The billion-dollar grey market in watches upsets big brands
No one is immune to a bargain — not even those who can spend £30,000 on a watch. At Watches of Switzerland, an authorised dealer, an Audemars Piguet Royal Oak automatic in rose gold sells for £42,600, but the same watch is on offer at website Chrono24 — on the "grey market" of unauthorised sales — from US dealer Watch My Diamonds for $34,850 (£27,227). Impossible to ignore, the grey market is becoming a powerful force in the watch industry.
Unauthorised watch dealers such as Jomashop.com, Authenticwatches.com and IconicWatches.co.uk discreetly buy stock that authorised dealers have failed to sell, and offer them at a lower price, often with an equivalent warranty. Chrono24, an online marketplace similar to eBay where dealers and consumers can meet, is another heavyweight in the sector, with more than 10m monthly visits. Discounts of 30-40 per cent on new TAG Heuer, Breitling and Rolex watches, delivered overnight and offering responsive customer service, appeal to price-conscious shoppers.
The term is not necessarily loved. "You can call it the grey market, but at the end of the day it's the same watch for a lot less," says Peter Grant, general manager of Authenticwatches.com, which lists 10,000 watches. (The company declined to give its revenues.) "The number one driving factor is price, the number two is accessibility and service."
The grey market is "growing massively" based on the number of products on their sites and their search penetration, according to Brian Lee, associate director at L2, a business intelligence service. Online is "the first touchpoint in the search. A lot of brands don't list the price still, so then people will go to the grey market" to find a watch price and often end up buying there, he says.
The overall global watch market is worth $62.5bn, according to Euromonitor, and the grey market largely affects the higher end of mechanical or designer watches. These have had two terrible years: according to the Federation of the Swiss Watch Industry (FHS), exports of Swiss watches fell 12.6 per cent to SFr19.4bn ($20.3bn) between 2014 and 2016. They have risen 0.7 per cent this year so far.
In this difficult period for the industry, the grey market has come to account for about 20 per cent of the global market for watches that retail for above $5,000, according to Jon Cox, an analyst at Kepler Cheuvreux in Zurich. Previously, the grey market was about 10 per cent of the global total, he adds.
"It does provide a useful function, no matter what some of the producers say: it does allow them to discreetly turn a blind eye to some of their retail partners getting rid of non-moving stock and replenishing with parts that are growing faster," he says. He notes that Richemont has been an exception, seeking to stamp out the grey market by buying back (and destroying) stock in Asia.
Grey-market websites are "second-hand dealers", says Raynald Aeschlimann, chief executive of Omega, dismissively, noting that manufacturers will not uphold the warranty if bought on the grey market. But brands are in a quandary too: they are unwilling to penalise their distributors who sell on watches, nor do they wish to compete with them online. Moreover, the grey market is as much of a solution (to overstocking) as it is an attack (on price integrity). How brands deal with the machinations of the grey market is of great importance.
These are no small businesses. Chrono24, where (mostly) unauthorised dealers offer watches, has listings for more than 300,000 new and used timepieces with a value of €2.5bn. The most popular watches on Chrono24 are Rolexes, says Tim Stracke, co-chief executive, with an average selling price of €6,000. It does not pitch itself as a discount site: there is no "redlining", an industry term for highlighting of discounts, though a search will show you the lowest offers.
Mr Stracke expects the site, which is based in Karlsruhe, Germany, will have about €1bn in transactions this year and will double that in five years' time. (Grey market dealer Jomashop.com had sales of $269m last year, according to a person close to the company.)
Like fellow internet businesses, Chrono24 garners plenty of data from its almost 1m registered shoppers, who can place watches on a personal clipboard. "We know a lot about the users," Mr Stracke says. "We know from previous visits what they like and dislike, we know how many years you've been with us, we know what you've bought before, sold before, what you've looked at before." These data are useful for algorithm-driven recommendation engines, suggesting further appealing purchases.
The business makes money by charging a monthly fee for dealers to list watches on the site, from €69 a month up to several thousand euros for those with over 1,000 watches on its site. Dealers pay a 3.5 per cent transaction fee and private sellers are charged 2.85 per cent on their purchases. Mr Stracke says Chrono24's "core business is very profitable", although investment in growth means earnings are "slightly negative" — a situation familiar to other internet businesses.
How the grey market finds its watches is a point of contention. Industry figures say watches come from authorised dealers around the world who are struggling to sell timepieces — official sales in Hong Kong, for example, fell 25 per cent in 2016, according to the FHS, and left retailers with a glut. One grey-market executive says his site often buys watches at the end of the quarter, when brand managers, seeking to meet their sales targets, are forcing retailers to take additional stock.
Even authorised dealers see the advantage of the grey market: one watch company executive says its retailers buy on the grey market to build their own stock of popular items cheaply.
Watch brands are publicly strict about trying to stem this trade. Several say they will penalise or even cut off authorised dealers if they find them selling to the grey market, and one grey-market dealer says he has seen threatening letters from brands to retailers. "We protect our suppliers' identity, it's the number one thing we do," says Mr Grant of Authenticwatches.com, adding that his site typically buys in bulk from authorised watch dealers in the US who are struggling to shift stock. (Dealers can sell within the authorised network.)
But brands will not necessarily take action to stop it. An executive at a mid-sized luxury watch brand says the only way to avoid its items entering the grey market is to buy back unsold stock from its dealers, which larger brands are not willing to do. Sometimes, in fact, brands perpetuate it: they themselves sell unsold and obsolete stock directly to the grey market, another senior watch executive says.
Some watch dealers even buy in one country where a product may be in oversupply, and thus cheaper, and sell in another country with greater demand and a higher price point. "The biggest areas [of supply] are still very much in Asia and you are seeing that [Asian watch retailers] are talking about controlling their stock levels. All the brands are taking a much more stringent view on this," says John Guy, head of European luxury at Mainfirst Bank.
"At the end of the day, you can try to control the dealer but they do what they want to do," says Theo Staub, chairman of watch brand Moritz Grossmann. "The tools you have when you sell to the dealer are quite limited."
If watch brands are serious about stopping the flow of their products on to the grey market, diminishing both their profit and their control, they can apply legal threats at several points.
The first is for a brand to police its own retailers. If it has a selective distribution system that prohibits retailers selling outside its network, the brand could sue for breach of contract, says Julia Dickenson, a senior associate at law firm Baker McKenzie, who works with luxury brands. "But practically speaking, those retailer relationships are often important, long-term and valuable . . . so some brands may well take a view they don't want to be as strict as they could be if they have seen leaks coming from them."
Moreover, the brands may not know where the leaks are coming from in the first place as traceability can be difficult, she adds.
Targeting the unauthorised dealers is often more palatable. This is most easily done by finding those grey-market vendors who buy products outside of the European Economic Area and sell within the EU, infringing the brand's trademark, according to Ms Dickenson. If the watch is both bought and resold in the EU by unauthorised dealers in a way that could damage the brand's reputation, then it may also be able to claim a breach of its trademark rights.
Using unfair competition law which strongly upholds the rights of brands could also be an option, while the law of tort could cover unlawful interference with contract and profiting from a breach of contract.
The difficulty for watch brands comes in the online market, where the courts and competition authorities are still catching up. Whether or not a brand can prevent their authorised retailers selling through an online marketplace is still uncertain. In July, a case before the European Court of Justice (Coty Germany v Parfümerie Akzente) came out with a non-binding opinion that beauty brand Coty can prevent the German retailer from selling its items on online marketplaces. A ruling is expected in the coming months.
Watch brands may have to join the grey market if they cannot beat it. The scale of Chrono24's audience and the data the company has on it are driving reticent watch companies to work with them directly, says Mr Stracke. This does not necessarily means brands will lower their prices but does help them retain control of their image.
"The top, top brands are in a very open dialogue with us right now. They are very conservative, they are not ready to put their brands on our platform, but most of the top brands, and I'm talking about chief executives of the top brands, are meeting us here in our office, talking with us and discussing ways to partner," Mr Stracke claims.
One brand that has decided to work with the grey market is Frederique Constant, whose "affordable luxury" timepieces start from around $870. "We have been feeling the impact for two or three years that the grey market is getting stronger and stronger," says Niels Eggerding, vice-president of sales at Frederique Constant. "It's very hard to control your brand against that," he says, with thousands of points of sale and distributors all potentially leaking.
That was part of the reason why, since March 2017, the brand has been selling on Chrono24 within its own boutique, at its regular prices. It is the highest-profile of the watch names there and is offering some of its timepieces at full price, alongside accessories, a company history and videos about its smartwatch. Mr Eggerding hopes that working with Chrono24, rather than against it, will help in "educating our consumers a bit better". But the same watches will probably be available through other dealers on the site, no doubt at a discount to the brand's preferred price.
"People say, 'Oh, you're really progressive,' or people say, 'You're crazy to be on this platform with such a high-end product,'" says Mr Staub of Moritz Grossmann, which also has a Chrono24 "boutique". The brand, which makes two-thirds of sales in traditional stores, has been "positively surprised" by early sales and expects rivals to follow it.
If they do, they will regain some profit and perhaps a degree of control in the unwieldy online marketplace — but at the risk of looking like they have capitulated to those who have made millions from ignoring their rules.
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