Luxury Braces for the Return of the ‘Daigou’
Luxury industry leaders have been keeping a close eye on China’s recovery this month. While key barometers like company earnings, GDP growth and outbound tourism levels are certainly illuminating, they’re not the only way to track the all-important market as it enters the final reopening phase. A controversial but no less revealing indicator to consider is the health of the daigou trade.
For one brief moment after the onset of the pandemic, it looked like China’s grey market resellers had reached the end of the road. Travel restrictions put a halt to much of the lucrative daigou trade, turning some of the biggest international hubs into ghost towns. The duty-free zone at the airport in Jeju, South Korea often featured a buzzing hive of resellers, but the pandemic emptied it of the usual crowd frantically unwrapping packaging from makeup and designer handbags before stuffing them into their suitcases to take into China.
“Instead of personally carrying products back into China, daigou sellers had to shift entirely to using cross-border mail services, which became more expensive and less reliable during the pandemic,” said Jacob Cooke, the Beijing-based chief executive of WPIC Marketing and Technologies, a company that helps brands formulate China market strategies. “This raised costs and eroded margins for daigou sellers, so tonnes of players exited.”
Despite these very real setbacks, the daigou resellers who kept trading managed to get by. Some shifted their focus to the domestic duty-free island of Hainan. Now, with China’s international travel corridors reopening, there are signs that the overseas trade could be making a big comeback.
For one, daigou adverts on WeChat and Taobao are up and running in greater numbers. One Canada-based reseller who uses the handle Bangni and has been in the business for six years announced that she would resume travelling to China next month and was taking pre-orders in her WeChat groups.
Another reseller, who advertises herself as Hong Kong-based and uses a professional WeChat account called HKDG for business, has been recently posting May Labour Day promotional cosmetics products. Although she has been full-time trading for the last five years, mailing goods while borders were closed, the frequency of posts on her account has increased since February.
Major luxury brands, long frustrated by the daigou trade, will no doubt be monitoring the results of this activity as it affects their performance in the China market.
In 2019, the year before the pandemic hit, the annual daigou trade (all parallel imports into China) was estimated to have reached around $57 billion, according to data analytics firm Re-hub. That’s a staggering amount considering luxury sales in China were worth $60 billion in 2021, according to Bain & Co — and that was only achieved after the repatriation of spending forced Chinese consumers to buy domestically during strict ‘zero-Covid’ lockdowns.
When China’s borders were shut, 95 percent of South Korean duty-free sales were from daigou, according to the Moodie-Davitt Report. Last year, even though visits by Chinese nationals to South Korea were over 90 percent lower than in 2019, duty-free sales remained at approximately 70 percent of 2019 levels, according to Bain. This implies professional daigou traders made up for the volumes.
Even Bernard Arnault commented on the global phenomenon. “I mean it’s quite fascinating to see the duty-free stores where there’s nobody — because their airports were empty — [and yet they] were generating huge sales,” the LVMH chief executive said after a January earnings briefing.
“Why? Because the products never arrived on the stands. They went straight from the inventory… to the… [daigou] who sold them on a discount in China. I mean, for your image, there is nothing worse. It’s dreadful,” he added.
Despite protestations from luxury executives, a brand’s popularity with daigou isn’t always a bad thing, suggest some industry experts. “They’re a useful tool to assess popularity and market opportunity, and ultimately the brand has profited from the original daigou purchase,” Cooke said.
It’s once the brand officially enters the China market that the drawbacks mount.
“That’s for several reasons,” Cooke explained. “First, daigou can serve as clear evidence to the consumer of a price gap, which hurts the brand’s reputation. Second, the brand benefits when it owns the sales channel because then it gets more customer data, which is key to growing sales. Moreover, the brand should be controlling how the brand is presented in the market.”
Price gaps between products in mainland China and other geographies continue to provide an opportunity for arbitrage, despite ‘harmonisation’ strategies by brands like Chanel early in the pandemic.
According to Morgan Stanley, which looked at average product prices in January, a Louis Vuitton handbag in China was 34 percent more expensive than in Europe, while a Gucci handbag was 42 percent and a Moncler down-jacket was 57 percent more expensive. A Bain comparison in February of leading products in the luxury leather goods segment found a price gap range of 25 to 45 percent between China and Europe, while watches and jewellery were less affected, usually with gaps of between 5 to 10 percent.
Now that travel is once again an option for Chinese consumers, shopping overseas has resumed in nearby destinations. Duty free sales in South Korea surged almost 37 percent month-on-month to 1.09 trillion won ($838.9 million) in February, according to the Korea Duty Free Shops Association.
Though it is unclear what proportion of recent duty-free sales are to daigou versus the end-consumer, pent-up demand for travel has made all shoppers acutely aware of current price gaps. Brands that may have relied on the pandemic’s closed borders and neglected to consider mitigation strategies can no longer afford to do so.
Yet the retail landscape has shifted significantly in China in the last three years, narrowing the space for daigou operators to manoeuvre. When over 90 percent of luxury spending was repatriated to China, many brands made key investments in the mainland market, from expanding their retail footprint and investing in CRM to optimising their product assortment and speed of store replenishment.
Although price is a key consideration for shoppers, the convenience of local access, the quality of the retail experience provided from an official store channel and the advantage of getting the product immediately can help offset a mild price gap. Another blow for daigou sellers is the increase of selling cross-border directly to consumers using online platforms like Alibaba’s Tmall Global.
“With the government and platforms investing big in cross-border infrastructure, it’s becoming much easier and cheaper for brands to set up an official cross-border sales channel,” said Cooke. “So as more brands set up official channels, that’s undercutting daigou even when there is a price gap.”
“The other advantage of daigou used to be speed of delivery, but now brands can store cross-border inventory in a free trade zone warehouse. For example, we have a warehouse in Nanjing’s Longtan bonded zone, so our brands that have cross-border stores can actually put their inventory in China, and it gets delivered to the consumer within days.”
There are other ways to reduce price arbitrage. Akshay Madane, a partner at consultancy Kearney, said that while it’s unrealistic for most luxury fashion brands to manufacture in China, high-end cosmetic brands could consider local manufacturing, which avoids import taxes, and is a set-up companies like L’Oréal use. “If it doesn’t have to go in and out of the market, it means it could still be acquired at a relatively decent price point [by the consumer],” Madane said.
But of all the factors that impact the post-pandemic daigou trade, the biggest one is arguably the extent to which the Chinese authorities plan to expand the domestic duty-free market in Hainan and beyond to other mainland destinations. While the government issued directives last year saying it would clamp down on daigou activity in Hainan, it has been hazy on how controls would be implemented.
Hainan duty free sales, already a $10 billion market in 2021, are expected to mushroom to $47 billion by 2025 according to a KPMG report, driven by a spending cap per person of 100,000 yuan ($14,000) the most generous duty free allowance in the world. That year is also when the entire island province’s retail sector will turn duty-free, up from the current scope of just 12 licensed duty-free shopping malls. New duty free zones in mainland Chinese cities like Shenzhen and Fuzhou are also in the pipeline.
While South Korea and Japan are likely to remain the preferred destination for north Asia-based daigou due to the proximity and maturity of the retail market in those countries, Hainan will grow as a draw for resellers in the south, according to Benjamin Sun, managing director of digital agency Think China.
Hainan’s continued growth could further affect Hong Kong, Sun added, but it depends on the kind of reseller. For grassroots or mid-tier daigou who are very cost-conscious, the expense of traveling to Hainan won’t make sense compared to the easy train, car and flight connections from Hong Kong. For larger-scale traders however, Hainan represents an attractive option.
In the long-term, Madane believes that daigou traders’ prospects will vary according to the motivations of the clients using them.
“A lot of the personal shopping that is more related to the price point will get absorbed [into official channels],” Madane predicted, “but personal shoppers who are getting used for their knowledge of the product probably won’t go away.”
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