Interview Frederique Constant CEO Peter Stas On The Apple Watch Threat

Two weeks later, I met with Stas at the Baselworld watch show to find out why he is so worried about Apple when so many of his colleagues aren't.

When it comes to smartwatches, the 54-year-old, Dutch-born Stas has cred. He has turned Frederique Constant, the firm he and his wife, Aletta Stas-Bax, founded in Geneva 30 years ago, into one of Switzerland's few smartwatch players. In 2015, Frederique Constant introduced its Horological Smartwatch, a connected watch with an analog dial and hands instead of the more common touchscreen dial. It used MotionX technology and was developed by the Swiss company Manufacture Modules Technologies (MMT). 

Stas says the Frederique Constant Group has sold 150,000 Horological Smartwatches under the FC and Alpina labels. (Alpina is a sports-watch brand the couple acquired in 2002 to complement Frederique Constant's classic-watch positioning.) Indeed, the FC Group holds an impressive 28.5% market share in value in the $600+ connected watch segment, according to confidential data that Stas showed Hodinkee from a top research firm. (The FC brand holds the lion's share at 25.3%.) 

This year, Stas has upped the ante with two new smartwatches. The Frederique Constant Hybrid Manufacture watch, priced from $3,495 to $3,795, is the world's first smartwatch with an in-house mechanical movement. The new Alpina AlpinerX Outdoor Smartwatch, which Stas has launched on Kickstarter, contains five sensors and more than a dozen functions, and it is priced at $995.

Consumers are responding to the new health features in smartwatches, Stas says. "We see this in the research data. We thought that smartwatches were being bought by 30-somethings, but they are not. They are mostly bought by 50-to-60-somethings, at least in our segment [which is] the more expensive watch. And this is logical, because older people are more interested in their health. 

"So, once Apple or others start to provide this information, then people are going to continue to wear those watches. The health part is only starting now. We [Swiss] better be very, very careful. Apple knows much more than we do, and I see clearly what they are doing. They will go more and more into this area, finding ways to inform people about medical situations. And they will only get better."

Apple is the big threat. It sold just under 18 million Apple Watches in 2017, according to industry estimates. (Market data companies International Data Corp. and Asymco put the figure at 17.7 million; Creative Strategies estimates 17.4 million. Apple itself does not disclose watch sales data.) 

"But it's not only Apple," Stas says. IDC estimates that all other producers sold 15.6 million. "The IDC data means there is 47% that is not Apple." 

Indeed, last year's total sales of 33.3 million smartwatches far exceeded the entire Swiss watch industry's output of around 25.5 million units. (Switzerland exported 24.3 million watches in 2017, according to the Federation of the Swiss Watch Industry; another 5% were sold in the country itself.)

It is this rising tide of smartwatches that Stas is worried about. "This is what's going to beat out the normal watch industry," he says. "It's already happening on the quartz side." 

Stas cites figures that we called attention to in a February 7 article, showing that Swiss exports of quartz watches had fallen by 3.25 million units in just two years to 17.1 million pieces, a drop of 16%. "That is because of the smartwatches," Stas says. The situation will worsen as smartwatch producers add health applications to the watches, he predicts. 

Concern about the impact of smartwatches on the Swiss quartz-watch market was a factor in Stas's decision to compete in the smartwatch category. Frederique Constant is a leader in Switzerland's "accessible luxury" category of watches (priced roughly from $1,000 to $4,000). It produces quartz men's and ladies' watches for the lower end of the product line. 

But that wasn't the main reason, Stas says. "First of all, we started this in 2015 because I like it. I like the product. I like the innovation part. That's the driver. I like it because you are adding features to a fine quartz watch, which is inherently a little bit boring, a little bit standing still for at least 25 years already. So now we can add really meaningful features, things we can experiment with, things we can use. I like the apps. And I am increasingly intrigued by what kind of insights we can give to people.

"But at the same time, it is a defensive move. I also see clearly that the smart category is going to eat into the quartz category. So, it's also partly a defensive move. I am very open about that."

Stas is very glad he took the leap into smartwatch technology. Smartwatches have become an important niche for the group. In less than three years, they account for 14% of FC Group's total annual revenue. For Frederique Constant, the leader brand, they represent 12% of total sales; for Alina, 20%. 

"That's important," Stas says. Smartwatches enabled the company to grow through the Swiss industry's downturn of 2015-16. "[The industry] had a difficult period," Stas says. "If we didn't have this category, we would have missed between 10% and 15% of turnover. And we would not have grown, I tell you." FC would have been among the horde of Swiss watch firms whose sales slumped during that stretch, he says. 

All of that makes Stas optimistic about the market for expensive smartwatches. "Now we are adding the Hybrid Manufacture, which, value wise, is high. Also, the AlpinerX, which is much more a mass product. So we'll see where it goes. I think it's a category that probably will represent about 20% of turnover in the medium to long term. And it could well represent 30%." 

(Actual sales figures for the group are not available. Through 2015, the company was privately held, and did not disclose sales data. In 2016, Japan's Citizen Watch Co. acquired Frederique Constant Holding SA for $119.2 million. Citizen is a public company, but it does not break out sales by brands. The FC group includes a third brand, Ateliers deMonaco, a small producer of haute horlogèrie watches, co-founded by Stas in Monaco in 2008 and now headquartered in Geneva.) 

Stas is convinced that Swiss brands can, and indeed must, compete in the smartwatch market, particularly in the hybrid category, which some analysts predict is about to explode.

He says studies show that price is not the primary factor in the purchase of a smartwatch. Or even the secondary factor. 

With smartwatches, he says, "the number one reason people buy is the design. It starts with that." Frederique Constant's best-selling smartwatch is its most expensive model, a rose-gold-plated watch priced at $1,290. It accounts for between 30% and 40% of the brand's smartwatch sales. 

The second most important reason is instant access to data.

On the new Hybrid Manufacture watch, the owner sees instantly his step target totals. "That's what the customer wants," Stas says. "We have other watches where you have to press the crown and the hands will point to the percentage. Even when those [models] are less expensive, they are less acceptable. People need to see the information instantly.

"The number three reason is price. Price is important but it's not the determining factor. It's OK that it's a little bit more expensive when the watch looks good." 

A handful of Swiss firms have introduced smartwatch models. In addition to FC and Alpina, they include TAG Heuer, Montblanc, Movado, Mondaine, and the Geneva design brand myKronoz. Breitling and Louis Vuitton have put a toe in the water. Most other brands, though, are taking a pass. And taking a risk, Stas says. 

"That 3 million drop [in quartz watches]: part of that is because of the smartwatch wave. And that's not going away. I still hear people saying, 'It's just something temporary.' I don't think so. I think when you're giving more health insights, when the applications are getting better and better, it will only accelerate the problem."