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.
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Yes, manufacturers could reduce supply, pushing up prices and ripping off consumers. A much better solution is to cut the profit margins across the board.
If all the manufacturers colluded they could do that. However, since they have to compete it wouldn’t really work.
I went to an Omega Boutique last week. When I asked, “How much is this?” I was told, “The value is $6,000.” I was pretty much done with that store after that – even as courteous as they were. “Value?” Is value a euphemism for price now?
You mean the same watch that retails online for $3500 and can be bought lightly used for $3,000 +/-? Its value is $6,000?
This article makes the assumption that the grey market is solely for clearing excess, slow moving, and dated inventory. However, I would argue that boutiques and ADs instead very much act as a charade. They set an illusionary retail “value” absurdly high then pass along the watches to grey market retailers where they are priced appropriately. Grey market buyers get a $6,000 watch for a mere $3,600! What a deal! Maybe the $6,000 watch was always a $3,600 watch? Do I believe they are not making money at $3,600? No.
The author’s solution? Artificially restrict supply to increase prices. If there were one or two makers of watches you could create this kind of captive supply (look at luxxotica), however to the benefit of watch buyers there are numerous brands competing and supplying watches.
As for “destroying” the brand’s reputation you keep assuming this without really illustrating how the grey market is detrimental to a brand’s reputation. With a few exceptions, just about every major watch brand can be found on the grey market. Are we to believe that Rolex, Tudor, Omega, JLC, have tarnished reputations simply because they can be purchased on the grey market?
Instead of “instantly wonder(ing) what is wrong with the watch or the brand.” I might instantly assume that they set the “value” artificially high so they could be discounted and purchased elsewhere. This is essentially what brands like Invicta do, but less obvious. $1500 dollar watch…now only $350. What a deal.
“This article makes the assumption that the grey market is solely for clearing excess, slow moving, and dated inventory.”
Clearing inventory, yes. “slow moving and dated”, no. You can find any current and hot watches on the grey market. For grey market retailers to agree to certain levels of bulk, they negotiate in current and hot product as well.
“I would argue that boutiques and ADs instead very much act as a charade.”
Not true. Boutiques maybe, but ADs are independent businesses with the majority of them being owned and operated by individual business people. It wouldn’t make any sense that they operate a business simply as a charade. They are being hurt by brands feeding the grey market more than anyone else involved.
I agree with your comments on the “value.” The value of anything is what others are willing to pay for it. Brands supplying the grey market undermines and purposefully hurts their authorized retailers, who in most cases have been loyal business partners for many years.
“The author’s solution? Artificially restrict supply to increase prices.”
Not at all. My solution is to reduce supply by limiting the manufacturing. In addition, I believe they should also lower the MSRPs to a level that is more in line with what the watches are selling for through the grey market.
As far as damaging reputations, in my first draft of this post, I listed a handful of brands that are no longer in existence due almost completely to them over supplying the grey market to a point where their grey market prices were 1/3 or 1/4 of the msrp. Eventually they couldn’t get any ADs to represent them and the brands folded. We ultimately didn’t include this into the published post as we felt it wouldn’t be fair to those brands, parent companies, and the people that worked for and ran those brands.
They way it destroys a brand is simple. Lets say you like a particular watch. You find your closest AD to go see it in person. You ask how much. Even if they give you a 25% discount, it’s still 25% higher than you can buy it on the grey market and lower than the AD’s cost. You go buy it on the grey market, fair enough. Eventually the AD no longer wants to carry that brand, and all other ADs of that brand follow suit. Now there aren’t any ADs. If having no ADs was viable to a brand’s success, they would have all done away with ADs years ago.
I do agree that many or most MSRPs are very artificially inflated. It is also one of the biggest challenges in the industry.
In my opinion, the folks in charge of many or most brands have steered their ships as if the internet didn’t exist. They set the prices very high, pump out as many watches as possible, and in the end, they need to get rid of that product. They have to either change the way they do business or go the way of many brands that aren’t in existence any longer.
Thanks for your input. We appreciate the honest and open dialogue.
Look every day there is an article about the failing Swiss export market. This is solved by the “Grey Market” The idea that production needs to slow down is wrong. There are allot of 40-50 somethings that are just finishing up all their big expenses, homes, college… We also have passions for everything from watches to cars…. We also were the first group that had a real internet available to look up all the thing we wanted at some time in the future and that is now. However I prefer to never be seen in, at or around a “Boutique”. Leave that for everyone who needs to tell people where they purchase things from, and have every form of credit almost maxed out, but give the impression they have money. It may just be that auto companies should follow the grey market lead. My guess is that if there were more trust worthy dealers of all goods on line, that would be the way a huge percentage of people would go. Imagine not wasting all day to get a car, trying to be up sold a “better” appliance, Better for the salesman’s spiffs. Not to worry there is enough Ultra wealthy, and fake wealthy to keep the “Brand” in the green and authorized retailers in business. For me I will keep grabbing Zenith’s and like for 4K instead of 12K and wait for other marketplaces and retailers to get wise to this situation.
Thanks for the thoughtful response.
My experience with AD and boutiques is that certain customers are not price sensitive and some like the environment i.e. the champagne, chocolates, etc.I was visiting a Rolex/Tudor AD event where we bought a Tudor for my wife. The group next to us was a small group of mid 30 something guys – my age. They were traders from what I could gather. They were buying $20k+ Rolex pieces on a whim. Watches they had never seen or heard of before were coming out and being sold. It was kind of shocking to me as we fretted over the $2k Tudor.
When I purchased my Nomos Orion a few years ago the only “AD” in North America was Watchbuys. I ordered online and saw the watch in person for the first time when it arrived. There was no grey market for Nomos. Shortly after they started showing up in Tourneau and other watch shops. It wasn’t long then until they were available on the grey market for 25% off. My guess is Nomos is selling more watches with the increased exposure and not everyone is buying their watch on the grey market – some are paying full retail at the store. The real loser is likely watchbuys – who is online and sells at full price.
Alternatively, Sinn, another brand I own, is still exclusively available through Watchbuys and there is no grey market that I am aware of. They seem to keep their pricing reasonable and rarely offer discounts. However, how many watches are they selling per year globally? 15-25k?
If I could walk into the Omega Boutique or AD tomorrow and pay $4k gross for the watch available for $3.5K online I would do so, but I’m not going to pay $6k+tax ($6,600). The warranty, the perks, the experience – none of it adds up to $3k.
Amen. The market has spoken and the grey market price IS the fair price for the watch without papers. I find it strange that sites like this advocate for practices that would drive up prices for the people who comprise their customer base.
Thanks for your comment, Steve. No one here is necessarily advocating. We are merely explaining a situation as seen from the inside. AND please remember that this site is completely free for you. There is no conflict whatsoever, nor are you our “customer base” as you do not buy anything here.
Well said! In addition, a watch factory can’t simply cut production to match demand that easily, as the author suggests. The fixed costs are a very high percentage of the cost of the watch, compared to the materials used to make it–you have the building, the utilities, the employees (unless you lay them off, but these are skilled workers, so not so easy to replace when times are good). You have a certain cost to cover whether you make 1,000 watches or 100,000; so revenue stream, even at the cost of low profit margins, is essential.
Also this allows a brand to cover the spectrum of buyers. Those that can easily afford full price and find the safety of this worth it go retail. Those with limited budgets can go grey market. Those that really have disposable income can buy the gold version (why do you think the cost of the gold version is multiples of the actual cost of the gold material.)
Thank you for commenting.
Reducing supply would be a solution for hopefully increasing demand. On the contrary to pushing up prices, I believe brands should bring them down to where clients would be willing to pay at MSRP.
If the brands could move their product through authorized retail channels at retail prices, there wouldn’t be any need for a grey market.
I have bought a couple of watches from the grey market, they were not only perfect but the price was really good. The problem with authorized dealers is the price, they are just overvaluated, in the grey market you can find some pieces at almost 50% from the msrp. Watch makers should cut off its prices or they could really add some value to its time pieces, not only stamp it’s name in the dial and add whatever zeros they want to the price.
Completely agree with you, Marco. If I hadn’t been in the industry, I’d be just like any other consumer and weigh cost vs. benefit and I’d probably purchase from the grey market.
As I mentioned in the post as well as in the comments, brands should reduce production and lower their prices to fit more in line with demand and what customers feel a fair value price should be.
Thanks for the comment.
Hello John, great article.
About cutting prices though; Let’s say a Breguet classique Hora Mundi sells around $80k at retail but it is $50k at grey market. AD or whomever sells this watch to grey market because the customer does not buy it.
Under such case; what do you think will happen when brands decrease their MSRP? Let’s say they decided its price to be around $50k like grey market. But customer still does not get it; still does not want to pay that price Because he/she knows if they don’t buy at retail it’ll soon be online at 30% discount. Like Japan dealing with deflation for many years, people don’t want to spend money at retail because they trust the pieces will be on grey market soon.
I don’t think many customers will say “oh, I should buy at retail because they decreased the prices at a reasonable level. If I don’t get this; this’ll soon be at grey market and both ADs and brand will suffer from profit margins and there might not be brand at all in the future” so; decreasing the prices does not seem to be a viable option here.
Additionally; it would be like a blasphemy to old customers who bought the watch at retail.
What brands need to do is tighten their ADs, distributors etc and even buy back the excess inventory themselves. Hard and turbulent times…
One reason I didn’t see is that retailers have to buy certain $ to become and stay an AD. If they can’t sell that regularly, grey makes sense.
If a retailer wants to remain or become an authorized retailer, they must maintain a certain number of watches in their showcase. Some brands aren’t too strict, but any of the brands that a retailer would desire to carry (andsells fairly well) puts a lot of pressure on.
I’m not saying that the grey market is a bad group of people or that they don’t have a right to conduct business at all, I just think it’s pretty crappy that the brands so blatantly and without regard screw the very channel (and people) who have been great business partners since the dawn of the industry.
To many Swiss watch brands loyalty means nothing apparently.
Ok, so lets have a look at the idea of reducing supply to artificially inflate transaction prices.
Customers… lose, as they pay higher prices or (more likely) just are not willing to buy a watch and the public as a whole misses out on this beautiful hobby.
People working in or for the watch industry lose out, as decreased volume means needing less people to produce and move said goods. Brands overall? May earn more through high prices than they lose through lower volume. But if that was the case across the board, they would probably do it that way already, is easy enough.
So everybody loses… except authorized retailers, who the author says he once worked for. Hooray for high prices!!!!
Maybe I wasn’t clear. Artificially inflating prices is far from what I want or think should happen. On the contrary, I believe the brands should both reduce supply as well as lower their prices. The bottom line is that brands are pumping out far too many watches where there is no justification or correlation to demand. This is leaving them with a ton of excess inventory without a customer willing to purchase it at a price that is remotely close to their (inflated) msrp.
I agree that if they reduce production that their cost per unit may increase slightly and that they’d have to lay off qualified talent, however, as I’ve clearly stated, the mess that the industry is in is due to their thirst to manufacture as much as possible.
As far as everyone losing except for the retailers, I’m not even sure how that’s possible. The retailers are the ones struggling to keep their lights on right now because it is impossible for them to compete with the grey market. They are purchasing their inventories for more than double that of the grey market retailers and they have much higher overhead.
At the end of the day, it really is quite simple: reduce production, reduce retail prices, support the authorized channel, and work on regaining a more stable business and industry.
Much appreciate your input and the honest and open discussion.
Yet that isn’t possible for a business. Reduce what you sell and how much you sell it for? Back to economics 101 for you.
It would be possible if the product being sold is artificially inflated to the levels that they can sell large amounts to the grey market for 15-20% of the msrp.
There’s got to be a happy medium between the two and I don’t think the price would have to be reduced by 50%; 20-25% should be plenty in my humble opinion.
The bigger challenge is that the brands aren’t paying any mind to the most basic economics 101 fact of supply vs. demand. They’re simply producing far too much product.
I for one, fully understand your argument. Brands are selling some watches through to ADs at relatively high wholesale prices, and dumping others at much lower prices, the latter practice being disloyal to their AD networks.
Reducing both production and wholesale price would narrow this gap, making the grey market less appealing, while not necessarily impacting revenue as greatly as one might assume.
It’s all a matter of degree. The grey market will never be eliminated, and as you pointed out in your article, it serves a purpose. But right now, the balance has swung too far towards the grey market at the expense of the AD network. Something should be done about it.
Question is: how come the brands themselves haven’t figured this out yet? Don’t they employ people to do this kind of financial modelling for them?
Answer: maybe they do – and maybe their modelling shows that the current balance is actually “spot-on” for maximising brand profit.
Which would be kind of scary…
I HAD to have the Omega SM300 the day it came out and my guy at the Scottsdale Omega official boutique and I HAD to have the first one that came in and I paid full retail and now the watch, new can be had for a few grand less. Well, thats just the way the ball bounces and I got what I wanted when I wanted it and if I would have waited i would have paid less. I dont buy Panerais in Costco for a reason
I hear similar stories often Eric. I think that if prices are more in line with what the market demands from the onset, they wouldn’t end up dropping so drastically after the buzz is gone.
But we’re all grownups and we base our decisions on how we feel at a particular time right?
Great watch though, and thanks for your input!
Are you suggesting Rolex does NOT have a gray market presence?
Not at all. As stated in the post regarding both Rolex and Patek…
“…or 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.”
Neither brand supplies the grey market directly and both are very proactive finding out where their gm watches are coming from and cutting off the supply.
I agree John, even-though I end up paying more for a desired timepiece in the and at an AD, reducing production by brands to suit their ‘real’ sales target at AD’s. This IS the common sense solution for the market adjustment where the grey market will dry out and eventually dies… but it won’t happen because if I was a ‘brand’ with supporting AD’s I would like some other brand to start to see how it works for them before I follow suit. Being the first might hurt so bad I will potentially loose my shirt so this only works if the major watch groups (SWATCH, RICHMOND, LVMH, KERING GROUPS etc..) would collectively start. The fashion brand groups (FOSSIL, MOVADO, CITZEN, TIMEX GROUPS) etc..we don’t really care about so much for the sake of this article I am presuming. SEIKO GROUP does quite well I believe.
One single brand won’t likely survive at first try is my guess.
But if it worked it would be great to have a market adjustment with honest prices. Even if they will be higher, you will be quick to snatch the last still available gray market stock because now these pieces will increase in their values since the ‘replacement values’ will rise accordingly. There’s a plus side to everything. I would rather deal with my favourite trusted retailer who wouldn’t shed extra stock of the same watch I just bought from them. Keep things clear. This market is so messed up right now and just for the record, I currently buy from almost anyone.
I don’t see anything wrong with lower production without excess stock.
Many years ago I worked at a bakery and needed to order tomorrows bread today. Sometimes we had a bad day in sales or I ordered with error but they (owners) would never allow me to reduce prices at the end of the day or give it away… because it would change the way people would buy their bread the day after tomorrow.
One method to control the pricing of high end watches may lie in the warranty offered. A 3 month warranty is not the same as a 5 year warranty. . It is well known that korean car manufactures increased their sales by offering a 10 year warranty. Most manufacturers were offering only a 2 year warranty.
This translated in buyers having confidence ion the product. My suggestion is in controlling the price by offering a variable warranty. one could satisfy the different markets. A 50% discount and a zero warranty would not see vmany buyers.
I don’t know if it has been mentioned already but the AD has to fill up a quota in order to get the volume discount from the manufacturer so if they end up anywhere close to 50% at msrp and 50% wholesale it is still good business.
You share good knowledge.
Dr. Willy, thank you for making one of my two points so eloquently! –“The fixed costs are a very high percentage of the cost of the watch, compared to the materials used to make it–you have the building, the utilities, the employees (unless you lay them off, but these are skilled workers, so not so easy to replace when times are good)”.
The other point is that this article is relevant only to large established brands. Smaller and/or less established brands who jumped into the mechanical watch boom several years back, have found it harder and harder to compete as the watches demand “bubble” broke and the larger (read stronger) brands have dictated that the retailers take old stock in order to get the newer pieces– the so called AD “quota”, leaving less money in the retailers pockets to invest in the smaller less established brands, and leaving them with little choice but consignment an/or eventually grey market…
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.