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by Stacy Perman

The gray market for luxury watches—that colorful internet-driven bazaar of unauthorized sellers often offering 40%-plus discounts on fine timepieces—is upending the global watch industry. It’s also just the latest manifestation of troubles whirring under the hood of the business, already hit hard by economic and political gyrations and China’s crackdown on corruption.

According to the Federation of the Swiss Watch Industry, last year exports fell nearly 10% to $19.4 billion, its steepest decline since the global financial markets collapsed in 2009. Sales fell 25% in Hong Kong and 9.1% in the U.S.

Sellers like those at the Dubai Gold Souk work with some authorized watch dealers to sell off discounted inventory. eye35/Alamy

Consider the fate of Whit Haydon, who began selling watches thirty years ago as an authorized dealer for brands like Patek Philippe, Jaeger LeCoultre, and Cartierat his Raleigh, North Carolina jewelry shop Haydon & Co. At that time the gray market “for all intents and purposes was non-existent.” That’s all changed. In 2009, with clients calling him up after comparison shopping online and asking him to undercut his own prices at a loss, he stopped selling timepieces altogether. “The gray market has grown to the point where I think they may sell more watches than authorized dealers do,” he says.

The industry’s most recent problems are a boon for the gray market, as overcapacity at the luxury watch brands has created a flood of inventory that is being hawked online. Websites like Jomashop.com advertise Omega Speedmasters at 42% off the list price; IWC Portuguese Chronographs are listed at 29% below retail at WatchWarehouse.com; and limited-edition Hublot Big Bangs are hawked at 35% off by PrestigeTime.com.

Industry sources tell us that sellers from 47th Street in Manhattan to the Gold Souk in Dubai, who once trafficked solely in preowned watches, are now quietly working in league with authorized dealers. Eager to offload their stalled inventories, some authorized dealers act as suppliers to the gray market.

Here’s how it works: A customer goes to one of these gray-market dealers and requests a particular watch. The dealer calls up an authorized dealer and buys the watch, for perhaps a 40% discount. Then the gray-market dealer, in turn, sells it to the customer at 30% off list and pockets the 10% difference.

According to various industry experts who spoke with Barron’s Penta, the luxury brands are aware of the practice and have simply turned a blind eye to it—at least publicly. For the moment, it’s a necessary evil needed to clear out excess inventory.

Internet forums and blogs have demystified the business and new digital entrants are changing the industry. Chrono24 is an online marketplace for new and preowned watches, based in Karlsruhe, Germany, that publishes all the available information about a watch, including its price. Co-founder Tim Stracke says that about 50% of the site’s listed pieces are new or “as new” (mint condition, unworn). Nearly 300,000 watches from Audemars Piguet to Zenith are offered from some 90 countries, by over 2,000 of the website’s dealers who are screened and preapproved. Last year, $750 million worth of watches were sold through Chrono24. Stracke claims sales are heading toward $1 billion.

Dealers pay a monthly subscription fee to list their watches on the site. Each watch is accompanied by a catalog of information, including the country of origin and the dealer’s name and contact details. Shoppers can opt to buy at the price advertised or make a counteroffer, enabling them to view comparables in multiple countries.

“The biggest impact we’ve had on the industry is that we’ve created a global price transparency that’s become a de facto standard among dealers,” says Stracke. That means a watch buyer in Silicon Valley can now confidently walk into a local jeweler and compare the watch’s local retail price to its global “spot” price listed on the German website—and see if he is getting a fair deal.

Chrono24 has also reduced the buyer’s risk through its “Trusted Checkout,” an escrow-type system whereby the site holds on to the buyer’s payment until the watch has reached them and they’ve accepted delivery.

Available deals? We recently found a platinum A. Lange & Söhne Datograph Perpetual Calendar Chronograph for 40% off list price, and an Audemars Piguet AP Royal Oak 41 in stainless steel with a black dial offered at a 20% discount. Stracke says Chrono24’s reach and scope also allows buyers to find in-demand but hard-to-obtain watches, like a new Rolex Daytona in stainless steel. “You will pay market price” in such cases, he says, “but unlike a store that will tell you to come back in five years, you can get it the next day.”

Another model making waves is Bob’s Watches in Huntington Beach, Calif., an online exchange for buying and selling vintage and preowned Rolex watches. It offers full-disclosure on pricing and guarantees that each timepiece is a 100% authentic Rolex, including its parts. Paul Altieri, who relaunched the site seven years ago after acquiring the domain name, modeled it on a stock exchange.

“We thought buying watches should be like buying IBM stock,” he says. “You go online and see the bid and ask—no questions, it’s completely transparent. It’s worked well for stocks. Why not for watches?”

A Rolex Daytona White 16523 two-tone is available, for example, on Bob’s lists for $9,795; he will buy the same model from you for $6,800. By disclosing the markup, Altieri has lifted the veil on the shady practice of those dealers who buy on the cheap and then inflate the price for resale, in some cases by as much as 100%.

Such openness has helped make Bob’s Watches one of the country’s biggest Rolex dealers. Altieri says he makes 700 to 800 transactions a month. In six years, business is up tenfold, from $2 million in revenue in 2010 to $20 million last year.

Seduced into buying a luxury watch on the gray market? There are pitfalls. Most brands will not honor a warranty on a timepiece purchased from an unauthorized dealer; you could be on the hook for any servicing or repairs.

The gray market largely moves excess inventory, which means much of what buyers are looking at are closeouts from an earlier season. And sometimes a watch’s condition has been compromised through handling, storage, detailing, or overpolishing, all of which can impact its value.

Worse still are “Frankenwatches,” timepieces built from age-appropriate but non-genuine parts that almost lose their entire value in the collectors market. A buyer may also unwittingly purchase a stolen watch or a fake. “The Asians have figured out not only how to make very good fake watches but also very good fake seals,” says an industry veteran. “You buy a watch as an investment, and six years later you open it only to find it was bogus. That kind of thing wouldn’t happen with an authorized dealer.”

Still, for the moment, there’s a buyer’s market in watches. John Reardon, international head of watches at Christie’s, tells us that such internet price comparisons mean the days of walking into a store and buying a high-end watch at full retail are numbered.

“The new marketplace empowers the end consumer to buy confidently at a price level that is justified by comparables and not simply dictated,” Reardon says.

One man’s gray is another’s gold.