Bienne, Switzerland–Swatch Group said today it would be terminating its long-term contract with Tiffany & Co. to make and manufacture Tiffany brand watches and plans to seek damages from Tiffany for lost business.
Originally signed in 2007, the agreement, which was for 20 years, created Tiffany Watch Co. Ltd., a joint venture to develop, produce and distribute worldwide Tiffany brand watches. All the design and manufacturing took place in Switzerland while the watches were being sold through Tiffany, Swatch Group and independent retailers. Under the agreement, Swatch could operate Tiffany watch stores in markets outside the United States and offer a selection of Tiffany jewelry.
Swatch Group accused Tiffany of breach of contract, and said that legal action is “necessary following Tiffany & Co’s systematic efforts to block and delay development of the business.” Swatch Group said it would seek damages “in compensation for the loss of planned long-term future business.”
Tiffany & Co. fired back this morning saying Swatch Group was “unwilling to honor the terms of our agreement.”
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“Despite assurances to contrary made in 2007, Swatch has failed to provide appropriate distribution for Tiffany & Co. brand watches, with the result that our current business forecasts do not include any meaningful increase in watch sales or royalty income,” Tiffany said in a statement.
“Tiffany has honored its obligations under the agreement, and insisted that Swatch honor its own obligations, particularly its obligation to respect Tiffany’s rights regarding brand-management and product design,” Tiffany said.
Both sides claimed they would be vindicated in a “pending arbitral proceedings” scheduled to be decided by a court in the Netherlands.
When the agreement was first struck, few details were released about the contract but at one point Swatch Group said the partnership had aimed for $500 million in sales in the medium-term.
Evidently, those sales failed to materialize. Tiffany said in its March annual report that the Swatch business represented less than 1% of its net sales in 2010, 2009 and 2% in 2008. Tiffany had also taken a $19 million pre-tax charge in connection with its decision to discontinue certain watch styles as part of its agreement with Swatch.
Nayla Hayek, chairperson at Swatch Group, who oversaw the Tiffany watch business, had told Reuters earlier this year that Tiffany wasn’t doing enough to promote the new division’s watches.
According to some European retail analysts, the agreement’s end isn’t much of a surprise. “Both companies were not satisfied with the success of the contract and sales are behind expectations,” said Rene Weber, an analyst at Bank Vontobel in Zurich.
Swatch Group said Tiffany Watch Co. will be allowed to wind down current business over the next two years.
Meanwhile, the termination of the Tiffany Watch Co. agreement may further fuel speculation about Tiffany & Co. as a possible takeover target. The contract with Swatch Group would have been an obstacle, or “poison pill,” since any company that tried to acquire Tiffany would have had to had Swatch Group’s agreement.