When the Apple Watch first launched, it only allowed for 12 contacts to be set as favorites. If you had more friends than that, well, you're popular; you were also out of luck.
With the release of Watch OS 2, Apple now lets you create different groups of contacts, complete with a title. Each circle is still limited to 12 people.
Parts of the process can be accomplished on the watch itself, but it's far easier to do on your iPhone. To begin editing and creating groups, launch the Watch app on your iPhone then scroll down and tap on Friends.
The standard friend circle is presented, only now you can swipe to the left to create a new group. Additionally, you can drag and drop a contact's avatar from one group to another. Small dots just above the "Blocked" title indicate how many groups you have, and which one you're currently viewing.
Along the top of the screen is a text field where you can label the group (friends, family, work, etc.). The label is presented on your watch's screen when you first scroll to the group, after which it's replaced by the contact's name.