What do China’s persistent border restrictions mean for luxury goods sales and Daigou trade?

The Chinese daigou trade is set to gain a new lease of life, as “Beijing plans to maintain its pandemic border restrictions for at least a year,” the The Wall Street Journal reported Tuesday, noting that a “tentative timeline for the second half of 2022 was set at a meeting of the country’s cabinet and other government bodies” last month. While daigou’s practice of “substitute shopping” – which sees professional buyers buying products in other markets, including duty-free shops in South Korea, Japan and Australia for those on the mainland, thus avoiding import taxes and / or non-harmonized prices – has seen a downturn leading to the pandemic and amid COVID travel and supply chain disruptions, daigou activity has resumed as consumers Chinese are limited on the international travel front.

This is no small feat, daigou is a multi-billion dollar market, with Re-Hub Search that the value of parallel import trade – which largely revolves around coveted luxury goods – has grown “exponentially” in recent years, amounting to an estimated market of $ 57 billion. Demonstrating the power of this market, the technology solutions company analyzed nearly 30,000 product listings in Alibaba’s TaoBao marketplace in February, with a focus on five of the market’s most iconic luxury handbags. Chinese: Gucci’s Marmont bag, Balenciaga’s hourglass, Céline’s Box Bag, Loewe’s Puzzle and Prada’s Hobo. He found that daigou vendors generated more than $ 4.3 million from the sale of nearly 4,000 of the aforementioned bags.

Such robust demand has seen daigou – which, according to Wang Jian, professor at the University of International Trade and Economics, is “a normal business practice based on the inevitable fact that market prices are different in different places.” – shift over time from small-scale operations to larger, more sophisticated and professional companies, as Chinese consumers clamor for luxury goods that typically range from expensive skin care to handbags without the hefty mark-ups, and the Chinese government continues to fight a potentially large source of tax revenue.

Increased activity

The lasting travel and border restrictions in China that were announced this week will almost certainly help revive activity in the daigou industry, as luxury shoppers in China are forced to do much of their shopping at home. home (as opposed to international excursions), where there is an often large gap between the prices of luxury goods compared to when they are sold in markets, like Italy or France, and in duty-free destinations like Hainan, an island in southern China. As we noted last week, despite a narrowing of the price gap resulting from the reduction in import-related taxes by the Chinese government, which is actively seeking to repatriate Chinese luxury spending, the rules of the game are prices are still not even in many cases due, in part, to a lack of price harmonization by brands.

While Bloomberg previously asserted that brands, especially small ones “who lack the resources to physically establish themselves in China” have benefited from an influx of income through sales of daigou, Re-Hub says “it is important for brands to control their brand image and quality assurance “in connection with the daigou trade” by taking proactive measures “since the” large size of [this] market and the lack of control “that brands have over pricing and branding” can significantly disrupt revenue and branding efforts. This has left brands to balance increasing revenue (especially in the context of falling COVID sales) with the need to crack down on out-of-channel consumer behavior to maintain branding, a constant issue in luxury goods. suppliers and the gray market in general.

Louis Vuitton is a brand that seems to act directly, with Moodie Davitt revealing earlier this month that the Paris-based luxury titan “is phasing out much of its downtown duty-free business, including its long-standing and expansive Korean presence,” such action reflecting “a certain concern over the increasingly daigou-oriented nature of these stores.Meanwhile, other brands, such as Chanel, have taken to harmonizing prices in recent years to promote what the French fashion brand called “a daring [move] initially “, but which was” in favor of our customers “and done” purely out of equity, [as] it was no longer acceptable for us to allow large price differentials to develop.

The future (and legality) of Daigou

As to what to expect from the daigou trade after the COVID boom, Bernstein suggests that industry growth may very well “slow down over time,” with Chinese duty-free consumption in Korea for purposes of de daigou, for example, is expected to start declining in 2024, a phenomenon that will coincide with increased duty-free sales in China and increased government efforts to keep newly recovered Chinese spending at home.

A hotspot that deserves special attention in the evolution of the daigou landscape: Hainan, the attractive island province in southern China, which “is expected to grow 18 times between 2019FY and 2025”, according to Bernstein, and to a notable extent , holds a key to containment of consumption in China. One of the latest indications of what Bernstein calls the “Chinese government’s effort to increase Chinese ‘onshore’ duty-free spending,” and thus reduce purchases of Chinese daigou in places like Korea? At the same time last year, Hainan increased its annual duty-free shopping quota from 30,000 yuan ($ 4,633) to 100,000 yuan ($ 15,433) per person, expanded the range of duty-free products from 38 categories to 45 and lifted the old tax exemption. limit of 8,000 yuan ($ 1,235) for a single product.

In terms of the legality of the daigou trade, Gowling WLG Ivy Liang, Vivian Desmonts and Jamie Rowlands state that “China’s current laws, regulations and judicial interpretations do not explicitly provide for the regulation of parallel imports”, and therefore, there is “ambiguity” as to the practice, with “each parallel import case requiring a case-by-case analysis. (For a reference point, in three cases from May 2020, the Guangzhou Intellectual Property Court allowed the parallel importation of non-luxury goods on the grounds that the goods were genuine goods and therefore the import and sale unauthorized “did not violate the principles of good faith and accepted business ethics and, therefore, did not constitute unfair competition.” “)

At the same time, Feng Xiaopeng, a partner of King & Wood Mallesons, told Chinese newspaper CGTN that “the Hainan Overseas Duty Free Purchase Regulation issued by the General Customs Administration in July 2020” prohibits the purchase of “goods outside taxes for others or resell them “. in the mainland market with the aim of making a profit. However, the uncertainty is not ruled out, as “the real world conditions are much more complicated”, especially since “it is difficult for regulators to determine the limits of” profit making “.

Wang Jian echoed this uncertainty, saying it is difficult to state clearly that price arbitrage and parallel imports, which are at the heart of the daigou trade, are illegal in all areas. Instead, he says, daigou is more accurately described as “genuinely exploiting policy loopholes,” which continues to allow it to thrive.

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