Arnault asked Biver to revitalize the company’s biggest revenue contributor and one of the most recognizable luxury watch brands – TAG Heuer.

TAG Heuer

Based in La Chaux-de-Fonds, the cradle of the Swiss luxury watch industry, TAG Heuer was formed in 1985 when Luxembourg-based TAG (Techniques d’Avant Garde) acquired Swiss company Heuer.

TAG, created in 1977, was a manufacturer of high-tech products such as ceramic turbochargers. The company became known as the financier of the TAG turbo engine developed by Porsche for Formula 1 and presented to the public at the 1983 Geneva Motor Show. In 1984, McLaren drivers Niki Lauda and Alain Prost raced with TAG engines and dominated the Formula 1 World Championship with 12 victories in 16 races. McLaren–TAG won the Constructors’ Championship and Lauda won the Drivers’ Championship. Prost won the Drivers’ Championship with the McLaren–TAG team for the next two years.

Heuer was founded in 1860 by Eduard Heuer, a Swiss entrepreneur. Over the next 150 years, the company pioneered many innovations such as the “oscillating pinion” in 1887 (still used today), the first hundredth-of-a-second chronograph (1916), the first chronograph with a world tidal indicator and a dial for regattas (1950), the first automatic chronograph movement (1969) and the first quartz chronograph with analog display (1983).

From the 1950s to the 1970s, Heuer was also a leading producer of stopwatches and timing equipment and as a result its watches became popular among automobile racers.11 In 1962 Heuer was selected by NASA to provide a timekeeping device for astronaut John Glenn, the first American in space. For many years the company was also the official timekeeper of the Olympic Games and of prestigious car races. Under the leadership of Jack Heuer (great- grandson of the founder), the company launched some of its most iconic watches such as the Autavia (1962), the Carrera (1964) and the Monaco (1969). American actor Steve McQueen wore the latter in the epic Le Mans movie.

TAG Heuer experienced high growth and developed into a well-known sports watch brand. LVMH believed in its potential and acquired the company for CHF 1.15 billion (US$740 million) in 1999. TAG Heuer continued to set the time-measuring devices for major sports events such as Formula 1, the American IndyCar Series and the Alpine World Ski Championships at St. Moritz, Switzerland, and produced limited edition chronographs to commemorate these events. In 2013, TAG Heuer celebrated the 50th anniversary of the Carrera, the racing-inspired chronograph that had been a key model in its portfolio.

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Over the years, its communication strategy had evolved and the company used the taglines “professional sports watches,” “don’t crack under pressure” and “what are you made of?” with considerable success (refer to Exhibit 3).

TAG Heuer’s bestsellers were the all-steel mechanical Carrera and Aquaracer models, which cost around CHF 1,500 to CHF 4,000 (refer to Exhibit 4). It had also launched some low- priced models. These were made of colorful plastic material and sold between CHF 500 and CHF 600. The company did not make its financial results public, but industry specialists estimated its 2013 revenue at around CHF 880 million, with the US being its biggest market, followed by Asia and Europe.12

In recent years, TAG Heuer had had a mixed performance. Between 2011 and 2013 its revenues had slightly increased and margins stood at over 20%. Nevertheless, the brand appeared to have lost its vitality. While it enjoyed high awareness, it was no longer perceived as an innovative, youthful brand. As soon as he stepped into the new role, Biver looked into TAG Heuer’s business plan. He recalled:

The company was on track to achieve its revenue target for 2014, but visits to major distributors in key markets such as the US, Germany, Japan and China revealed a different picture. I discovered that the majority of the watches sold to distributors over the last 18 months had not left the shops, that its retail shops were unable to sell their inventory of TAG Heuer watches. This was bad news in the long run. Further, TAG Heuer’s historical positioning was that of a sporty affordable product bought by university graduates as their first valuable watch. Its heritage was associated with motorsports and Formula 1 champions as its brand ambassadors. After the LVMH acquisition, management was encouraged to increase prices as the company now belonged to LVMH – the biggest luxury group in the world. It started increasing prices, offering high horology products and spending money on advertising and celebrity endorsements without any clear rationale. When I asked why they had increased prices by nearly 40% during the last four years, they replied that they needed to follow the price increases of production and of the competition. This explanation made no sense to me, since some brands such as Omega had a very different positioning. I knew that extremely well, since I had managed Omega some years ago. Relaunching TAG Heuer was one of the most challenging and interesting missions of my professional life.

Execution Time at TAG Heuer

During the first six months in his new role, Biver spent “14 hours a day, six days a week” assessing the situation at TAG Heuer. He visited suppliers, retailers, customers and collectors, and met all 1,200 members of staff at a series of two-hour breakfast sessions, each involving around 40 people. Through these meetings, he discovered that the watches appealed mostly to the “old” generation and that young people were not buying TAG Heuer. By September 2014, he had a full picture of the company’s challenges and opportunities. He observed:

The organization had become very technocratic and was increasingly disconnected from the market. We had too many people in almost every function, too many meetings, and too many consultants with too many PowerPoint presentations. With the wrong pricing, some wrong channels and huge overhead expenses, it was no surprise that we had a big problem on our hands. I was convinced that we had to change the perception of TAG Heuer, particularly for the younger generation who had no preconceived ideas about the brand and for which the names of Steve McQueen or Ayrton Senna did not mean much. So, I set about making major changes.

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New Management

One of Biver’s first decisions was to let go of around 20 senior executives in purchasing, marketing and sales who were based at headquarters and in major markets, such as the US, China, Japan and Europe. In total, about 200 people left over a two-month period. Biver commented:

It was a painful and expensive decision. We had to move fast because I wanted to change the culture of the company as quickly as possible. If not, some key people would have continued to protect the culture of the past decade and find excuses as to why we could not change.

A significant number of the managers and executives that left were not replaced, which freed up cash that could be reinvested in the company. Wherever new talent was needed, Biver promoted young managers and staff from within the company. He explained:

From my experience, bringing in outsiders can be very disruptive when a company is in turmoil. When you are trying to make changes in the corporate culture, it is not the right time to bring in external people who do not know the history of the company. By promoting younger staff from within TAG Heuer, I was also sending a clear message that I was not against them, that I trusted them. After a while, these young people became my best ambassadors.

Positioning

Traditionally, TAG Heuer was known for its masculine sports watches and great chronograph designs. While studying the history of the brand, Biver and his team decided to revisit its original meaning Techniques d’Avant Garde. Biver explained:

My philosophy is that I’m not the boss but the servant of the brand. We had almost forgotten what TAG meant because we had always used the acronym. Suddenly everything became so clear. We had to be “avant-garde” again – a pioneer in everything we did: products, communications, distribution, etc. Here was the opportunity, right under our noses!

One of the first things the new management did was to bring back the old slogan from the 1990s “don’t crack under pressure.” It increased the number of brand ambassadors and launched advertisements that highlighted their personalities and accomplishments (refer to Exhibit 5). It also placed greater emphasis on what it called “event marketing” – prestigious events that attracted significant media attention.

Soon after, the company identified four segments, which it referred to as “universes” – sport, heritage, lifestyle, and art & music. These four universes allowed TAG Heuer to enter new areas and speak to a younger generation. The first examples of collaborations with the new universes included David Guetta (art & music), One Republic (art & music), Martin Garrix (art & music), Cara Delevingne (lifestyle), Chris Hemsworth (lifestyle), Red Bull Racing (sport), Manchester United (sport) and Muhammad Ali (heritage).

Pricing and Distribution

In the 1990s, the average retail price of a TAG Heuer watch was around CHF 700. By 2014, it was around CHF 2,850. Nevertheless, the company was still using the same distributors and retailers. It had about 8,000 retailers worldwide with very different profiles and practices. Furthermore, in order to increase sales in some markets (the US, Australia and the UK, among

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others), management had decided to sell a significant amount of products through outlet storesiv and on the “gray market.”v For Biver this was a disastrous decision given that “the best way to kill a brand is to overprice the product, sell it through the gray market and forget about its DNA.”

The new management revisited pricing. It decided to withdraw a certain number of the CHF 6,500+ models and focus on the best-sellers: watches priced between CHF 1,500 and CHF 3,000, which accounted for 65% of the company’s sales and profits. The number of distributors and retailers was cut to 6,000. Another major decision was to buy back about CHF 60 million in unsold inventory, which was later destroyed. Biver explained:

Reducing the prices of models which had become “overpriced” was a very unusual decision in our industry. Not only did we lose a lot of money but many retailers and customers were unhappy as they had bought our products for a higher price than they were now worth. But my rationale was to go back to prices that truly reflected the perceived value of our product. This was important because we had recently defined the three commands of the brand: Tag Heuer had to (a) be avant-garde, (b) be the leader in “affordable” or “accessible” luxury watches, and (c) have a high perceived value – twice as high as the retail price.

The company also restructured all its factories as well as its quality and after-sales departments.

During the next two years, TAG Heuer underwent a major cultural change with the objective to “reconnect the brand to the values Jack Heuer had developed” and “focus more on the young generation.”13 It launched several new products – a combination of “refreshed” old models and new designs (refer to Exhibit 6) – which generated great enthusiasm among industry experts, retailers and consumers. In 2016, the brand delivered double-digit growth, whereas the total Swiss watch industry declined by 10%.14 Industry sources estimated its revenue at around CHF 1 billion.

The Digital Watch: New Opportunity or Threat?

While Biver was busy turning around TAG Heuer, industry experts were wondering whether the Swiss watch industry faced a turbulent future due to the emergence of digital watches. In 2014, Apple unveiled one of the most anticipated products of the year – the Apple Watch. The Apple Watch together with competitive devices from Samsung and LG, among others, marked the emergence of a new product category, which many watch executives considered as a major threat: digital watches (also called smartwatches or connected watches). These were wrist devices, which in addition to telling the time, displayed fitness information, notified calls and messages, and allowed access to e-mail, calendar and social media, among other functions.

Apple Watch was not the first digital watch. The first, the Pulsar, was introduced in 1972 by Hamilton Watch Company, which was bought by Japanese manufacturer Seiko in 1978. Nevertheless, this time Swiss watch industry specialists felt that digital watches posed a real danger that could disrupt the industry, like the “quartz revolution” had in the late 1970s. They were particularly worried about the Apple Watch, given the company’s powerful brand and remarkable financial prowess. As Biver observed:

iv An outlet store or factory was a brick-and-mortar or online store in which manufacturers sold their stock directly to the public, cutting out the middlemen and resulting in significant discounts to end users. v The gray market referred to the legal but unregulated trade of goods through unconventional distribution channels or outlets for less than the official retail prices. It was very different to the illegal trade on the black market.

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We are a tiny company in a tiny industry. […] The whole world watch industry, including its suppliers, is worth about CHF 40 billion. Compare this number with the CHF 65 billion cash flow of Apple. In comparison, we are ants among elephants!

The Apple Watch enabled users to “Get Active. Stay Connected.” It had a big focus on fitness. Thanks to its Activity App, users could keep track of their fitness goals and create customized workouts based on distance or the number of calories they wanted to burn. The app also allowed users to set goals and pace for popular training sessions such as running and cycling. Apple Watch also included a heart rate sensor and a GPS, and it could use the Wi-Fi of the connected iPhone to provide a comprehensive picture of the user’s daily activity. It then used this history to suggest individual goals, reward the achievement of milestones and keep the user motivated. In order for users to enjoy all these functionalities, the watch had to be connected to their iPhone, but if their iPhone was not nearby, they could still use most of the activity and workout apps, see the time and use the alarm, timer and stopwatch.

Apple Watch prices started at CHF 346 with the Apple Watch Edition starting at CHF 10,000. All the watches were compatible with iPhone 5 and up. At launch, Apple did not disclose the revenue forecast for the new product, but Wall Street analysts estimated that it would sell between 10 and 20 million watches in 2015 alone. Given that 1 billion people used Apple devices worldwide and that millennialsvi were attracted to technology gadgets, experts believed that the new product had tremendous potential.

Apple was not the only company active in this emerging market. Samsung had introduced the Gear S2 and Sony the SmartWatch 2 also known as SW2. Motorola had a digital watch, the Moto 360, which was available in different sizes and four models: sport, luxury, man and woman. All three ran on Android Wear – Google’s operating system for smartwatches – and cost between CHF 300 and CH 400.

Some experts classified digital watches as wearables. Usually worn on the wrist, these were devices that carried sensors and often used Bluetooth technology to connect to a smartphone. Other wearable categories included fitness trackers and sports watches. Worn on the wrist or clipped to a belt, fitness trackers were generally bands or watches of some type that displayed information on calorie burn and exercise, e.g. the number of steps a person had taken. Fitness trackers came in all sorts of shapes, sizes and levels of sophistication and at a price range of CHF 50 to CHF 150. Major brands included Fitbit, Jawbone, Misfit and Withings. Sports watches (also called running watches and GPS watches) were more sophisticated devices. They had GPS and provided another level of information about a chosen sport such as running, cycling or triathlon and helped people take their training to the next level. TomTom, Garmin, Polar and Suunto were some of the biggest suppliers of sports watches with prices ranging from CHF 200 to CHF 400.

It was the beginning of a new chapter in the history of the watch industry that puzzled the Swiss. Many of them saw wearables, and specifically digital watches, as a serious risk, particularly in the lower price segment. In the last quarter of 2015, digital watch sales reached 8.1 million units, exceeding Swiss watch sales (7.9 million) for the first time. Apple Watch had around 63% share, followed by Samsung with 16%.15

Others dismissed the idea that such devices posed a threat and observed that they could even have a positive effect; digital watches could bring a new type of customer into the watch-

vi The term “millennials” referred to individuals who had reached adulthood around the turn of the 21st century. Typically, millennials were defined as people who had been born between 1980 and 2000.

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wearing population. Nick Hayek had questioned the future of the digital watch commenting, “I do not see any signs of a revolution. What Apple and the others have presented so far, does not take anyone out of their socks.”16 This opinion, however, was not shared by Swatch wristwatch co-inventor and serial entrepreneur Elmar Mack, who had recently observed:

So far, I see watchmakers in this country making the same mistakes as back in the quartz crisis days. We've seen a lot of arrogance in the Swiss watch industry in the past few years, calling the smartwatch a gadget and not taking it seriously. Anything in the price range of 500 francs to 1,000 francs ($500-$1,000) is really in danger. I do expect an Ice Age to come our way.17

Frédérique Constant (now part of Citizen Holdings in Japan), Breitling and Swatch (which had reversed course) had already announced their intention to launch a digital watch. However, most Swiss manufacturers remained uncertain. Should they invest in this new market or should they “stick to the knitting,” producing high-priced mechanical watches and emphasizing their traditional values of heritage, craftsmanship and precision engineering. TAG Heuer was one of the country’s major brands faced with this dilemma when Biver was appointed to its helm.

TAG Heuer Connected

Some people in the company had not forgotten the fate of the luxury cell phone series that the company had launched in the early 2000s. Priced between CHF 8,000 and CHF 20,000 and running on the Android operating system, the TAG Heuer luxury cell phone turned out to be a flop. This time, however, Biver felt that a digital watch was a unique opportunity for TAG Heuer to reconnect with its customers and the millennial generation.

A new project was launched and the company reached out to Silicon Valley, California, in order to get access to the much-needed technology. About a year later, in November 2015, TAG Heuer unveiled its first digital watch – TAG Heuer Connected (refer to Exhibit 7).

Connected was modelled on the company’s Carrera family of watches. It had a case size of 46 mmvii that was covered by a crystal sapphire. It came with a rubber strap with different color versions and three digital watch faces that mimicked its line of mechanical watches (including an interactive chronograph).

Connected ran on Android Wear and had an Intel processor. Customers could issue voice commands to start timers, send messages, perform Google searches and get notifications. It lacked a heart rate sensor but it counted steps. The press announcement read, “In addition to being a classic timepiece, the TAG Heuer Connected watch offers features such as fitness tracking, notifications and alerts, exclusive TAG Heuer apps and access to the full Android Wear universe.”18

Prices started at CHF 1,500. In what was an unusual move, the company offered customers the opportunity to upgrade Connected to a mechanical watch, after the two-year warranty period. The upgrade watch cost CHF 1,500 and was a special edition Carrera model only available to owners of the Connected. It had a three-hand movement and resembled the design and materials of the Connected (refer to Exhibit 8). At that time, prices for the mechanical three-hand Carrera watch started at CHF 2,000.

vii Case size referred to the diameter of the screen. For women, a standard watch case measured 26- 29 mm. For men, the average watch was 37-39 mm; a sports watch was 40-42 mm and over-sized watches measured 45 mm and up. Source: www.truefacet.com/guide/guide-watch-size-fit/

For the exclusive use of M. Vyas, 2019.

This document is authorized for use only by Megha Vyas in MBA646-AP-2019-02B taught by SHIRLEY YE SHENG, Barry University from Jun 2019 to Aug 2019.

www.truefacet.com/guide/guide-watch-size-fit
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Using the tag line “#connected to eternity,” the launch of Connected was supported by major public relations events. Interviews with Biver, Intel’s CEO Brian Krzanich and LVMH chairman and CEO Bernard Arnault on CNN, CNBC and other US networks created sensations, especially as Arnault seldom spoke to the media.

Within a year, TAG Heuer had over 25 different connected watch models on the market, ranging in price from CHF 1,500 to CHF 8,000 with an average price around CHF 2,500. It was the most expensive digital watch on the market, together with special editions of Apple Watch such as Apple Watch Hermès and Apple Watch Ceramic with prices starting around CHF 1,500.

Three Challenges Ahead

A number of issues were still bothering some people in the TAG Heuer team; but Biver was confident that these challenges were far from being insurmountable:

1. “Swiss Made”

I know that with the key component – the microprocessor – coming from Silicon Valley, we may not be able to use the “Swiss Made” label because our legislation says that the movement of a Swiss watch must be “Made in Switzerland”… but we are a big Swiss brand! (big laugh) and I am confident we can solve this issue because the watch is made here in Switzerland. Almost 90% of the value of the watch is created here in Switzerland… I am confident that we can sell it even if it’s not officially “Swiss Made” because it is assembled here in Switzerland. People who buy an Apple Watch don’t care so much if it is made in California or in China… For a mechanical watch, I can understand that the “Swiss Made” label is important; but I am not sure how much customers for connected watches really care about the Swiss label. What is key is the emotion linked to the product and the brand. New players like Samsung have heavily bet their success on technology, but the TAG Heuer Connected watch cannot just be about technology. Our customers are human beings and are connected by emotions and love! Technology cannot just bring love and emotions. Our connected watch must deliver both.

2. Obsolescence

A number of industry specialists and some people inside the company were wondering how TAG Heuer would deal with the programmed obsolescence of the connected watch. With his spectacular turnaround of Blancpain during the quartz revolution and his famous tagline: “Since 1735 there has never been a Blancpain quartz watch and there will never be.” Biver was known for promoting the eternity of Swiss watches. When asked this question, he replied:

In two to three years, when the processor dies, one option for the customer is to buy a new processor. A second option is to turn the connected watch into a mechanical watch. The Samsungs and Apples of this world offer the first option, but they do not offer the second option. This is our competitive advantage and our unique selling proposition. We can offer eternity even to a connected watch (big laugh!).