I really hope that this is just a policy that they publish to reduce hassle and inconvenience, but that they don't enforce
I'd assume that they do enforce the policy, because the work necessary to "not enforce" could be substantial.
I guess you have to define "hassle and inconvenience." A high percentage of items (not just watches, but phones, iPads, etc.) are replaced rather than repaired. Consider the systems that would have to be in place to make sure a particular watch band (or Otterbox case, charging cable, SIM card) makes its way to the department that ships those replacements and is reliably reunited with the correct replacement unit. If the items are repaired rather than replaced, those extra items have to either travel with the item throughout the repair process, or be stored elsewhere and, again, reunited prior to return shipping.
These aren't small workshops; they're factory-sized facilities, with hundreds or perhaps thousands of employees spread over large distances. No doubt work in the facility is highly compartmentalized for maximum industrial efficiency. Those various departments might even be in separate buildings.
A system that would reliably ensure that watch bands (or again, Otterbox cases, charging cables, SIM cards...) would either follow the item throughout the repair process, or be set aside in storage so that it could be reunited with its owner would have to be very robust. That's a lot of work for the sake of people who fail to follow instructions.
I think it's more than a hassle. There would be errors. This is a matter of refusing to accept
responsibility for something that is not required during the repair. When a particular-color band that was sold for six months four years ago is sent to the wrong person, that's actually two people who get the wrong item (or one gets a "gift" and the other gets nothing). Will they have identical replacements for (potentially) discontinued items sitting in a warehouse? If we're talking about an Otterbox or a non-Apple watch band, should Apple have to locate and purchase a replacement? What of the lost time and inconvenience while the error is sorted? There will be unhappy customers.
I've had a Watch repaired a couple of years ago. As others have noted, the packing materials and instructions sent by Apple made it very clear that they didn't want me to send in my Milanese Loop band. I was glad for that. It's little different than the auto repair shop that has a sign "Not responsible for personal items left in the vehicle." At least in your local repair shop the number of employees is small, so loss/theft doesn't happen all that often. In an industrial-sized enterprise??
