The gray market for watches has become a big business—and it’s hurting traditional retailers

There has been a lot of talk about the disruptive impact of e-tail on jewelry, and in particular how Blue Nile has dampened diamond margins. But online has also sunk its tentacles into the watch market—as evidenced by some jewelers’ complaints last holiday season.

Many watch brands don’t sell product online or allow their customers to. But that doesn’t account for the gray market—the legal (blessed by the Supreme Court!) channel for watches procured by, as one commentator puts it, “irregular but not illegal means.” Sometimes gray market goods were originally meant for overseas but end up getting sold (for less) stateside. Sometimes they comprise excess inventory dumped by retailers. They are authorized items, sold in unauthorized ways.

And business in booming. The leading e-tailer selling gray market watches, Jomashop, racked up $140 million in sales in 2014, according to Internet Retailer.  According to a survey by think tank L2, gray market sellers occupy 22 percent of the first three organic watch search results on Google.

Perhaps not surprisingly, a new study by Blueshift Research—summarized here—found that all this is taking a bite out of traditional watch sales at retail.

“People aren’t buying fewer watches,” Ariel Adams wrote recently on ABlogtoWatch. “The problem is that watches are not sold via the ‘official’ authorized channels. Thus, watch sales are high, but the official numbers coming from the authorized channels make it look like sales overall are down.”

Adams tells JCK that stores such as Jomashop have “professionalized” the gray market.

“When the gray market first came around, it was kind of shady,” he says. “You didn’t know if you were buying a real product. Now the word has gotten out.”

Of course, most watch companies won’t service gray market goods, though Adams says, “That’s no big deal. Most watch warranties are not particularly valuable. The consumer doesn’t get anything but some vague notion of safety.”

The larger problem is an industry glut, fueled by the economic problems in Asia, which has led to a clogged and overstuffed watch pipeline.

“China, Russia, all these countries were doing well for a long time,” says Steven Kaiser, president of Kaiser Time. “People tend to buy heavily when things are good. Now you have a drastic slowdown in the business. The distributors and retailers, what are they going to do, especially if someone come around and says, ‘I will give you 30 cents on the dollar.’ ”

So, even though manufacturers steadfastly refuse to endorse the gray market, with all the world turmoil, some watch manufacturers may be giving this unofficial channel their unofficial blessing.

“I have all kinds of contacts in the gray market world that talk about going directly to Switzerland and buying from the factories,” Adams says. “While the brands publicly admonish these sites, they have direct relationships with the brands that the brands will never admit.”

Rolex and Patek Philippe both do good jobs at controlling distribution—and both are, not incidentally, privately held companies that look to the long term.

“If the brands really wanted to, they could clear things up,” Adams argues. “A lot of the brands have favorite distributors, and they put their hands over their eyes. They may not know everything that is going on, but for the most part they do.”

Ultimately, Adams believes brick-and-mortar stores need to tell manufacturers to clamp down.

“Retailers really need to take a stand against the brands,” Adams says. “They need to communicate that this is not a sustainable approach. And they need to take a long hard look at the smaller, independent brands.”

Kaiser feels that cut-rate pricing could hurt the industry’s image in the long run: “It teaches the consumer to buy at a huge discount. You don’t want to train the consumer to buy at 30 percent off.”

With the internet now a haven for unauthorized sales, some are thinking it may be time for watch companies to start authorizing the real deal. Kaiser believes that will happen soon.

“If have a watch and I lose it, I don’t want to have to go to the store and buy a new one,” he says. “I think eventually online sales are going to happen as long as the retailer gets credit and it’s at the right price. I don’t think it will kill stores. There are some people who just want to shop online. This is another way to capture clients but still do it in a luxury setting.”

Still, even then, the gray market might be a problem.

“You can go on Cartier’s site and you can purchase a majority of watches,” Adams says. “But then you can get the same watches for less on Jomashop.”

Follow JCK on Instagram: @jckmagazine
Follow JCK on Twitter: @jckmagazine
Follow JCK on Facebook: @jckmagazine