On December 21st, a Dutch arbitration panel ordered Tiffany & Co. to pay almost $450 million dollars (402 million Swiss Francs) in damages to the Swatch Group. The hefty award is what appears to be the final result and verdict of the arbitrators in the ongoing legal battle between the two luxury power houses that had begun back in 2011. While major news sources everywhere are covering the rather shocking damages award based on what was a very bitter battle, few people seem to understand exactly what happened, and what the dispute between Tiffany & Co and the Swatch Group was all about.
Allow me to state that I was not privy to the private proceedings, but I have been following the relationship since it began in 2007. As a member of the watch industry press, I feel the need to decipher a series of events that I have been hearing about for over five years now, that has led up to this decision. The Tiffany & Co. and Swatch Group relationship was set to be among the most important of the last decade in the watch industry. Even the two parties felt that it should have been, as the original agreement they made was set to last for an extremely long contract term of 20 years.
It all started with the desire to grow business. Tiffany & Co., a major luxury and jewelry retailer around the world, was getting about 9% of its business from the sale of watches. It sold a handful of brands in its stores including Rolex and Patek Philippe, as well as its own house-labeled watches. In fact, for a period in the 1990s and early 2000s, Tiffany & Co. timepieces were very nice and highly desirable – a rarity among timepieces labeled for a retailer.
At some point, Tiffany & Co. likely felt that it wanted to outsource its production and handling of its name-branded watches. This was probably due to a number of very legitimate reasons. First of all, producing timepieces is very complex, and the after-sales service (repairing, etc…) is just as complex. Tiffany & Co. had a good track record so far, but if it was going to increase business in the watch arena it needed a solid partner that knew watches. Given the Swatch Group’s huge standing in the watch industry, producing timepieces from the mainstream Swatch brand up to high-end prestige brands such as Breguet and Blancpain, Swatch had everything from production to distribution under its belt. Tiffany & Co. could more-or-less sit back and let someone very well-qualified take over that arm of the business. More recently, Tiffany & Co.’s watch business was down to about 1% of its overall sales.
Tiffany & Co. had something Swatch Group really wanted – expertise when it came to selling precious stones. The Swatch Group had no well-performing jewelry watch brand and they likely saw Tiffany & Co. as their way into that business. It made perfect sense. To enter the jewelry watch industry in a serious way, why not work with one of the world’s most important makers of engagement rings and other fine jewelry?
From what I can recall, that relationship between Tiffany & Co. and the Swatch Group was rather straight-forward in theory. Tiffany & Co. would display and market the watches, and the Swatch Group would design, produce, service, and distribute the watches. One of the novel elements of the deal, was that for the first time ever, Tiffany & Co. watches would be carried by non-Tiffany & Co. stores. That meant Swatch Group-owned stores such as “Tourbillon” and independent retailers all over the world would have a chance to carry the new Tiffany & Co. watch collection.
The set up was ideal, as it attempted to utilize the strengths of both companies. In 2007 it honestly made perfect sense and almost everyone in the industry was hopeful. Swatch Group CEO Nick Hayek even said that Tiffany & Co. would become one of the most important watchmakers in the world. A new watch brand was formed from the alliance, “Tiffany & Co. Watches,” and the CEO of the new brand was Nayla Hayek, one of the three children of the late Nicolas Hayek, senior. The Hayek family currently runs the Swatch Group. So, it was clearly a brand they were taking seriously.
In 2009, things began to fall apart from the perspective of people viewing the watch industry. It was Baselworld 2009 when the Swatch Group debuted the first “new” Tiffany & Co. Watches collection. I was there to see the fresh collection of what was supposed a major star of the industry, and quickly realized that something had gone amiss. I summarized my feelings about the 2009 Tiffany & Co. Watches collection here. In short, the watches were not suitable for the Tiffany & Co. brand.
Allow me to be diplomatic, because both the Swatch Group and Tiffany & Co. probably still feel pretty bad. Well, Tiffany & Co. feels a lot worse right now to be fair. Seeing the new collaborated Tiffany & Co. watches I had immediately realized what had happened. Tiffany & Co. did not have much of a hand in the design of the watches, and the Swatch Group decided on a market position for Tiffany & Co. watches slotted somewhere between the rest of their brands.
The way Swatch Group operates is a bit like a car maker with a lot of brands. Think General Motors before half of their brands disappeared. Each of the brands is supposed to have a marketing position, specific customer demographic, price point, etc… The stratification of the Swatch Group brands is designed logically so that there isn’t too much overlap and so that brands don’t heavily compete with one another. So, logically, Tiffany & Co. Watches were designed to fit into a segment.
What that translates into, is that Tiffany & Co. Watches were not as elegant and classy as they should have been. I am not saying that the Swatch Group was wrong. I don’t know that. They spent millions of dollars on planning the designs and the brand. No doubt there was a method to their actions and the design of the watches which involves elements I can’t even consider. What I am saying, is that Swatch Group did not produce the watches Tiffany & Co. envisioned for itself, and they were not similar enough to the previous generation of Tiffany & Co. watches that existed before the Swatch Group relationship.
A year later in 2010 things didn’t get that much better. Over on aBlogtoWatch I discussed my less than excited thoughts on the latest collection of Tiffany & Co. pieces I saw at Baselworld and things didn’t get much better. As a long time fan (and owner) of Tiffany & Co. watches, I really wanted the new collection to meet my own expectations. Tiffany & Co. seemed to be entirely absent from the design part of the equation, and the Swatch Group had its own plans for the brand.
In fact the “strategic alliance” between Tiffany & Co. and the Swatch Group more-or-less called for this. Tiffany & Co. more-or-less licensed the rights to their name and left most of the business to the Swatch Group. By 2010 things started to go bad and by 2011 legal action ensued when the Swatch Group filed suit against Tiffany & Co. and Tiffany & Co. counter-sued. Each claiming a range of contractual breaches.
When the Swatch Group announced its plan to end relations with Tiffany & Co. in 2011 they cited that the reason was due to Tiffany & Co.’s “systematic efforts to block and delay development of the business.” Taken by itself, the statement is less than clear. What does it mean? Tiffany was supposed to promote the watches by displaying them prominently in their stores and spending marketing dollars to advertise them. According to the Swatch Group they did very little or none of these things.
Basically, what the Swatch Group was saying is that Tiffany & Co. refused to get excited about the watches and push them in their stores or ads. The deeper meaning is that because Tiffany & Co. itself refused to push the watches, the Swatch Group was unable to sell them. It is true that without advertising it is very difficult to sell luxury products. If you go into a Tiffany & Co. store and the watches aren’t anywhere but at the back of the store (if at all in the store), they simply aren’t going to gain that much traction.
The response from Tiffany & Co. was just as vague. They claimed that the Swatch Group was “unwilling to honor the terms of [the] agreement, make the necessary commitments, work cooperatively to develop the business [for Tiffany & Co. Watches]…, [and] failed to provide appropriate distribution.’’ Again, taken out of context the statement barely means anything. What I feel that Tiffany & Co. was suggesting, is that the Swatch Group did not produce the types of products the two parties had initially agreed upon, and did not work hard enough on their own to sell them through Swatch Group and third-party retailers. The phrase “work cooperatively to develop the business” really says it all. Tiffany & Co. wanted to be more involved in the decisions relating to the nature of the products, and as far as the Swatch Group was concerned, Tiffany & Co.’s responsibility was to lend their good name and help sell the watches in the stores – and little else.
What I hope you are starting to see is that what truly happened cannot really be expressed easily in legal or business language. Two major groups with major senses of self-worth joined up to hopefully produce something wonderful. Each side felt it was offering something more valuable. Tiffany & Co. perhaps felt that their name and prestige were so valuable that the Swatch Group was working for them (clearly they’d never worked with the Swatch Group), and the Swatch Group felt that they were doing Tiffany & Co. a service by developing their name into a new watch brand, and that whatever the Swatch Group decided was the best direction for that brand is what would rule.
Tiffany & Co. probably didn’t push the Swatch Group designed watches because they didn’t like them and didn’t feel that they matched up with their own personal perception of their brand. That is perhaps the only reasonable way of understanding why they “systematically” tried to block business. The Swatch Group, on the other hand, was probably less than excited about the prospect of going back to the drawing board and designing a whole new collection. Egos from both sides probably prevented the parties from peacefully resolving the conflict early on and preventing a total fallout.
Once again, due to the fact that I haven’t read the agreement between the parties nor was I privy to the confidential arbitration proceedings I cannot say any of this for a fact. This is however an entirely plausible analysis of the events based upon the evidence, historical dealings of both brands, as well as the outcome of the conflict. When it comes down to it, the right to share decision making power or agree upon matters such as market position or product design is extremely difficult to put into a contract. Unless such decisions are made in advance of a contract it is almost impossible to put a clause in to a contract that the parties will agree on such undetermined matters at some point in the future.
What really happened between the Swatch Group and Tiffany & Co. in my opinion was a simple butting of heads. Each side fundamentally disagreed on the market position and design direction of the Tiffany & Co. watches. For whatever reason either entirely reasonable or emotional they were unable to agree on a solution. Tiffany & Co. decided to simply no promote the watches, and as a result the Swatch Group was unable to sell them.
The Almost $450 million award to the Swatch Group sounds like a lot, but was actually only a fraction of the total amount they wanted in damages. Most of those damages involved future lost profits and when the Swatch Group originally sued Tiffany & Co. they asked for 3.8 billion Swiss Francs. Tiffany & Co. counter-sued for over $550 million dollars. Their counter-suit got completely dismissed by the arbitration court in the Netherlands. By the way, binding arbitration was used by parties rather than a traditional court because it was either set out as the only means of dispute resolution in the original contract or agreed to by the parties later. Arbitration is often utilized because it is either more cost effective or more private.
Tiffany & Co. might have some avenues to attempt and fight the award of damages to the Swatch Group but has claimed that it has sufficient cash reserves to pay the award in full even though the award is more money than Tiffany & Co. made in the prior year. That statement was more about preventing a bigger shock to its stock, but it sounds like Tiffany & Co will survive the blow. The aftermath in the realm of watches is that they seemed to have learned a valuable lesson; if they want to make watches they better do it themselves. In fact, as of over a year ago, Tiffany & Co. has publicly stated that will arrange for alternative ways of producing Tiffany & Co. Watches. So that sounds like good news.
Swatch Group feels like the biggest winner here and perhaps they are. My inclination is that the agreement they had with Tiffany & Co. was probably designed to give them the majority of decision making power and bestowed duties upon Tiffany & Co. that it did not meet no matter what the reason. Tiffany & Co. probably did in fact materially breach the agreement and it is a shame that an alternative means of resolving the problem never arose. This is the danger of having shared decision making power between two powerful companies.
Swatch never abandoned their desire to have a strong jewelry watch brand. In fact, once they realized the Tiffany & Co. relationship was on a decline, they started to look elsewhere. In January of 2013 the Swatch Group did not partner with, but entirely purchased the watch and jewelry maker Harry Winston. No more shared decision making or unpredictable partners, Harry Winston would be entirely within the Swatch Group’s control.
There are probably many interesting details that will come out over the next few years about what happened between the Swatch Group and Tiffany & Co. They aren’t likely to remain friends, but each will likely get what they want a few years from now and it seems as though their dispute is officially over. I think it is difficult to point fingers at who was the good guy or who was the bad guy. I think both sides clearly misjudged the situation and probably wasn’t as eager as they could have been to resolve the matter out of court (or arbitration).
As a watch lover and fan of both the work of the Swatch Group and Tiffany & Co. I really just wanted to see great timepieces and designs. Now that the dispute is behind them, Tiffany & Co. can work on doing that again while the Swatch Group can resume business as usual and focus on the future of Harry Winston for their jewelry watch dreams.
Ariel Adams publishes the watch review site aBlogtoWatch.com.