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Grey market has become a necessary evil for luxury watchmakers

  1. pitpro Likes the game. Apr 12, 2017

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    • Technology News | Wed Apr 12, 2017 | 2:01pm EDT
      Grey market has become a necessary evil for luxury watchmakers


      April 12, 2017
      REUTERS/Arnd Wiegmann
      By Silke Koltrowitz | ZURICH
      A diamond-studded Rolex at 40 percent off the $34,000 retail price or an Omega Speedmaster Moonphase for less than $10,000? While still out of reach for most people, the increasing prevalence of such deals highlights the perplexing predicament in which luxury watchmakers now find themselves.

      With sales falling, more unsold timepieces are finding their way from the Swiss-dominated industry's carefully controlled official retail networks to online platforms where they are often offered at steep discounts.

      Swiss watchmakers say they loathe this "grey market" because high discounts damage the meticulously crafted aura of prestige and make it harder to sell their goods at the full price.

      "In luxury goods, when you break the illusion of prestige, the dream, the prices, it takes away the confidence. It means slow death for luxury goods," Jean-Claude Biver, head of LVMH's watch division, told Reuters at last month's Baselworld watch fair, describing the grey market as the "industry's cancer".

      However, a sudden end to a boom in Chinese demand is forcing the brands to begin working quietly with dealers in the grey market, occasionally to help with sales but mostly to secure some influence over the unofficial resellers, according to dealers and industry executives interviewed by Reuters.

      "There are many sources for grey market watches: authorized retailers who want to get rid of slow-selling models, country distributors or even the brands themselves," said one watch industry executive who asked not to be named.

      He said that in some cases operators in the grey market are cooperating with the brands, removing new models from sale when asked or reducing discounts manufacturers consider excessive.

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      Though representatives of the biggest luxury watchmakers, including Swatch Group and Richemont, refused to discuss their strategy with regard to the grey market, some manufacturers may find that it offers benefits.

      "For every timepiece we sell, the manufacturer is getting the lion's share of the profit, and then all the search engine queries, image searches, social media brand posts, tweets and pins are terrific and free (advertising)," said Darryl Randall, founder and owner of United States-based online platform SwissLuxury.com, which he said generates sales of about $10 million in good years.

      Another grey market dealer said he will sometimes withdraw watches if asked by manufacturers and that brands regularly offer U.S. dealers packages of 15 or 20 pieces at a discount.

      "As much as the brands dislike us, we have more or less the same goals they have -- we also want to sell the goods and be able to make a profit," he said.

      Chinese demand for luxury timepieces boomed after the 2008/09 financial crisis, leading to a surge in production and retail prices. But demand has dropped sharply in the past two years as extremist attacks have deterred tourists from visiting Europe, where many of the watches are sold, and China has cracked down on luxury gift-giving by civil servants.

      It was difficult to rein in production when demand fell, partly because the watches are put together slowly in stages, meaning production plans are often made two years in advance.

      Nobody needs a luxury product, but the brands find that when customers see and touch an intricately crafted watch in an opulent boutique and are drawn into its "story", they will want it so much that the price becomes secondary.

      MIXED AVAILABILITY

      In the good times, the industry can take home 20 percent of sales as profit and retailers are still left with an attractive margin of up to 45 percent.

      But when business tails off, the manufacturers do not allow official retailers to cut sticker prices too far, fearing that big discounts will damage their brands -- a policy that may push cash-strapped retailers to sell to the grey market.

      Swiss watch exports fell 8 percent in the first two months of this year, on top of a 10 percent drop last year.

      In the grey market sales are often clinched in small, shabby stores or via online platforms that do not have most of the watches in stock and source them only when orders are placed.

      Randall said that brands vary in their efforts to keep products out of the grey market. Some of the hardest to source are Patek Philippe and Richard Mille, which both keep a tight rein on production. Audemars Piguet, another independent brand, only distributes certain models through its own boutiques.

      "Brands like (Swatch's) Omega and (LVMH's) Tag Heuer are easily available at all times," Randall said.

      The unnamed U.S. grey market dealer agreed and said that Richemont's Jaeger-LeCoultre and Vacheron Constantin and Swatch's Breguet are also easy to source.

      The United States is the second-biggest market for Swiss watches and is a hub for grey market watches, with online platforms such as Jomashop.com, AuthenticWatches.com and PrestigeTime.com.

      Also In Technology News"There's a lot of grey market watches coming in from outside the country. The excess of the world's products used to flow to Hong Kong, now it flows to the States," said Danny Govberg, an official U.S. retail partner for Switzerland's biggest brands but who also sells pre-owned watches online.

      He confirmed that brands sometimes offer him new pieces to sell as pre-owned but would not name them and said it was only a small share of his flourishing business.

      FROM ZURICH WITH A DISCOUNT

      The grey market is by no means restricted to the United States. Germany's Chrono24.com has sales offices in both Hong Kong and New York, while a lot of grey market watches are also sold on Amazon and eBay, the unnamed watch industry executive said.

      As its name suggests, there are no statistics on the grey market and few dealers are willing to explain how the system works.

      Unlike fakes, grey market watches are legal, authentic goods sold by their rightful owners, though they generally come without factory warranties because brands refuse to service watches that are not sold via their official networks.

      While that might deter some buyers, other more price-conscious shoppers may actually prefer the convenience of the online platforms that are tempting potential customers with trade-in schemes for old watches, financing solutions, price-match guarantees and their own warranty and service centers.

      Randall said he has been sourcing most of his watches in the United States to get them to customers quickly but can also find good deals in Europe thanks in part to the strong dollar.

      "We just sold a beautiful Jaquet Droz Eclipse to a Chicago businessman and were able to get a great deal and quick shipment out of Zurich. The price was so good we gave him an additional $2,000 discount," Randall said, adding he sold the watch at 22 percent below the list price of $29,300.

      Saifullah Kazmi, from Karachi, said he bought a TAG Heuer Carrera at almost half price on Jomashop.com and had a relative bring it to Pakistan, where a local retailer confirmed that it was genuine.

      Kazmi was concerned at first about the legitimacy of Jomashop and the absence of a factory warranty, but the big discount tipped the scales, he said.

      (Editing by David Goodman)
     
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  2. watchknut New watch + Instagram + wife = dumbass Apr 12, 2017

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    AND...this is the reason I only buy vintage.
     
  3. M'Bob Apr 12, 2017

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    Is the Swiss watch industry in a down-spiral? I don't think so. The Chinese may be out as big players, but that probably inflated the market anyway. It will settle out again. There will always be people with deep pockets, who want to buy nice things. This article means there are deals to be had out there...for now.
     
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  4. M'Bob Apr 12, 2017

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    I find this statement incredibly dubious. There are articles galore in NYC about the closing of retail shops, due to on-line shopping. No one who wants a particular watch is going to be deterred from buying it because they didn't visit Europe. That's just nonsense.
     
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  5. Rman Apr 12, 2017

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    It seems the supply of good vintage examples has traced the same curve of new retail sales.
     
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  6. Greatpa Apr 12, 2017

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    +1
     
  7. Fatcat Apr 12, 2017

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    I know personally one of this guy in Zurich , they reduce the shops stocks to keep selling licences for the next year, they can offer you form of course Omega to Patek , discount are in the middle of 35% in average, of course we see more listing on Hublot, IWC, Chopard than Rolex but generally in October there is a nice list of Rolexes to sell quickly, for that reason for me the vintage as more value and history than new watches.
     
  8. semper_shells Apr 12, 2017

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    I think the old guard is going to adjust to the market. The internet and all the like have caused whole industries to rethink their strategies. Watches are not excluded. Hotels have experienced it with AIR BNB, Taxi's with UBER and LYFT, even the US auto industry has felt it with the introduction of Tesla and it's direct sell strategy. While I don't know the watch industry enough to predict what they will have to do to regain their foothold, I imagine they are not just standing by waiting on the rebound. I have noticed a trend of vintage inspired watches that have been priced directly in line with what their vintage counterparts are selling for. I do not think this is by coincidence, I think they are trying to undercut the vintage market. They are saying why buy old, when you can buy new, better (bigger size, better materials) and for the same price.
     
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  9. ICONO Apr 12, 2017

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    Interesting thinking & not without merit

    However, would you agree, the Vintage will continue to appreciate ( assuming fine condition example ) ? ,…… whereas the Modern will depreciate like a lead balloon ?
     
  10. semper_shells Apr 12, 2017

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    I do think the vintage market will continue to increase. However, I do not think that the modern market will depreciate very steeply. If we use collectible cars as a metric we will see that instead of modern collectible cars decreasing in value the auto makers tighten the amount of cars they make. This puts the power back in their hands. Look at how Hamilton announced the remake of the chrono-matic, they are only producing 1968 of them and selling them for $2200. They just instantly took the air out the room and because they kept it limited it fells like a collectible. Most of the "big" announcements I saw from Basel 2017 was about re-issues of popular vintage watches. These companies watch the vintage market and they know what the used and vintage watch market is doing.
     
  11. ChronGo Apr 12, 2017

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    Fascinating. Thanks for sharing!
     
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  12. Riviera Paradise Apr 12, 2017

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    https://www.deployant.com/early-2017-swiss-watch-exports-continue-fall-lvmh-bucks-trend/
    Don't know how much the LVMH "bucks trend" is reliable information, but if it is true it would show that some in the industry are adapting better to the downturn than others.

    Omega seems to have invested significantly in ramping up production, Metas certification, new product models...so it probably prefers to keep the production lines flowing and dumping on the grey market during this phase of steep correction.

    Perhaps they should have adopted a specific strategy for new models above the US$10K level, restricting the flow of these to the ADs and boutiques, and refusing to offer them direct to the grey market...this might have created some degree of value perception for the resale value of the XSOTM range, for example, over time, combined with a less ambitious product release schedule for the XSOTM range. I would guess that watches over US$10K are not a significant proportion of Omega's sales worldwide, so they could continue dumping "less prestigious" models on the grey market for positive cash flow, but use the "more prestigious" watches and their improved resale value as a long term halo effect for the brands image.

    Right now they way Hayek is running the Swatch group in the current climate (seems to be a head in the sand mentality), I do think they might run into issues, although RA certainly is putting in a big effort and seems to be doing a good job.
     
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  13. nalexi Apr 13, 2017

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    Big like!
     
  14. glownyc Apr 13, 2017

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    I don't think it was meant that way. It's not about the buyer that knows what they want. It's about the buyer that has been thinking about a luxury watch but hasn't really started to browse or research. When that buyer is in "vacation mode" and walks by a shop they might be more incline to go inside a and end up make a purchase. If the wife is "vacation mode" and herself has purchased a luxury handbag or something she might be more willing to agree with the purchase. If the buyer qualifies to get the VAT back then even more so.
     
  15. BPD Apr 13, 2017

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    Since I only buy my watches new, I have been very fortunate to have a great relationship with my AD. They either match or beat whatever the current grey market price is for the watch that I am buying. The sense of seeing and inspecting the watch itself rather then hoping that what I bought is what I'm actually going to get or if the watch will get delivered in one piece is a nice piece of mind. Not only do they give me the deals, they are always willing to help out with any issues that I would have with any of my watches plus I always get first dibs on a new release :thumbsup:

    If you do your research and shop around, you can find an AD in which you can get great discounts. I also find that if you are equipped with the knowledge of what you are buying, it's easier to deal with the AD. I always enjoy my visits because the person I usually deal with is a watch nut and our conversations are always interesting and thought provoking. However, the most important reason of why I buy from my AD is the feeling of contributing however little it maybe into the local economy and the fact that I am helping to keep people employed.
     
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  16. M'Bob Apr 13, 2017

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    If you're talking about buyers that don't know what they want, you're talking about spontaneous buyers. I doubt that is a high enough percentage of total watch company sales to effect the need for grey-market unloading.
     
    Edited Apr 13, 2017
  17. glownyc Apr 13, 2017

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    I was thinking more like tour groups. Larger number of people.
     
  18. M'Bob Apr 14, 2017

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    Let me get this straight: a large tour group, who en masse visits Europe, and collectively buys luxury wristwatches?
     
  19. glownyc Apr 15, 2017

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    No, just simply a larger pool of potential buyers.
     
  20. Swissluxury.Com Apr 15, 2017

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    There is a 15%-20% decrease in sales volume in the last 12 months..........also a shift in products as we sell more $50,000.00 watches and less $5,000.00 watches. Product is backing up in Switzerland and they manufacturers have had it great for so long that they are ill prepared for a downtown and bear in mind this is all with the stock market at record highs and interest rates at historic lows. Interested discussion above about vintage vs new and in my opinion if you buy new need to make sure you start with a 20-30% discount and no tax if possible and most importantly make sure whoever you are buying your Omega watch from will include the official dealer stamped warranty card (our firm always does).......Darryl Randall (Owner) https://www.swissluxury.com
     
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