Aug. 25, 2014 5:10 p.m. ET
ZURICH— Swatch Group AG UHR.VX +0.62% Swatch Group AG Switzerland: SWX Europe CHF502.00 +3.10 +0.62% Aug. 25, 2014 5:31 pm Volume (Delayed 15m) : 131,354 P/E Ratio 15.05 Market Cap CHF27.03 Billion Dividend Yield 1.49% Rev. per Employee CHF254,600 08/25/14 Swatch Switches Gears on Smart... 07/24/14 LVMH Moët Hennessy Louis Vuitt... 07/22/14 Swatch Pressured by Strong Swi... More quote details and news » is starting to get worried about smartwatches.
For years, Biel, Switzerland-based Swatch has dismissed Internet-enabled watches, such as Samsung Electronics Co. 005930.SE -0.33% Samsung Electronics Co. Ltd. S. Korea: KRX KRW1,224,000 -4,000 -0.33% Aug. 26, 2014 11:53 am Volume (Delayed 20m) : 102,741 P/E Ratio 6.38 Market Cap KRW206,424.38 Billion Dividend Yield 0.08% Rev. per Employee N/A 08/25/14 Swatch Switches Gears on Smart... 08/24/14 Huawei Is Shaking Up the Smart... 08/22/14 Michael Malone: Why Silicon Va... More quote details and news » 's Galaxy Gear and Pebble Technology's Steel, as novelties that won't disrupt business at the world's biggest watchmaker.
Chief Executive Nick Hayek has said smartwatches don't have the elegance of his company's high-end Omega and Breguet brands, and displays on the devices are too small to be useful.
Now, with its stock slumping and analysts saying Apple Inc. AAPL +0.22% Apple Inc. U.S.: Nasdaq $101.54 +0.22 +0.22% Aug. 25, 2014 4:00 pm Volume (Delayed 15m) : 39.61M AFTER HOURS $101.29 -0.25 -0.25% Aug. 25, 2014 7:59 pm Volume (Delayed 15m) : P/E Ratio 16.29 Market Cap $606.69 Billion Dividend Yield 1.85% Rev. per Employee $2,214,380 08/25/14 Swatch Switches Gears on Smart... 08/25/14 Apple May Sweeten MobileIron's... 08/25/14 Best Buy Won't Fade to Blue --... More quote details and news » 's expected launch of a smartwatch poses a serious threat, Swatch appears to be reconsidering.
The company said it is introducing fitness functions, a key feature of smartwatches, to its Touch line of digital watches. Swatch hasn't detailed the fitness functions it will launch, but said they would be the "usual features." Smartwatches often have pulse measurement, training calculators and speed monitors.
The new features will launch in 2015, a Swatch spokeswoman said.
This represents the first time the company has made watches with "smart" features since an ill-fated venture 10 years ago.
Swatch is seen as more vulnerable to the wave of smartwatches hitting the market than more luxury-focused competitors because it generates 30% of revenue from low- and midrange brands.
Smartwatches generally sell for between $150 and $300, roughly the same range as the company's priciest plastic watches and its least expensive quartz timepieces.
Competition will build later this year when Apple is expected to launch a smartwatch.
Smartwatches could eat as much as 10% of sales of Swatch's entry-level plastic brand and 5% of its midrange brands, which include Tissot and Mido, in 2015 and 2016, said Luca Solca, an analyst at Exane BNP Paribas.
"Nick Hayek is very concerned for sure," said Mario Ortelli, an analyst at Bernstein. "But he can't say that publicly."
Swatch didn't make Mr. Hayek available for comment.
Nervousness over Swatch's vulnerability has contributed to a selloff in the company's stock. Over the past 12 months, Swatch shares have fallen nearly 11%, more than rivals Compagnie Financière Richemont SA and LVMH Moët Hennessy Louis Vuitton SA, which have dropped 5% and 6%, respectively.
Competition from Apple will likely be particularly tough.
Apple could sell as many as 4 million units this year and up to 50 million smartwatches in its first full year, according to the Smartwatch Group, a consultancy.
"[Apple] is a technological behemoth with a clear history of destroying categories," said Gary Paulin, an analyst at brokerage Aviate Global, who recommends selling Swatch shares in part because of the smartwatch threat. He said the pending launch of Apple's smartwatch is the biggest challenge Swatch has faced since digital watches upended the market.
An Apple spokeswoman declined to comment.
Investors are betting Swatch shares will continue to sag. Since August 2013, short interest in Swatch shares has risen to 6.5% from 1.2%, according to Markit, a data provider. Short interest is the percentage of a company's shares that have been borrowed and then sold in hopes they can be bought back more cheaply.
Of course, the success of smartwatches is far from assured. Internet-linked watches made by Sony Corp. and Samsung have had disappointing sales thus far.
Swatch itself offered an early smartwatch in partnership with Microsoft Corp. MSFT +0.04% Microsoft Corp. U.S.: Nasdaq $45.17 +0.02 +0.04% Aug. 25, 2014 4:00 pm Volume (Delayed 15m) : 16.37M AFTER HOURS $45.14 -0.03 -0.07% Aug. 25, 2014 7:59 pm Volume (Delayed 15m) : P/E Ratio 16.98 Market Cap $372.03 Billion Dividend Yield 2.48% Rev. per Employee $677,570 08/25/14 Steve Ballmer's Road Past Dona... 08/25/14 Swatch Switches Gears on Smart... 08/25/14 Best Buy Won't Fade to Blue --... More quote details and news » in 2004 that delivered personalized news, sports, and weather forecasts, but sales were disappointing and the company still has unsold inventory in stock.
Earlier this year, Swatch opposed Apple's attempts to trademark the "iWatch" name in several countries, claiming it was too close to the company's own "iSwatch."
Write to John Revill at john.revill@wsj.com
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