The grey market: lifeline or kiss of death?

In watches as in countless other sectors, the grey market is very much a reality, though no-one would confess to playing a part, anxious not to dent what must remain an impeccable brand image.

Michel Jeannot

If Nature abhors a vacuum, it has an equal aversion to overflow, which will automatically find its own outlet. As a necessary means of running down surplus stock or past collections, and therefore organised sometimes by certain brands, sometimes by certain distributors, the grey market would be nothing out of the ordinary were it not swathed in such mystery. For this is a market governed by a relatively simple rule: who? me? The main principle is to sell off goods with a minimum of fuss… and without coming to the attention of the other market players (distributors, end customers, even competitors). Traditional distribution channels would consider these parallel sales as unfair competition while end customers would feel robbed after paying full price for a watch that others had purchased at a substantial discount.

The price is right

Indeed, getting rid of the surplus that traditional distribution channels weren’t able to sell at full price means making sacrifices. Professionals in the sector accept to take on these goods for less than companies usually bill their first intermediary (subsidiary or agent). These products can then go on sale at a substantial discount compared with market prices, which is the key to clearance.

Brands prefer to control these parallel sales by working with reputable liquidators whose channels they know. This is an all-important factor: just as certain brands intend that these remain discreet "arrangements", so they insist on knowing exactly where their products will be sold, leaving them ready to respond should one or other official partner in the market become aware of the situation.

Under pressure to perform

Japan, experts agree, is where parallel sales are most rife. This can be attributed to the specific nature of the Japanese market which has virtually institutionalised discount networks, and which are doing rather well thank you.

A taboo subject, one of the grey market’s most potent stimuli is the obligation to post positive results each year, each month even, and in certain cases each week. This pressure, which certain brands exert first on subsidiaries or agents, then on points of sale which may be forced to accept goods they would rather not take, has negative repercussions too. Certain players are prepared to use any means possible to divest themselves of an unreasonably large stock, even when this means the grey market.

A risky business

While this form of trading, sometimes described as providing "essential breathing space", serves as an outlet for surplus and to regulate stocks, it nonetheless entails several major risks, all of which concern the distribution channels used. Whether these are bricks-and-mortar or virtual outlets, the risks are very real. In the first instance, sales by specialist retailers or retailers who are known for offering discount prices inevitably destabilise the official sales network in that region. One can imagine the impact on prices for official retailers in the face of these competitors’ far more aggressive strategy.

The risk is perhaps even more insidious regarding grey-market watches that find their way online. By choosing the same distribution channels as counterfeiters, these players further blur the line between genuine watches and fakes. In a situation like this, how can one distinguish between real and counterfeit, all the more so when they are proposed at almost identical prices? The potential for damage in the long term is very real. ■

See also:
The note from Christophe Roulet

© 2007 All rights reserved

The comments on this article

- Tim Jackson

Dear Sir, Your article is written more from the perspective of the brands/manufacturers. Why do I say this, well as retailer who is asked to stock higher levels than is economically prudent and with the brands reluctant at best and not willing at their worst to take back non-selling models, I have first hand experience. The other part of the equation that you and everyone else seems to not talk about is value erosion of the brands from the clients/end buyers standpoint. The idea that there really is no established value owing to the consumer not knowing what he should pay for a watch, is it 5% off,10% off or 35% off list. And what is list/MSRP anyway. A pie in the sky price, sort of like a bogus appraisal on a piece of jewelry from the outfit that sold you a great deal and goes on to appraise the item for 2x what one paid for it! The buyer then walks away thinking they got a "good deal", when in fact they only got what they paid for. The grey market is the achilles heal of the watch business and one that needs to be addressed by the consumers who shell out their hard earned cash for items that are supposedly difficult to make or rare and should be sold at a uniform price level. No one likes to find out or feel they paid too much. So for the parallel market to exist ultimately benefits the manufacturer only. Given the record profits being made, which are widely reported and just by looking at all the revived & new brands emerging onto the market, there is something wrong with the picture. For an independent retailer to promote, inventory and sell a brands watches that can be found for a lot less on the web or in a grey market window makes little sense to me. I haven’t even touched on the brands boutiques which have product only available at the boutique. This might be fine if the independent retailers had access to the regular production items as easily as the boutiques, but when the company store gets preference I see a problem. From my perspective the retail landscape will change significantly in the next 5-10 years, the big groups will have their own retail outlets for individual brands, the production levels have to fall, there are just too many watches being produced for the market to properly absorb through the standard distribution channels, which is why the parallel market exists. From the consumers standpoint, less watches is better. If the consumers wake up one day and realize what is going on the landscape will look a whole lot different. In the luxury business value perception and uniform pricing is extremely important. One only has to look at Louis Vuitton to see how effective it is. Try going into a LV store and getting a discount for that purse or pair of shoes. I don’t see LV outlets anywhere in the malls. The watch business needs to wake up, both the retailers who sell on price/discount and the manufacturers who condone the "alternative" distribution channel, otherwise we’ll all be hurting. Why should consumers pay for watches that aren’t worth what they are paying. They are only worth it when the value/price is uniform and not discounted due to the manufacturer making too many watches. Maybe I’m niave, but having to face friends/clients and tell them their watch is only worth 35-40 cents on the dollar of what they paid, when these are supposedly valuable items is not the way it should be. Now if the business is part of the fashion industry, then that’s another matter altogether, and one that from recent showing in Basel may be. I don’t like the throw away society/aspect of the business, where last years models are out. It cheapens the hard work done those craftsmen from my perspective and creates valueless watches, which might as well be quartz models for a few hundred dollars as opposed to Haute Horology which is what the main brands are proffering to the buyers as why to buy!

3 June 2007

Tim Jackson - 3 June 2007

Dear Sir, Your article is written more from the perspective of the brands/manufacturers. Why do I say this, well as retailer who is asked to stock higher levels than is economically prudent and with the brands reluctant at best and not willing at their worst to take back non-selling models, I have first hand experience. The other part of the equation that you and everyone else seems to not talk about is value erosion of the brands from the clients/end buyers standpoint. The idea that there really is no established value owing to the consumer not knowing what he should pay for a watch, is it 5% off,10% off or 35% off list. And what is list/MSRP anyway. A pie in the sky price, sort of like a bogus appraisal on a piece of jewelry from the outfit that sold you a great deal and goes on to appraise the item for 2x what one paid for it! The buyer then walks away thinking they got a "good deal", when in fact they only got what they paid for. The grey market is the achilles heal of the watch business and one that needs to be addressed by the consumers who shell out their hard earned cash for items that are supposedly difficult to make or rare and should be sold at a uniform price level. No one likes to find out or feel they paid too much. So for the parallel market to exist ultimately benefits the manufacturer only. Given the record profits being made, which are widely reported and just by looking at all the revived & new brands emerging onto the market, there is something wrong with the picture. For an independent retailer to promote, inventory and sell a brands watches that can be found for a lot less on the web or in a grey market window makes little sense to me. I haven’t even touched on the brands boutiques which have product only available at the boutique. This might be fine if the independent retailers had access to the regular production items as easily as the boutiques, but when the company store gets preference I see a problem. From my perspective the retail landscape will change significantly in the next 5-10 years, the big groups will have their own retail outlets for individual brands, the production levels have to fall, there are just too many watches being produced for the market to properly absorb through the standard distribution channels, which is why the parallel market exists. From the consumers standpoint, less watches is better. If the consumers wake up one day and realize what is going on the landscape will look a whole lot different. In the luxury business value perception and uniform pricing is extremely important. One only has to look at Louis Vuitton to see how effective it is. Try going into a LV store and getting a discount for that purse or pair of shoes. I don’t see LV outlets anywhere in the malls. The watch business needs to wake up, both the retailers who sell on price/discount and the manufacturers who condone the "alternative" distribution channel, otherwise we’ll all be hurting. Why should consumers pay for watches that aren’t worth what they are paying. They are only worth it when the value/price is uniform and not discounted due to the manufacturer making too many watches. Maybe I’m niave, but having to face friends/clients and tell them their watch is only worth 35-40 cents on the dollar of what they paid, when these are supposedly valuable items is not the way it should be. Now if the business is part of the fashion industry, then that’s another matter altogether, and one that from recent showing in Basel may be. I don’t like the throw away society/aspect of the business, where last years models are out. It cheapens the hard work done those craftsmen from my perspective and creates valueless watches, which might as well be quartz models for a few hundred dollars as opposed to Haute Horology which is what the main brands are proffering to the buyers as why to buy!

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