HaskayneConsulting

SWATCH GROUPCLASSIC WATCHES FOR THE INFORMATION AGE

Presented to Nick Hayek, President and CEOSwatch Group headquarters in Zurich Switzerland // January 2016

Allison LennoxKenny LaurinAbeer HabibullahJeff Hall

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PROBLEM

How should Swatch Group Ltd. respond to the growing popularity of smart watches and wearables?

SWATCH GROUP 2

Is this a threat or an opportunity?

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EXECUTIVE SUMMARY

SWATCH GROUP 3

1.9 billion profits Swiss francs by 2019

Issue Recommendation

How should Swatch respond to the growth in wearabletechnologies and smart watches?

Don’t panic and pivot – continue to focus on core productsRestructure to develop innovation division featuring agile teams to work on smart technologies

What new products should Swatch develop? Introduce “anaLOG” watch at $180 price point – look of a classic watch with smart features (steps, RFID, etc.)

What should swatch do with Swatch Touch 01 Introduce Swatch Touch 02 incorporating additional sports on one watch (hockey, soccer etc.)

What should swatch do with luxury watches Continue with traditional watchesStart to incorporate smart features (RFID) without changing classic design in certain models

Low battery life associated with smart watches Functionality closer to a wearable initially Wireless charging Innovation team focused on battery life

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WHAT DOES THAT REALLY MEAN?

Swatch needs to protect its core business and develop classic watches that are built for the information age

• Develop innovation division• Incorporate smart features in classic designs today• Prepare for continued growth of smart watches in the future

SWATCH GROUP 4

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DON’T PANIC!

• 95% of Swatch’s profit comes from luxury watches

• Currently smart watches are seen as more of a “gadget”

• Only 15% of survey respondents would substitute an Apple watch for a luxury watch

SWATCH GROUP 5

Not currently a significant threat to Swatch’s largest source of profits

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PREPARE FOR THE FUTURE

• Technology is evolving rapidly and changing consumption patterns at a rate never seen before

• 168 million units of wearables technology is going to be sold by 2019

• Innovation Division will build internal capabilities to compete if this trend continues and becomes a larger threat

SWATCH GROUP 6

Need to lay the foundation for the future – don’t become Kodak or Blockbuster!

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A GAP IN THE MARKET

“People do not buy watches for their functionality, but because of the emotions they transport/carry.”

SWATCH GROUP 7

Opportunity to add functionality to emotive time pieces

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A TIMELESS DESIGNKENNY WILL PROVIDE FURTHER DETAILS ON THE RECOMMENDATION

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CLASSIC WATCHES FOR THE INFORMATION AGE

SWATCH GROUP 9

Swatch’s portfolio is across price segments

Product segment Price

Economy $0-$75

Entry-Level $75-$200

Mid-Range $200-$1000

Luxury $1000-$5000

Super luxury Over $5000

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INNOVATION DIVISION

Innovation teams built close to core company strengths

Agile, cross functional teams – not rigid, no silos

Driven by business goals and entrepreneurial spirit

Mentorship based leadership – more autonomy to allow idea generation

SWATCH GROUP 10

Create the environment for product innovation

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INNOVATION DIVISION• 5 teams of 5-10 employees

SWATCH GROUP 11

Must become an innovator for future consumer needs

Battery technology

No pairing requirements Customization

Vehicle communication

Future full smartwatch

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CLASSIC WATCHES FOR THE INFORMATION AGE

New entry level segment product introduction - anaLOG

Introduce Sport zero two for additional sports

Additional functionality into luxury segment

SWATCH GROUP 12

New opportunities across product portfolio

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NEW PRODUCT - ANALOG

Well designed, classic mechanical look

Entry level price - $195

Fashion conscious & tech savvy consumer

SWATCH GROUP 13

Designed as a watch

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NEW PRODUCT - ANALOG

Timepiece, fitness tracking, near field communication

Pairs with smartphone – doesn’t need to be always connected

Long battery life, no touch screen, no applications supported

SWATCH GROUP 14

Same look, additional functionality

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SPORT SPECIFIC WATCHES

Sport specific devices – Swatch zero two

Same device, customize software

Opportunities in golf, swimming, cycling, tennis

SWATCH GROUP 15

Certain in sports remain to be underserved

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PRODUCTION INNOVATION – LUXURY SEGMENT

Maintain design & craftsmanship

Add functionality – fitness tracking, near field communication, car unlocking

Partnership opportunities luxury car brands - BMW, Porshe, Mercedes

SWATCH GROUP 16

Opportunity is not limited to low price segment

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COUNTING THE SECONDSABEER WILL TALK ABOUT THE FINANCIALS

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Swatch needs a strategy to reverse declining margins

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CURRENCY RISK

SWATCH GROUP 19

The primary reason for decline in revenue in 2015 was currency market fluctuations

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MITIGATING CURRENCY RISK

•We recommend that you enter into currency swaps and swaptions for all major currencies Swatch Group Ltd. does business in (EUR, USD, HKD, and CNY)

•This strategy would offer a fixed rate for all these currencies and reduce the impact of currency market fluctuations on our financials.

SWATCH GROUP 20

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COST OF IMPLEMENTATION

SWATCH GROUP 21

Initiative In CHFNew Hire (5 senior managers) 325,000

Product Development (1% of sales) 85 million

Marketing Campaign (up to 1% of sales) 20 - 85 million

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ASSUMPTIONS

•We will capture 2% of the wearables market by 2019

•Hybrid watches will have a 30% higher margin per unit

•Average watch price of $737

•$1.5 USD to 1 CHF

SWATCH GROUP 22

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Revenue will increase to CHF 10.9 billion by 2019

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Net income will increase to CHF 1.9 billion by 2019

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ALTERNATIVES

SWATCH GROUP 25

Focus on analog watches only

Partner with a smart-watch developer

Position yourself as a components supplier

STOP!

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FOCUS ON ANALOG WATCHES ONLY

• Wearable technology is a rapidly growing technology. Swatch needs to position itself in this industry early on.

SWATCH GROUP 26

STOP!

Do not Focus on analog watches only

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PARTNER WITH A SMART-WATCH DEVELOPER

• They may develop brand and competencies and cut us out

• Does not lead to in-house development which is not aligned with our long term strategy for Swatch

SWATCH GROUP 27

STOP!

Do not Partner with a smart-watch developer

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SHIFT ENTIRELY TO SMART TECHNOLOGY

• Only 15% of luxury watch customers would substitute for a smart watch

• 95% of Swatch’s profits are from luxury analog watches

SWATCH GROUP 28

STOP!

Do not Position yourself as a components supplier

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ASSEMBLING THE GEARSJEFF WILL OUTLINE THE IMPLEMENTATION PLAN

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IMPLEMENTATION PLAN

Step 1: 6 months – 1 year

• Hiring of managers and creation of Innovation Division

Step 2:1-2 years

• Launch anaLOGhybrid watch

• Release hybrid tech in luxury segment

Step 3:2-5 years

• Roll out hybrid technology in watches at all price points

• Development of future tech

SWATCH GROUP 30

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STEP 1: INNOVATION DIVISION TIMELINE0-3 months – VP human resources

• FIND TEAM LEADERS

• Internal or external hires

• Experience with tech, startups, managing people, record of innovation

0-6 months –Innovation leaders

• BUILD TEAMS• Cross-functional:

Engineering, marketing, manufacturing etc.

• Small teams, flat structure focused on mentorship

6 months – 1 year – Define objectives

• Goal oriented, focused on innovative results

• Fail fast, fail cheap

• Autonomous teams separated by goals

SWATCH GROUP 31

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STEP 2: ANALOG PRODUCT LAUNCH

•TARGET CONSUMER•Motivations:• Style conscious, tech savvy• Want limited functionality with classic looks• Weary of complicated apps, annoyances

•Demographics:• Likely 45 years old or younger• Male & female• Young professionals

•Buys• Online, frequently, impulsively

SWATCH GROUP 32

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STEP 2: ANALOG MARKETING

•Messaging:•Timeless looks – throwback to classic swatch looks, on trend design•Core functionality – “The features you need, none you don’t”•Still a classic timepiece, with added features for today’s consumer

•Media•Heavy use of social media – targeted facebook, instagram ads•Use of influencers – create excitement through carefully selected social media personalities

•Limited online ads – banner ads etc.

SWATCH GROUP 33

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STEP 2: LUXURY PRODUCT LAUNCH

•TARGET CONSUMER

•Motivations:• Wants a watch that demonstrates taste• Focused on heritage & tradition

•Demographics:• Likely 45 years old or older• Male & female• Retirees, Executives

•Buys:• In store, infrequently, luxury & super luxury

SWATCH GROUP 34

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STEP 2: LUXURY MARKETING

•Messaging:•Classic style – “the same luxury image you’ve always enjoyed”•Ease of use – still a classic timepiece, not a newfangled gadget

•Media•Magazines – GQ, Vogue, Forbes, Esquire•Television – Golf Channel, NBC, NBC news

•Promotion•Partnerships with Porsche, Louis Vuitton, other luxury brands to develop limited launch editions

SWATCH GROUP 35

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STEP 3: ROLLING OUT TO ALL PRICE POINTS

•Trickle down effect to all price ranges

•Not all watches, need to keep some classic offerings

•Carefully select functionalites base don consumer segments

SWATCH GROUP 36

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RISKS & MITIGATIONS

Risk Mitigation Likelihood Impact

Smart watch market explodes Have a strong foundation, prepared to innovate

M H

Currency fluctuations Engage in swaps and swaptions

Other companies copy our strategy Competency in design, brand

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YOU ASKED US, WE ANSWERED1. Will the Swatch Group be able to compete with its own resources and capabilities

against the Apple Watch?- Yes, by establishing a new innovation division and introducing new products

2. Should Hayek directly compete with Apple? If so, how?- No, continue to build products for discerning timepiece buyers

3. Is it really a threat or rather an opportunity?- It is a growth opportunity to further your position as a market leader

4. If it is a threat, what should the products of the Swatch Group look like, and in which price segments should it fight?

- New product at $195 price point, functionality at all higher price points

5. How can Swatch design a smartwatch incorporating the technology with heritage?- Keep classic appearances, avoid app funtionality

6. What will happen if Apple starts to compete in the luxury watch segment?- Swatch will be prepared and defended by hybrid technology

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FUTURE CONSIDERATIONS

•These are some “outside the box” ideas we are not recommending right now, but should be considered in the future.

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A TIMELESS SOLUTIONALLISON WILL WRAP THINGS UP

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WHAT DOES THAT REALLY MEAN?

Swatch needs to protect its core business and develop classic watches that are built for the information age

• Develop innovation division• Incorporate smart features in classic designs today• Prepare for continued growth of smart watches in the future

SWATCH GROUP 41

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EXECUTIVE SUMMARY

SWATCH GROUP 42

1.9 billion profits Swiss francs by 2019

Issue Recommendation

How should Swatch respond to the growth in wearabletechnologies and smart watches?

Don’t panic and pivot – continue to focus on core productsRestructure to develop innovation division featuring agile teams to work on smart technologies

What new products should Swatch develop? Introduce “anaLOG” watch at $180 price point – look of a classic watch with smart features (steps, RFID, etc.)

What should swatch do with Swatch Touch 01 Introduce Swatch Touch 02 incorporating additional sports on one watch (hockey, soccer etc.)

What should swatch do with luxury watches Continue with traditional watchesStart to incorporate smart features (RFID) without changing classic design in certain models

Low battery life associated with smart watches Functionality closer to a wearable initially Wireless charging Innovation team focused on battery life