Navigating The Grey Market: A Retail Expert Explains The Whys And Wherefores
by John Keil
Friends, colleagues, and clients have posed many questions about the grey market for fine timepieces over the years. Most recently, my post A Cautionary Tale on Buying New Watches Online was met with quite a few comments, quite possibly leaving more questions than answers.
The following is a broad description of the grey market, how and why it exists, and what (if anything) could be done for a brand to eliminate – or at least minimize – its presence.
And let me be clear from the get-go: this is not a rebuke of online stores, grey market dealers, or the many people working on that side of the industry. Many are highly reputable; some are not.
The truth is that the grey market exists because the brands themselves not only allow it to happen, but in many cases directly feed it.
The grey market serves a purpose that, in my humble opinion, is detrimental to any brand involved and the industry as a whole. It allows brands and retailers to clear slow-moving inventory when all − especially collectors − might be better served if brands tailored production more closely to consumer demand.
What is the grey market?
As it pertains to the fine timepiece industry, the grey market is a store (online or brick and mortar) selling brand-new watches, but it is not part of a brand’s authorized retail channel.
The classic authorized retail channel works this way: a brand manufactures watches, which are sold to official distributors throughout the world. The distributor then sells the watches to authorized retailers, who sell the watches to retail clients.
Grey market retailers are not part of that authorized retail chain, but they still manage to obtain and sell new timepieces.
Why does the grey market exist?
Simply put, this non-authorized side of retail provides the brand or retailer with the ability to clear excess or old inventory.
And the grey market has been around for many decades, long before the Internet.
When a brand or retailer has excess inventory, it might approach grey market dealers with offers to purchase that inventory in bulk at deeply discounted prices. Pre-Internet, grey market retailers often existed in major cities and had a storefront (think 47th Street in Manhattan), where they displayed the watches and sold them at discounted prices.
These pre-Internet transactions had little effect on the typical authorized retail channels because unless you actually walked into a grey market dealership, it was highly unlikely you would ever know they existed or that you could purchase watches at seriously discounted prices.
Since the Internet, grey market retailers have been able to create a presence on the web, so doing a Google search for a watch is likely to allow consumers visibility of the prices offered by grey market dealers and buy online.
The negative effects of this turn of events on the official side of the industry are extremely damaging for authorized dealers, distributors, and even the brands themselves.
For the authorized retailers it causes problems because now a client walks in, tries on the watch, asks how much, then says, “Gee, I can get the same watch for 20 percent less from www.blahblahblah.com.”
The retailer is then forced to either sell the watch for little or no profit or not make the sale at all.
The grey market also causes challenges for a brand’s distributor, whose main priority is to sell watches to the authorized retailers.
When the brand representative walks into a brick-and-mortar authorized retail shop, he or she now hears, “I can’t sell any of your watches because my clients are buying them online for less than I can sell them for” or “why should I spend thousands of dollars and dedicate valuable retail space to your brand when your watches are being sold all over the Internet for much lower than my cost?” This state of affairs leaves the distributor losing sales.
The biggest challenge that the grey market creates (again, in my opinion) is to the brands themselves.
Brands that take the most advantage of supplying the grey market eventually gain a reputation for their watches being essentially worth much less than the retail price indicates.
If you’re looking at a watch that has a manufacturer’s suggested retail price (MSRP) of $12,000, which you can purchase with a modest discount from your local authorized retailer, but then look at it on grey market sites, where it’s being offered at $7,500 brand-new, you might instantly wonder what is wrong with the watch or the brand.
When that happens consistently for a period of time, clients and authorized retailers alike tend to stay away from purchasing any watch from that brand completely.
How is the grey market supplied?
When you ask this question, most people in the know will answer by spinning a yarn. “Well, a retailer in some foreign land was closing and it liquidated its inventory.”
That’s the type of narrative brands offer.
Sorry, but there isn’t a retailer large enough – or even two or three – closing or not, that could supply the amount of product to the grey market that is out there. Even if there was, that product would eventually be sold and disappear, and that’s not happening.
It is the brands themselves that largely supply the grey market. Whether they sell to grey market retailers directly or through a grey market wholesaler, as I stated earlier, they do it to generate short-term cash flow and eliminate slow-moving inventory.
Where retailers can be largely blamed is the “as needed” watch. Grey market dealers have relationships with a few authorized retailers and when they have a demand for a specific watch, they can call the retailer and purchase it when they get an order.
In the United States, the authorized retailers in question are widely known by the industry, but it’s accepted so that the distributors can push excess inventory their way at a discounted price for the same reason the brands do.
How do you tell the difference on a grey market retailer’s site between watches that were dumped by the brand vs. watches purchased from an authorized retailer?
If you’re browsing a grey market site, and the watches are “in stock” or “ships in 2-3 days” (or less) and are offered at 40 percent or more off, these are usually watches dumped by the brand.
If a watch has a discount of 30 percent or less and “ships within 7-10 business days,” then it is likely to be a watch that is obtained on an “as needed” basis from an authorized retailer.
A good question that I’ve been asked many times is, “Why would an authorized retailer sell to the grey market?”
The answer is simple. Brands impose strict limits on authorized retailers regarding how much they can discount no matter how much excess stock they may have.
Even though the margin they might make selling to the grey market may be very small or non-existent, dozens (or more) watches sold to a grey market dealer over the course of time add up and the cash flow generated can be the difference between surviving until better times or going out of business.
Another reason that most people don’t think of is that that watch – wherever it is eventually sold – adds to the advertising dollars that the brand will kick back to the authorized retailer because advertising is usually based on the retailer’s annual sales volume.
So in the end if an authorized retailer sells $100,000 of a particular brand to the grey market, it may only show a profit of $5,000 to $10,000, but it will also receive an additional $5,000 to $10,000 toward advertising.
This is where you say, “Okay, smart guy, why and how should a brand avoid selling to the grey market?”
“Why” is the easy question to answer
Look at the the brands that aren’t suffering right now during this time of economic hardship for most, brands like Rolex and Patek Philippe.
Both have annual inventory sell-through well into the high 90 percent range. It is extremely rare to see these brands on the grey market.
If something isn’t easily attainable (assuming the product is great) – like that of these two brands – demand always meets or outweighs supply, therefore making it unnecessary to sell at discounted prices.
Additionally, their authorized retail network is extremely loyal, bending over backwards to remain a part of that network.
“Well, they’re Rolex and Patek Philippe,” you say.
Not over-manufacturing, returning the loyalty of their networks, and not dumping watches on the grey market in the first place is (in large part) how they became Rolex and Patek Philippe in the first place!
For those of you who say, “I see them on the grey market”: yes, occasionally it happens. But the watches found there are purchased from retailers at a modest discount and sold at or very close to MSRP.
Additionally, Rolex and Patek Philippe usually pursue the offending authorized retailers and close them quite quickly, choking the supply.
How can brand stop the presence of its watches on the grey market?
It’s not easy, but it is doable.
The most obvious answer is: make fewer watches!
One of my favorite lines is, “Just because you can, doesn’t mean you should.” This pertains to brands with a large manufacturing capability. Just because you can make 40,000 watches a year doesn’t mean that you should.
If the global market and forecasting show that you will sell 30,000 pieces, then make 25,000!
If the brand’s watches are selling through at a 90+ percent rate through authorized channels, then there would be no reason to dump them at discounted prices and risk destroying its own reputation.
Brands can also lower their MSRPs. If they can’t sell current collections at current prices, maybe those prices are too high. Make the watches more appealing to the end consumer.
Finally, instead of a brand going the route of liquidating to the grey market, why shouldn’t it approach its authorized retail channels with an offer to purchase these excess watches at more aggressive prices? When I was in retail, I certainly would have loved the opportunity to select a handful of discounted watches to purchase at bulk. I would in turn be able to pass those better prices on to my clients, thereby cultivating brand and store loyalty at the same time.
But, ultimately, I can’t fault anyone for being in the grey market business.
These people have the opportunity to buy and sell amazing products, so who can say that that is wrong? I do feel, however, that the grey market creates long-term problems for brands, distributors, and authorized retailers.
Additionally, I can’t disagree with a client who purchases a watch on the grey market.
There is a greater risk of being ripped off or the watch being not as advertised, so it is much more important to do your homework than when buying from an authorized retailer, but in most cases, you will find the same product at much better prices, and sometimes the service is just as good (or better) as that of an authorized retailer.
You may also enjoy A Cautionary Tale on Buying New Watches Online.