In China, the resale market (Daigou) is impacting luxury
By Fanny Tang30 mai 2023
«Daigou», the Chinese reselling market of products bought abroad by private individuals, impacts luxury due to its opaque networks and prices. The lack of traceability generates risks of counterfeiting and strong image damage.
The Daigou (in Chinese 代购, Dai = to replace, and Gou = to buy) is an informal transborder market in which individuals buy products abroad to resell them in China for a profit. Products can be of any kind but specifically impact luxury, as the price difference makes them much more attractive.
This type of trade emerged in 2008 in China with the Sanlu incident, a Chinese public health scandal during which toxic products were detected in powdered milk for infants. This catastrophe had led the country into a trust crisis towards powder milk. As of then, the Chinese population actively looked for different supply channels for powder milk among foreign brands. According to figures from "The Daigou Index" report published in 2020 by the Re-Hub platform, the Daigou market is valued annually at around 400 billion yen RMB (57 billion US dollars). In 2016, in what is also called the "Era of Shopping by universal procurement" ("全民代购时代" in Chinese) luxury product Daigou trade became extremely popular in China. Many Chinese consumers have sought ways to buy luxury products abroad that are not available or with high prices in China. Anyone living abroad or having access to foreign products could become a Daigou agent. The most used channel remains abroad still the WeChat mobile app, the most popular chatting platform in China, on which Daigou agents can share product photos or presentations with their friends.
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Reasons that enabled Daigou trade to prosper
Thanks to international luxury product online sales, it is no longer necessary to travel to buy a luxury bag from a French brand
Oscar Sand, general manager of L'Atelier Peony by OSCAR, an expert in luxury marketing and specialist in the Chinese market
The impact of Daigou trade on the luxury industry is complex to value. On the one hand, it generates an informal market expansion, as it allows luxury brands to gain new consumers indirectly. It offers a broader presence in the country, including in less accessible regions such as cities from the third circle. Furthermore, Daigou agents naturally handle promotion across their network on local and often opaque markets. Thanks to a better understanding of their client's preferences and competitors, they are often great sources of information, helpful to brands who wish to gain market shares and better penetrate the local market. The efforts input by Daigou agents on product promotion are, furthermore, cost-saving in marketing and advertising. However, on the brands' side, this lack of control regarding products in circulation among private networks represents a significant risk regarding brand image and regulation management. Indeed, the counterfeiting resale of luxury products bought outside of the official distribution system means high risks. Many cases of Daigou agents selling counterfeit products or potentially dangerous expired cosmetics have been recorded. Daigou trade can, therefore, strongly damage brand image and jeopardize the perceived value of the company.
Bernard Arnault, Chairman and CEO of LVMH, said he was opposed to this form of informal trade, which he even qualified as fraudulent, underlining the negative effects on the brand image during an online conference announcing the 2022 annual results. It is difficult to get a precise figure estimate regarding potential profits and losses for luxury brands when it comes to Daigou trade, but direct damages, such as a decrease of demand in Chinese shops, or indirect damages, such as effects on brand reputation related to counterfeit products, are apparent.
Yet, the key element that continues to feed interest in Daigou trade remains the significant price difference between luxury products in the Chinese and European markets. For example, the price of a Celine Triomphe canvas shopping bag is significantly higher in China ($ 3'675) than in Europe ($ 2'616), i.e., 40% higher than in France. One of Louis Vuitton's most popular bags, the Neverfull, is sold for 30% more in China ($ 2'280) than in Europe ($ 1'690), according to the Lectra platform's "Retviews data barometer" report. Daigou agents will, therefore, prioritize buying luxury goods in tax-free zones and reselling them on Chinese territory with a comfortable margin while remaining competitive.
The battle against Daigou trade is intensifying
One solution would be to reduce price disparities between the Chinese and foreign markets and adopt a strategy of unifying prices worldwide and across all brands. But this solution would require luxury companies to seek common ground and agreements, which is unlikely.
Oscar Sand, general manager of L'Atelier Peony by OSCAR, an expert in luxury marketing and specialist in the Chinese market, said, "Daigou trade has strongly reduced during the COVID-19 pandemic and travel restrictions. Today, it is active but in a lesser way."
Luxury brands are not alone in battling against the Daigou trade. Since 2019, the Chinese government has implemented regulations and systems to fight against this business, including verifying the online buyers' identity, reinforcing border regulations and surveillance of foreign purchases, and establishing blacklists of people and companies involved in fraud at the borders.
In parallel with an improvement of regulations and pricing strategies, brands are taking measures to improve distribution in China. The country is very advanced in e-commerce and encompasses many big players in online purchasing, such as Alibaba, Tmall, and JD.com, which are accessible internationally. These platforms, comparable to Amazon or eBay, are well implanted in China. "Chinese consumers feel increasingly at ease to buy online, specifically jewelry and affordable luxury products, and this is affecting Daigou. Thanks to international luxury product online sales, it is no longer necessary to travel to buy a luxury bag from a French brand," says Oscar Sand. Luxury brands have even accelerated their digital presence since the pandemic through these e-commerce platforms. Like Cartier, Prada, Louis Vuitton, and Estée Lauder, most luxury segments are now present online. The JD Luxury platform features over 300 major brands and some 50'000 products.
Another intriguing effect since the end of pandemic-related restrictions in China is the "Reverse Daigou" phenomenon. Chinese agents buy products made in Shenzhen deemed unobtainable elsewhere, cross the border with Hong Kong, and deliver them to consumers. Currently confined to low-cost and food products, this business could also grow in other sectors.
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