The Preowned Balancing Act

Why does anyone buy a brand new Swiss watch from an authorized dealer? There are certain "obvious" answers, such as Rolex, Patek and their ilk, wherein the market price of a preowned watch is well above retail. If you buy at retail, the AD is effectively giving you money. But I'd like to look at some other brands, where the answer is not as obvious. Take, for example, the Longines Hydroconquest reference L37414966.

The Longines Hydroconquest on the grey market.

This is a 39mm automatic blue dialed dive watch with rotating bezel and date complication on a steel bracelet. The watch runs off an ETA 2892 based movement with a long 64 hour power reserve. The retail price for this timepiece is $1,275. The watch is available new, on the grey market (Jomashop), for $895, a 30% discount. Watchrecon finds this reference available from a private seller for $610, which is more than a 50% discount from the retail price. Carfax claims that a new car typically depreciates by 20% when driven "off the lot" (in its first year).

Longines Hydroconquest preowned listing.

Certain new watches seem to have that beat, hands down.

There are a number of reasons why a buyer might source from an AD despite a higher price. The first is impulsivity and / or a lack of information. The buyer may not take the time to look at grey market and / or preowned prices and, therefore, they may not know how much they are overpaying. Another explanation would be lower risk. Warranty terms and condition are clear and obvious when buying new. A third reason might be the buying "experience." Perhaps you enjoy hanging out with your AD and you just want to support their business or build a relationship so that you can perhaps gain access to more scarce brands, eventually.

The reality is, though, that buyers who do research and have some level of risk tolerance will choose preowned / grey market over authorized channels for buying watches. This means there is a kind of parity between the preowned / grey market and authorized dealers. As preowned / grey prices fall, ADs will lose more buyers to that channel. A reduction of uncertainty in those channels (perhaps due to more reliable return policies, supplement warranties, and / or quality assurance of some sort) would do likewise. eBay's new authentication service, for example, increases competition with the AD channel and represents a challenge.

It is with this in mind that I'd like to turn to a novel initiative involving Grand Seiko owners in the United States: the GS9 Club. The club was announced towards the end of 2020. It is an outbranch of a club which first opened in Japan a few years ago. In order to become a member of the GS9 Club, you must show that you bought a new Grand Seiko watch from an authorized dealer (Boutique, Salon or Mastershop) since March 23, 2017. The perks are outlined on the club's web page. Rather than concentrate on those details, I'd like to explore the impact of this kind of offering on the market for Grand Seiko watches, although the analysis would really apply to any brand. I think this analysis is important because, as we'll see, this is a brand strategy for bolstering the authorized channel, potentially. It is also a strategy with some potential unintended consequences.

The first, and most direct, impact of this strategy is something I'll call "buyer stealing." Suppose a buyer is considering the purchase of a Grand Seiko watch or a similarly priced IWC watch. The existence of the GS9 Club might be the "nudge" which puts the buyer's dollars in Grand Seiko's till. My guess is that this was the primary reason the brand introduced GS9.

Here, I'd like to explore another likely side-effect of perks such as GS9: the "collector composition" effect. For this part of the discussion, I'll need to make use of a couple graphs representing standard models of supply and demand. To begin, let's consider the pre-GS9 club market for new watches. Hypothetical market characteristics for new watch purchases are presented in Figure 1.

Figure 1: New GS Market pre GS9 Club

The red line is a standard demand curve while the blue line assumes that Grand Seiko will only produce 1000 watches no matter the price. The market clearing equilibrium price, in which all produced Grand Seikos are sold, is given by the dashed line at $8,000.

The second graph, presented in Figure 2, represents the market for preowned Grand Seikos. The red and blue lines represent demand and supply, again. I hypothetically assume that there are 1,000 preowned Grand Seikos available on the market.

Figure 2: Preowned GS Market pre GS9 Club

The preowned Grand Seiko market will clear at a price of $3,000.

Although there are obviously some serious assumptions in these graphs, they qualitatively capture the reality that new Grand Seikos are dearer than preowned. There is a premium on new Grand Seikos of $5,000 under these hypotheticals. Let's now introduce the GS9 Club. Buying a new GS from an AD is now a bundled proposition. You get the watch but you also get the experience and benefits offered by the club. Placing a dollar value on that proposition is quite subjective. But let's suppose that there are a group of preowned buyers who would be willing to pay $3,500 more for a new Grand Seiko (relative to preowned).

Without the GS9 club, such buyers are priced out of an AD purchase. However, if these individuals value the GS9 Club at $1,500 or more, then they will switch from buying preowned to buying new. While this may seem like a high bar for club valuation, consider that the valuation is amortized over the life of the owner. You aren't excommunicated from the GS9 Club if your sell your GS! Although it is a little amusing to consider the idea of a Grand Seiko Owners Inquisition. If you expect to live 20 more years, then this boils down to $75 per year, which appears quite reasonable.

For the sake of argument, assume that after the GS9 Club announcement, 200 buyers switch from the preowned market to the market for new Grand Seikos. Let's begin with the impact on the preowned market. The new graph for this market, presented in Figure 3, shows that there is a new demand curve (drawn in purple and labelled Demand') to the southwest of the original demand curve.

Figure 3: New GS Market post GS9 Club

This shows that the introduction of the club will likely soften demand for preowned timepieces. This also means that the price of those timepieces will fall to a new equilibrium, which is, in this case, $2,600. The good news is that Grand Seiko will become more accessible, at least in terms of preowned examples. The bad news is that collectors will see the value of their watches decline.

Turning to the AD channel for new watch purchases, in Figure 4 I illustrate the impact of the collector composition effect. The demand curve shifts right as the 200 vintage buyers switch to new watch purchases.

Figure 4: preown GS Market post GS9 Club

The new demand curve is drawn in purple and labelled Demand'. Consequently, the price increases to a new equilibrium value of $8,400. This clearly benefits ADs and Grand Seiko in terms of revenue (which is the obvious intent behand the club's introduction). The higher price can reinforce the perception of luxury and exclusivity. The downside for collectors is that new Grand Seikos become less accessible. It is important to note that Figure 4 does not include the buyer stealing effect, which would also serve to increase new Grand Seiko prices.

In conclusion, offering perks associated with an AD purchase is clearly a viable option for boosting sales through official channels. There are two benefits to a brand in pursuing this strategy: drawing collectors from other brands and shifting buyers from the preowned market to ADs. There are secondary benefits such as: 1) raising the price and perceived exclusivity of the brand and 2) lowering the price of preowned watches, thereby increasing accessibility. It is important to note, though, that there are unanticipated consequences, such as diminishing the value of Grand Seikos already in watchboxes as well as reduced accessibility of new references. Whether a brand, on net, financially benefits from this new perk remains to be seen. Clearly, though, the potential for GS9 Club to build and enhance community among collectors and enthusiasts is a promising development.