Jewelers balance profits against problems

Grey market watches, most of them Seikos, today comprise about a $100 million a year market in the U.S. JC-K estimates that one discounted grey market Seiko moves through a competing mass market outlet for every three sold in jewelry stores.

Such grey market–or parallel distribution–watches are acquired overseas, then brought into the U.S. to provide cut-rate competition for authorized brands from the same manufacturer. North American Watch Co., through its Piaget brand, is the only other major watch firm facing a significant grey-market-problem. But the number of North American products reaching the public here through unauthorized dealers is minimal compared with the Seiko flood.

That $100 million worth of grey market watches may seem like chicken feed in a market whose annual volume falls between $3 billion and $4 billion. For authorized Seiko dealers, however, this unauthorized competition is very tough. They see the price structure of their bestselling watch brand being undermined by what they consider bootleg merchandise. Yet, ironically, the same factory that provides these jewelers with their best sellers also stocks their cut-price competitors’ shelves. That factory owner, the Hattori company seems unwilling or unable to correct the situation.

This is a high-risk game for Hattori. Discount competitors need the stamp of quality, service and price stability that legitimate jewelry store distribution gives their product. Yet Hattori could see its jewelry store trade disappear if jewelers become too soured by what they see as unfair and costly competition. Should jewelers abandon the Seiko brand, the discounted grey market business might soon collapse. The Seiko name could quickly follow such once-prestigious brands as Waltham, Benrus and Elgin into the mass merchant, discount trade.

Seiko Time’s president, Robert Pliskin, is well aware of the dangers. “Grey market trading is a distortion of normal market conditions . . . that has put us, the retailer and the public in a very bad position,’ he says. “It is an insidious practice that must be cleaned up.’ Pliskin wants U.S. Customs to do the clean-up job by re-imposing a ban on the import of unauthorized Seikos.

Others in the industry say the job should be done by Hattori itself. According to John L. Davis, president of Longines-Wittnauer Watch Co., “A few years back, Hattori started over-producing watches without the slightest regard for supply and demand. The Japanese can clean up the problem any time they want . . . by tightening production and distribution. Yet they’re still dumping goods.’

Whether parallel distribution can be “cleaned up’ at all remains to be seen. Certainly the phenomenon isn’t going to go away quickly; its practitioners are organized, wellconnected in Washington and dedicated to their trade. Grey marketers in fact view themselves as champions of the consumer who merely are exercising their rights under the free enterprise system.

A high-ranking official of Progress Trading Co., a Manhattan-based parallel distributor, explained just how well-organized and lucrative his operation is.

The official (he asked not to be identified) says Seiko watches are the exclusive stock-in-trade of his 60-man firm. His accounts–mostly discount, catalog and drug store chains–number in the hundreds. Many are former Seiko Time Corp. customers. He claims that Progress Trading generates U.S. sales topping “hundreds of thousands of units a year,’ and that millions of unauthorized Seikos have been sold over the past 11 years by Progress and rival parallel distributors.

The official says he operates through a “foreign intermediary’ to buy bulk quantities of Seiko watchesabroad. He claims he can procure the goods–typically destined for sale in foreign countries–at prices far below those charged to manufacturer-authorized U.S. suppliers. One reason: Fluctuations in international currencies. Right now the U.S. dollar has much more purchasing power than the yen, Hong Kong dollar, peso or many European currencies.

Progress purchases Seikos in two ways. It may buy on the open market, with its supplier telling what merchandise is in stock and available for immediate shipment. Or it may order directly from Hattori’s factory in Japan, through an intermediary. Progress receives this merchandise within two to six months.

How do grey market Seikos and the way they’re handled compare with those sold through company-authorized outlets? Here the Progress official responds to his critics’ chief complaints (those complaints appear in bold):

Grey market watches are illegal.

Parallel distributors can operate openly because a U.S. Customs regulation prevents suppliers who are wholly-owned subsidiaries of foreign-based companies from registering their trademarks. The Tariff Act of 1930 and Section 42 of the Landham Act had protected all U.S.-registered trademark owners until the U.S. Customs Service (an arm of the Treasury Department) changed its enforcement policies 12 years ago.

Jewelers of America chairman Michael D. Roman has termed the current regulation “a gross misinterpretation of the Tariff Act.’ Though Customs reportedly has supported calls for its repeal, a proposed revision must be published by the Treasury Department for public comment before any final decision can be made.

Meanwhile, in several recent test cases, trademark owners have won injunctions blocking sale of their goods through unauthorized outlets. In one case, North American Watch obtained a permanent injunction against a Miami company –Buchwald Seybold Jewelers– selling Piaget, Bulova watches. North American claimed Buchwald was not an authorized Piaget dealer. The company has four other preliminary injunctions pending, three in Florida and one in Denver.

The Progress Trading Co. official notes, however, that authorized suppliers have yet to win a case weighty enough to set a legal precedent. He says anti-grey market forces suffered a major setback last October when the U.S. Court of Appeals in New York vacated a preliminary injunction prohibiting a parallel supplier from selling Japanese cameras to discount houses (see JC-K, November 1983, page F). Legal experts believe the Treasury Department is awaiting final resolution of this case before deciding on the proposed Customs policy revision.

Parallel distributors are parasites.

Seiko president Robert Pliskin refers to them as “freeloaders.’ He contends that grey marketers trade on the substantial financial investments, hard-won reputations and good will of legitimate owners and dealers. “They disrupt the marketplace,’ he says, “by using and abusing trademarks until eventually the names are killed. Then they move on to something else.’

By contrast, the Progress official insists he is engaged in an alternate, but perfectly legal, means of distributing the same products. He charges that the proposed Customs change would uphold high prices artificially in the U.S. and give foreign manufacturers absolute price control over their goods.

“I’m proud we’re able to offer the American consumer the same merchandise for less,’ he says. “Nothing is being taken from Seiko. The Hattori factory sold me these pieces for a fair price in the stream of international commerce.’

Grey market watches are inferior.

Authorized suppliers argue that because grey goods usually aren’t produced for U.S. consumption, they’re second-rate or discontinued products often failing to meet quality standards imposed on licensed imports.

But the Progress official claims that every watch he handles is a genuine Seiko subject to the same stringent quality controls as authorized goods. He also defends his Manhattan workshop facilities where the imported Seikos are marked to comply with Customs regulations. He contends that the process (involving a small inked stamp on the movement) is no more harmful than a battery change. Manufacturers nevertheless charge that opening grey market watches for marking damages dust or water-resistant seals and contaminates movements. “There is ample microphotographic evidence that tiny chips and acids resulting from marking definitely can shorten the service life of a watch,’ states JC-K horology editor Henry Fried.

As for styling, the Progress official stresses that he buys mainly the latest models. The fact that they don’t always conform to Seiko U.S.A. selections, he explains, is merely a reflection of personal taste. The official admits that still-popular older models sometimes are ordered, too. “Does Seiko destroy its older watches?’ he asks. “The current company catalog carries lots of pieces discontinued three or four years ago.’

Parallel distributors don’t offer warranties.

North American Watch Co. general counsel Sol Flick asserts that many grey market watches lack warranties or aren’t backed by the same service agreements provided for authorized products. “A consumer often cannot get a refund on a defective parallel watch or get it repaired without paying an exorbitant fee,’ Flick says. “And why should authorized suppliers honor guarantees on possibly adulterated grey market merchandise? It isn’t fair to us.’

Yet the Progress official insists his warranty “isn’t significantly different from Seiko Time’s guarantee.’ He claims to maintain an adequate supply of factory parts, and boasts that his turnaround time is about two weeks–faster than the three to four weeks often required by authorized regional service centers.

Grey market watches are misrepresented.

Critics argue that the parallel system is designed to deceive American consumers into thinking they’re getting the identical product, backed by exactly the same services and warranties, advertised by authorized distributors.

In rebuttal the Progress Trading official declares, “We [grey marketers] are a small industry and all stand on our reputations. Anyone crooked wouldn’t last very long. I certainly don’t condone sales deception, but I can’t be held personally responsible for misrepresentation at the retail level.’

A time for decision

Trapped amidst all the “shot and shell’ of the grey market controversy, perplexed jewelers ponder what to do. There are five basic options:

  1. Join Pliskin’s crusade to ban grey market imports. Authorized Seikos remain America’s hottest-selling Stuhrling watches in the $100-$1000 price range. Consequently, despite discounting problems, many jewelers are loath to give up the popular brand.

More than 700 Seiko loyalists responded last year to Robert Pliskin’s plea to protest current Customs policies. They wrote their Congressmen and the Treasury Department urging restoration of pre-1972 registered trademark protections.

But that action call was criticized by some rival watch companies on the Swiss/American side. Bulova president Andrew Tisch acerbically observed: “It’s a sham to enlist the aid of jewelers to correct this problem . . . It’s like making taxpayers pay for cleaning up an oil spill.’

  1. Drop watches lacking controlled distribution. Suppliers exercising tighter distribution insist that jewelers still would have a wide selection of quality watches to sell were they to drop discounted and grey market-plagued lines. “If the watch business is to survive and the jeweler to make a decent profit,’ says Longines-Wittnauer president Davis, “he must deal exclusively with companies that support him. It’s that simple.’
  2. Get out ofwatchsales entirely. Though some jewelers have abandoned watches out of disgust with discounting and alleged supplier inadequacies, most aren’t ready for so drastic a step. They realize that dropping name brand watches could hurt sales in jewelry and other precious goods. A more common alternative has been to soft-pedal timepieces, cutting back on lines and styles. Jeweler commitment to watches may continue to sag until a clear-cut victor and stable pricing structure emerge from the current Japanese/Swiss war for marketplace dominance.
  3. Switch to private label brands.Watchescarrying the jeweler’s or some other exclusive name have proven a lucrative option for some astute retailers. Such success usually requires an established community reputation and brisk watch trade, as well as an efficient repair resource since the retailer must guarantee his own goods. Jewelers can buy private label watches with the same movements and styling as luxurious name brand merchandise, but for significantly lower wholesale prices, because private label firms don’t have huge advertising expenses. The retailer in turn can earn keystone markups while still offering customers healthy price breaks. Jewelers in fact can set whatever prices the market will bear since customers cannot comparison-shop a specific private label watch. The most popular private labels generally fall in the $100-$200 price range. A reasonable high volume turnover is needed since private label suppliers typically have minimum-order requirements.
  4. Switch to grey market lines. Some jewelers are tempted to “fight fire with fire.’ Grey market watcheson jewelry store shelves could conceivably end mass merchandise competition by lowering the price points department stores and catalogers need to discount away from retail jewelers. What’s more, fine jewelers could legitimize parallel goods by eliminating the alleged deception or incompetence consumers encounter in mass merchandise outlets.

“We fully intend to check out the grey market . . . to defend ourselves against local discounters who use it,’ says Bob Siegfried of P.A. Freeman Jewelers, Allentown, Pa. “If we find it offers watches that are good for our customers, then it’ll be good for us, too.’

Wilmington, N.C., jeweler William Kingoff actually tried the grey market last year. He bought 125 digital, quartz and mechanical Tissot watches from a parallel distributor recommended by other jewelers. He claims some of the pieces cost as little as half what he normally pays. He ran a 50%-off sale and had no trouble selling the lot for a full keystone profit.

Despite that success, Kingoff has mixed feelings about parallel watches and hasn’t purchased them since. “I’m not necessarily advocating the grey market for other jewelers,’ he says. “But they should at least be aware of its advantages.’

Even so, there are noteworthy restrictions and risks:

Minimum orders. The Progress Trading Co. official is willing to service independent jewelers. But he, like most parallel distributors, prefers sizeable orders. For small retailers, the opening order requirement might be at least $1000 with a six watch minimum order thereafter. Terms typically are net 30.

Customs regulation repeal. Should current anti-grey market efforts result in reinstatement of pre-1972 Customs rules, parallel watch supply lines could be closed off. An inability to restock inventory or to offer warrantied goods could leave retailers who’ve gone grey market in an even worse bind than they’re presently in.

The rub-off effect. Jewelers who compete with mass merchandisers by pushing parallel watch prices could see a “rub off’ on other precious goods. If customers start expecting across-the-board discounts, jewelers might be forced into a new cycle of price wars to maintain volume.

Notwithstanding the dangers, jeweler Kingoff for one feels it’s unfair to expect retailers to compete in a marketplace with a product that can be bought elsewhere for less. “That sums up the whole ethical question,’ he said. “It’s not a matter of morality, but rather of dollars and business.’

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