Navigating The Grey Market: A Retail Expert Explains The Whys And Wherefores (Archive)
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.
This article was first published on January 30, 2017 at Navigating The Grey Market: A Retail Expert Explains The Whys And Wherefores. You may find some of the comments under that article interesting (or not).
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Hi John, thanks for your article. There’s one factor which watchmakers like Rolex and Patek are culpable of. By limiting supply of some popular models – esp steel sports watches, there’s also a huge incentive for customers who are allocated those watches to flip to grey dealers for a huge profit. In the same vein, if Authorised Dealers are given more of “unpopular” models to sell, how else do they manage their cashflow if demand is not there?
You are completely wrong!!! There are hundreds or Patek Models on these grey market websites and thousands of Rolex models. You say it’s extremely rare? Journalists full of favoritism these days is why the industry fails and you should not be paid for such worthless character and investigations.
Like he said in the article, you can find them on the grey market but you’re still paying at or just below the retail price. There is no way you are finding a brand new Rolex or Patek Philippe on the grey market for 30-40% off retail like you easily can an Oris or Bell & Ross. Comprehend what you are reading before blasting a journalist for favoritism.
Show me some links to sites where I can buy brand new Rolexes and Pateks for 30%, 40%, 50% or more off like most of the other brands!
I am an irregular contributor on Quill & Pad, Elizabeth knows me personally and knows what I am doing. I am a vintage watch dealer, collecting and trading for 20 years now. For 8 years I have been doing this full time.
I would like to clarify a few things on my end. While my focus is vintage watches (I am not a grey market dealer but a vintage dealer), watches made before 1988, I also sometimes find myself in the situation where I need to sell a brand-new, unworn watch.
There are certain watches that are in huge demand from Rolex and Patek. But we are looking at only a few models, such as Daytona, GMT, maybe Submariner and Nautilus. These watches sell above retail. Everything else can be had at discount, oftentimes huge discount. I have acquired a Patek Nautilus 5711 for 16k when list price was about 21k. And we are talking maybe 2 or 3 years ago. Even Daytonas sold for below retail and were actually hard to sell even at retail a few years ago. I am talking from experience, not from what you see on websites. I am the real deal, the money I talk about is not what you see on Chrono24, but what happens in reality. Now, let’s talk about big discounts, 30 or 35%, on Patek and Rolex. It happens. Not often, and only models that nobody wants, but both companies have such models. That is the truth. I have tried to sell certain models from these makers that would not sell at 25% off, and believe me I did not pay 25% off, I paid a lot less. I want to avoid going into details, as this may only hurt the brands and all of us as participants in this business. The market of grey watches as well as used watches has become incredibly tough. I heard through the “grapevine” that there are companies selling directly to GM dealers. That is what is undermining the business for an AD. It is not loyal and it shows what a shark tank the watch business has become.
Brands outside of the realm of Rolex and Patek partly sell for 70% off. Again, I am talking from real life experience. And don’t ask me to give you the exact models. I won’t.
The consumer nowadays is incredibly educated and informed. Maybe a bit overinformed and sometimes misinformed. Deals largely happen based on price alone. You only sell when it is the cheapest deal they can find. And they keep looking and asking everywhere. It is in fact a mess. I believe it is weighing on everybody, even on the grey market as grey market dealers probably are faced with fast shrinking margins as well.
I recall the words of Mr. Biver saying that the grey market is something like a cancer. It is. But the companies are responsible for it. They sold too many watches that are hard to sell to the ADs, and the ADs are invested too high. They need to move inventory. So they sell to the grey market. There are so many things that go wrong. At the end of the day, I am happy to be a vintage seller. Even if we see some companies entering the vintage market now as well. They face the same issue we all face which is finding the watches. The vintage market is bought up.
I hope it is ok to speak out what I am writing. If not, I do not mind if this does not get published. I am sure Elizabeth and Ian know what to do.
Thank you for your remarks, Boris. I am sure they are helpful to this discussion.
Grey market is likely to survive for as long as big watch makers keep their prices and attitude inflated.
My impression is that other Nautilus, Patek can be purchased at significant discounts from authorized as well as grey market dealers. My impression is that other than steel sports, Rolex can be purchased at significant discounts from authorized as well as grey market dealers. Both brands pull this off by creating artificial shortages. As it now stands, I don’t see much difference between authorized and grey. Both now feel considerable pressure from the rising secondhand market. Watches are forever, and the internet is the great luxury goods equalizer.
Great article, but the obvious thing not mentioned is the very high markup/margin on luxury goods, watches and jewelry in particular. These inflated margins create the opportunity for any of this gray-market discounting to happen in he first place. Look at Turneau and other big retailers and think about the service you received there and then think about the profit they made on the watch they sold you. At least for me, this equation doesn’t make sense anymore. I will buy from reputable used dealers or online from gray market retailers. Lastly, you probably won’t get a meaningful warranty from a gray market seller, but for me the big savings and the very high reliability of today’s luxury watches make that an easy trade off.
Maybe people are sick of paying for overpriced watches. Insane advertising, sport sponsorship and ambassadors eat on the bottom line and drives prices up. Giving millions all over the place does not bring a dime to the quality and craftsmanship of a watch. The whole model need to be re-evaluated.
In comes microbrands.
The answer to all of this issues possibly?
Absolutely agree to you. This is by far the best analysis.
As an Authorized Retailer I feel I should jump in here… Firstly, to THK, the margins are getting squeezed at the retail level whilst the cost of doing business is rising. The investment required for a big brand is massive and can take years before one sees a return on investment. And to John, the author, you miss a couple of big points. Firstly, a quality AD provides insight, knowledge and advice as well as convenience and reassurance to a local clientele. And most importantly the opportunity to try on and compare multiple watches. Secondly, when you buy a watch with no warranty/papers you often take a massive hit on desirability for the resale market which means you have a less valuable product, longterm.
Everyone should be able to exist and help the market but the current attitude towards ADs overall is deplorable. I see many customers who have made terrible mistakes online that could have easily been avoided. And how is buying online more convenient when you have an issue that means shipping your watch to an unknown person??? And then stressing about whether their “highly trained” watchmaker can repair your issue??? We all have choices to make. However, the one point I think that we can all agree on is that it is the Manufacturers themselves who cause the majority of problems in the industry. Yet we all love the products and keep coming back for more!
Very well said Jeremy. And I did miss those points. Not because they’re not important (they are very important) but coming from managing a store not unlike yours, I had those as givens in my head but certainly should have written about them.
And I agree about your comments on the margins. When I see comments about “markup/margin on luxury goods”, I can’t help but wonder where some people get this illusion.
To clarify for our readers, many brands sell to Authorized Retailers for 40% off, 35% off, and in some cases even less. Then a client comes in and asks for 30% off because that’s how much they can get it for (or more off) from the Grey Market. It’s an unsustainable business model and clients have to realize this.
To elaborate on your comment on it’s the manufacturers themselves causing the issues, you’re 100% correct. It’s awful that an AD supports and represents a brand in good faith for years, then the brand goes and sells directly to the GM dealers for half of what they’re charging you for the product. A poor example of loyalty.
Anytime a retailer contacts me for advice on whether they should carry one brand or not carry another, I always tell them my first rule of thumb is to jump online and check all of the Grey Market retailers. See what they’re selling the product for. If it’s more than 30% off, don’t do it. A lot of GM retailers will list watches for 20-30% off and not own the watch. This means an order comes in and they go and find the watch. In this example, the brand isn’t likely dumping watches on the GM. If the watches listed on a GM site at 35%, 40%, or more, the brands are very likely dumping their watches on the GM and will not be a faithful business partner to an AD.
Something’s got to change if the brick and mortar retail model is to survive (which I for one hopes it does).
Thank you for the excellent reply.
Thank you for reading and remarking, Jeremy! I would love for more ADs to weigh in on this important topic.
Regardless of which side you’re on, this piece is an essential benchmark for buyers to understand the who, what & where decisions are made. It’s always buyer beware. If support & reputation matter to the buyer, he/she should always find reputable dealers who can supply the desired product. As in any product anywhere, the manufacturer is responsible for managing where their products end up. Those who deal or speak from both sides of their respective mouths live or die by their own swords. Good job John stimulating excellent conversation!
I recently bought 2 watches 1 from AD and the other from GM. The one from AD is not the absolute cheapest but it’s priced close enough so I don’t mind the slightly higher price. I see a lot of value in AD but sometimes I feel that ADs (not all but Rolex in particular) “abuse” the position they are in by not selling the high-in-demand pieces and even suggest that you have to “build a relationship” by buying other things the buyers do not want before they can get those pieces. I can understand if there really is a shortage but I constantly see those watches sold new (marked up) by probably those who did have “a relationship” with those ADs.