Swatch Group's Declining ROCE and Capital Allocation Woes Signal Long-Term Value Erosion

The luxury watch industry, long a symbol of exclusivity and enduring value, faces a critical test. For Swatch Group, the world's largest watchmaker by sales, the past two years have revealed a troubling trend: a persistent decline in its Return on Capital Employed (ROCE), a key metric of profitability and capital efficiency. This deterioration, alongside stagnant capital deployment and brand portfolio inefficiencies, suggests a strategic misalignment that could erode long-term shareholder value.

ROCE: A Deteriorating Benchmark

Swatch's ROCE has fallen from 9.2% in 2023 to 8.3% in 2024, and further weakened to 0.4% by year-end due to margin pressures and overcapacity costs. While this figure remains positive, the trend is alarming. Crucially, it lags significantly behind luxury peers like Richemont (owner of Cartier and Piaget) and LVMH's watch divisions, which historically maintain ROCE in the high teens or low twenties due to stronger pricing power and asset-light models.

The decline reflects Swatch's reliance on fixed manufacturing costs and a fragmented brand portfolio. Unlike peers that outsource production or focus on high-margin flagship brands, Swatch operates 20+ brands—from Omega to Longines—many of which face declining relevance in a market shifting toward exclusivity and scarcity.

Capital Allocation: Stagnation Amid Volatility

Swatch's capital deployment strategy has been equally problematic. Despite a 74% drop in net profit to CHF 219 million in 2024, the company maintained production capacities and Swiss jobs, incurring costs that further strained returns. Meanwhile, investments in mid-range brands like Hamilton and Rado have yet to yield meaningful growth, while flagship Omega struggles to counterbalance weakness in lower-tier lines.

The result is a stagnant capital base: total capital employed grew only 1% over two years, yet ROCE contracted by nearly 50%. This signals poor reinvestment opportunities and an overextended portfolio. In contrast, rivals like LVMH's TAG Heuer or Rolex (owned by the Pensinsula Group) have achieved superior returns by focusing on premium segments and asset-light distribution.

Brand Portfolio Inefficiencies: The Omega Overhang

Swatch's portfolio suffers from structural imbalance. Omega, its most profitable brand, accounts for roughly half of sales but is increasingly overburdened by the group's operational costs. Smaller brands, meanwhile, lack the scale or differentiation to compete with niche players like IWC or Vacheron Constantin.

The group's mid-range brands, such as Tissot and Rado, face declining demand in China and Southeast Asia, their largest markets. Swatch's attempt to pivot to “affordable luxury” has backfired, as consumers in these regions now prioritize either ultra-luxury exclusivity or budget-friendly alternatives.

Investment Implications: A Sell on Strategic Concerns

Despite Swatch's current price-to-book ratio of 1.2x, a discount to peers trading at 2.5-3.0x, the stock is overvalued relative to its strategic challenges. Investors should prioritize two risks:

1. Overexposure to Omega: A single brand's performance cannot sustain a multi-brand conglomerate in a consolidating market.
2. Portfolio Dilution: Smaller brands drain capital without delivering growth, while peers focus on high-margin niches.

Conclusion: Swatch Group's declining ROCE, capital allocation inefficiencies, and brand portfolio weaknesses paint a bleak outlook. While short-term valuation may appear attractive, long-term value erosion is inevitable unless the group simplifies its portfolio, exits non-core brands, and adopts a more agile capital strategy. For investors, this is a sell, as the risks of prolonged underperformance outweigh near-term discounts.

Risk Factors:
- Continued weakness in Chinese demand and Southeast Asia.
- Potential margin compression from labor costs in Switzerland.
- Rising competition from digital-first luxury players.

In the luxury watch sector, where exclusivity and focus are paramount, Swatch's current trajectory risks becoming a relic of a bygone era.