China's Daigou trade is expected to get a second wind as "Beijing plans to maintain its pandemic border restrictions for at least another year," the Wall Street Journal reported Tuesday, noting that the schedule was "tentative." for the second half, “2022 was set during a meeting of the country's cabinet and other government bodies last month. While Daigou's “surrogate shopping” practice – where professional shoppers buy products in other markets, including duty-free shops in South Korea, Japan and Australia for those on the mainland, avoiding import taxes and / or unharmonised prices – experienced a decline that led to a pandemic, and amid COVID travel and supply chain upheavals, Daigou activity has picked up again as Chinese consumers are constrained on the international travel front.
No small matter, daigou is a multi-billion dollar market, and Re-Hub found that the value of the parallel import trade – which revolves primarily around coveted luxury goods – has grown "exponentially" in recent years, to a market that is valued at $ 57 billion. As evidence of the power of this market, the tech company analyzed nearly 30,000 product listings on Alibaba's TaoBao marketplace in February of this year, with a particular focus on five of the most iconic luxury handbags in the Chinese market: Gucci's Marmont Bag, Celine's Box Bag, Loewes Puzzle and Prada's hobo. It found that Daigou sellers made more than $ 4.3 million from the sale of nearly 4,000 of the aforementioned bags.
Such robust demand has caused Daigou – described by Wang Jian, professor at the University of International Business and Economics, to be "a normal business practice due to the inevitable fact that market prices are different in different places." Over time from small-sized businesses to larger, more sophisticated, and professional companies as Chinese consumers yell to get their hands on luxury items that typically range from expensive skin care products to handbags without the sturdy markups, and the Chinese government continues to struggle to a potentially sizable source of losing tax income.
The ongoing travel and border restrictions in China announced this week will almost certainly help reinvigorate Daigou industry activity as luxury shoppers in China are forced to do much of their shopping at home (as opposed to international excursions). where there is often a significant price difference between luxury goods compared to selling in markets like Italy or France and in duty-free destinations like Hainan, an island in southern China. As we found out last week, despite the reduction in the price difference due to the reduction in import taxes by the Chinese government, which is actively seeking to reduce Chinese luxury spending, the price differences are still not even in many cases due to the partial lack of price harmonization of the brands.
While Bloomberg previously claimed that brands, especially small ones, “who don't have the resources to physically establish a business in China” have seen revenue growth thanks to Daigou sales, Re-Hub says that “it matters to brands is to control your brand ”. Image and quality assurance ”in connection with the Daigou trade“ through proactive steps ”, as the“ huge size (of this) market and the lack of control ”that brands have over pricing and their brand image“ can significantly disrupt sales and branding “Efforts.” This has resulted in brands having to balance soaring revenues (especially given the striking COVID sales slump) with the need to combat off-channel consumer behavior in order to maintain branding, an ongoing problem with luxury goods suppliers and customers the gray market in general.
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Louis Vuitton is a brand that appears to be taking direct action, "with such action reflecting" some concern about the increasingly Daigou-driven nature of these businesses ". Meanwhile, other brands like Chanel have moved to harmonize prices in recent years to promote what the French fashion brand initially called "a bold (move)" but was "in favor of our customers" and "pure." out of fairness, (because) it was no longer acceptable for us to allow significant price differences to arise. "
The future (and legality) of Daigou
What to expect from Daigou trade after the COVID boom, Bernstein suggests that the growth of the industry could very well "slow over time," with Chinese duty-free consumption in Korea for Daigou purposes on the course, for example will decline from 2024, a phenomenon that coincides with soaring duty-free sales in China and greater government efforts to keep newly recovered Chinese spending at home.
A hotspot in the evolving Daigou landscape that deserves attention: Hainan, the seductive island province in southern China which, according to Bernstein, "will grow 18-fold between 2019 and 2025" and, to a remarkable extent, a key to reducing consumption in China . One of the most recent references to what Bernstein calls the "Chinese government's drive to increase duty-free Chinese onshore spending" and thereby reduce Chinese Daigou purchases in countries like Korea? Around this time last year, Hainan increased its annual tax-free purchase allowance from 30,000 yuan ($ 4,633) to 100,000 yuan ($ 15,433) per person, expanded the range of duty-free goods from 38 to 45 categories, and increased the previous tax-free offer Limit of 8,000 yuan ($ 1,235) for a single product.
Regarding the legality of the Daigou trade, Ivy Liang, Vivian Desmonts, and Jamie Rowlands of Gowling WLG state that "China's current laws, regulations, and legal interpretations do not specifically provide for parallel import rules," and therefore there is "ambiguity" in In practice, "every parallel import case requires an individual analysis". (For one point of reference, in three cases from May 2020, the Guangzhou Intellectual Property Court allowed the parallel import of non-luxury goods on the basis that the products were real goods and thus the unauthorized import and sale was not possible "Does not violate the principles of good faith and recognized business ethics and therefore does not constitute unfair competition."
At the same time, King & Wood Mallesons partner Feng Xiaopeng told the Chinese news agency CGTN that "The Hainan Duty Free Offshore Shopping Ordinance published in July 2020 by the General Administration of Customs" encourages the purchase of "duty-free." -Shopping "forbids. to release free goods to others or to resell them on the mainland market in order to make a profit. ”However, uncertainty is not off the table as“ the actual conditions are much more complicated ”, especially since“ it is difficult for regulators to determine the limits of profit making 'to be determined ”.
Repeating this uncertainty, Wang Jian notes that it is difficult to say clearly that price arbitrage and parallel imports, which are at the heart of the Daigou trade, are illegal across the board. Instead, he says, Daigou is more accurately described as "actually taking advantage of political loopholes," which allows it to continue to thrive.