Grey market has become a necessary evil for luxury watchmakers

Silke Koltrowitz

* Swiss watch shipments down 10 pct in 2016

* Luxury brands face dilemma over unsold stock in demand

downturn

* Excess inventory often flows into grey market

* Some watchmakers cooperating with unofficial sellers

ZURICH, April 12 (Reuters) - 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: authorised

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.

"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

centres.

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)