China's Corruption Crackdown Is Hurting Hermès's Watch Business

Hermès had a great 2013 from a sales perspective. Its watch business, however, performed less spectacularly.
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Lauren Indvik
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Hermès had a great 2013 from a sales perspective. Its watch business, however, performed less spectacularly.
Hermes CEO Axel Dumas at Hermes's Beverly Hills boutique, which was revamped last year. Photo: Kevin Winter/Getty

Hermes CEO Axel Dumas at Hermes's Beverly Hills boutique, which was revamped last year. Photo: Kevin Winter/Getty

Hermès had a very good 2013, with sales up 7.8 percent to €3.8 billion ($5.2 billion) and a higher operating margin (32.4 percent) than ever. Sales at its own stores increased 13 percent across the board, and growth rates remained in the steady double-digits in the U.S. (up 14 percent) and Europe (up 12 percent), despite a "difficult economic climate" in the latter.

Hermes's sales and net income in 2013. Chart: Hermes

Hermes's sales and net income in 2013. Chart: Hermes

But there was one area that didn't perform as well as the rest: Hermès's watch division. Sales there were flat -- up 1 percent in 2013, after witnessing a 17 percent jump in 2012. The reason? A "sales slowdown" in China. CEO Axel Dumas has said previously that Hermès has not been affected by the corruption crackdown in China because its products are "discreet," but indicated at a press briefing in Paris on Thursday that its jewelry and watch goods are not quite as discreet as its fashion and leather products, and thus have been negatively impacted by the crackdown. Though fortunately for Hermès, its watch and jewelry businesses are much smaller than its fashion and leather divisions.

Overall, Hermès's sales in Asia (excluding Japan) were up 16 percent year-over-year -- strong, but lower than the 25 percent increase the luxury brand saw in 2012. Net income for the whole company was €790 million euros ($1.1 billion), up 6.8 percent over 2012. Hermès's stock price was largely unaffected by the earnings announcement on Thursday.