Could TAG Heuer's Smartwatch Steal the Luxury Spotlight From Apple's Watch?

LVMH's (LVMUY -0.33%) TAG Heuer could launch a smartwatch soon, according to LVMH watch business head Jean-Claude Biver. In an interview recently published by Swiss newspaper NZZ am Sonntag, Biver stated, "We want to launch a smartwatch at TAG Heuer, but it must not copy the Apple (AAPL -0.57%) Watch."

Source: Flickr.

Although Biver did not reveal any more details, his comments are notable for two reasons. Last month, Apple hired Patrick Pruniaux, TAG Heuer's vice president of sales, which fueled speculation that the Apple Watch would be a high-end luxury device. When Apple finally unveiled the smartwatch earlier this month, Biver told the German daily Die Welt that the device had "no sex appeal" and looked as if it were "designed by a student."

If TAG Heuer, one of the world's best-known luxury watch brands, makes a play for the high-end wearables market, could it steal the spotlight from the Apple Watch?

Why TAG Heuer wants to make smartwatches
TAG Heuer, LVMH's largest watch brand, accounts for roughly a tenth of the world's luxury watches, according to the company. A report earlier this year from research firm Digital Luxury Group revealed that TAG Heuer was the third most searched for luxury watch brand in the world (based on over 1 billion watch-related queries on major search engines), trailing only Rolex and Omega. TAG Heuer watches generally cost between $2,000 to $10,000.

Despite its brand name appeal, year-over-year growth has been sluggish. In 2013, revenue at LVMH's watch and jewelry division, which includes TAG Heuer, Bulgari, Hublot, Zenith, and Chaumet, fell 1.8% year over year to €2.78 billion ($3.58 billion). That decline was primarily attributed to lower demand in China and sluggish growth in North America.

In addition to those gloomy numbers, there has been speculation that smartwatches could hit the Swiss watch market as hard as quartz watches did in the 1970s. Yet the Swiss are indifferent about the rise of smartwatches. Last year, a survey from Deloitte showed that two-thirds of executives at Swiss watchmakers believed smartwatches posed no threat to classic watches.

Apple Watch. Source: Apple.

However, market projections tell a different tale. Research firm ON World forecasts that smartwatch shipments will jump from 4 million in 2013 to 330 million in 2018. Within that market, Apple's Watch is expected to be a dominant player. Morgan Stanley analyst Katy Huberty forecasts that Apple could sell 30 million to 60 million Apple Watches within the first year of availability.

Therefore, it seems TAG Heuer is breaking rank with its Swiss peers and acknowledging that smartwatches pose a threat to the high-end market.

The uncharted territory of luxury wearables
Most of the smartwatches on the market today top out at $300. In a survey of 1,000 U.S. online customers, ON World found that only 8% were willing to pay over $299 for a health-tracking smartwatch.

Just a handful of companies have unveiled wearable devices above $300. Apple's Watch will launch at $350, but the 18-karat gold edition could cost as much as $5,000. Intel (INTC -1.79%) and Opening Ceremony next year will release MICA, a $1,000 luxury wearable made of snakeskin and adorned with precious stones. A start-up called Kairos is developing a mechanical watch, featuring a transparent OLED screen for digital notifications, that will cost between $499 and $1,199. Hewlett-Packard (HPQ -0.25%) is also working with designer Michael Bastian and fashion retailer Gilt to develop a high-end smartwatch.

Intel's MICA. Source: Intel.

The Apple Watch will clearly be the defining product for this market. If Apple sells as many watches as analysts expect, luxury retailers could start launching their own watch faces or watchbands for the device, just as high-end brands like LV started selling iPhone and iPad cases. This would be bad news for Swiss watchmakers, since Apple would have effectively created a market for DIY luxury watches.

A Foolish final word
Apple definitely represents a bigger threat to TAG Heuer than the other way around. The two brands will overlap, but they are approaching from different ends of the market.

Apple is letting consumers upgrade their watches to luxury watches, but I doubt TAG Heuer will ever sell a smartwatch for less than $2,000. TAG Heuer and other Swiss watchmakers also underestimate Apple's luxury appeal, although comScore MobiLens found that 41% of U.S. iPhone owners earn over $100,000 per year.

The key difference here is that Apple has flexibility, an established user base, and technical know-how, while TAG Heuer merely has brand name appeal. A high-priced TAG Heuer smartwatch will likely miss the cheaper, growing segment of the market where Apple, Samsung, and Motorola reside, and simply be sold back to its slow growth base of high-end customers. Meanwhile, Apple could creep up out of the midrange market and steal the luxury spotlight away from TAG Heuer.