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Fashion’s Dirty Secret: Millions in Grey Market Sales

The sale of luxury goods on the grey market is a lucrative and largely unspoken practice in the fashion industry. Why are brands so hush-hush about it and do they really want it to end?
Luxury handbags in a store | Source: Shutterstock
  • Sarah Shannon

LONDON, United Kingdom — Fashion's favourite poster boy of disruption Guram Gvasalia skewered the industry last year for its practice of quietly selling product on the grey market to boost sales, dubbing it the sector's "dirty secret." The Vetements co-founder told the Financial Times that luxury brands routinely inflated sales figures by allowing product to leak into "horrible" stores where it's sold at discount.

The grey market refers to the trade in goods from unofficial suppliers. The way this often works in luxury fashion is a retailer buys product at wholesale from a designer and instead of selling it directly to end consumers, sells it to another retailer or agent who isn’t approved by the brand and typically lacks the same aura of exclusivity as official sellers. The product is legitimate but sold via an unofficial channel, hence the term grey. (This is distinct from counterfeit goods, which are “black” market).

Often grey market sales are a play on price differentials. Retailers engaged in this practice typically buy product at wholesale prices, about one-third to half of recommended retail prices, and then resell it for a smaller margin to unauthorised retailers. When that unauthorised channel is based in another country — typically China, Japan, South Korea and the Middle East for luxury products — this is known as “parallel imports” because the product is sold in a market for which it was not intended and without the permission of the company that created it.

But many major luxury brands are known to turn a blind eye to such sales, or even sell directly to grey market players themselves to boost their sales revenues, with known Chinese grey market partners even coming to view product in their Paris and Milan showrooms, usually the preserve of an exclusive coterie of buyers and editors. One senior fashion insider close to several of the biggest global luxury houses described it as a “tap” that brands open or close, depending on their sales targets.

Few luxury brands will discuss the practice, though most participate in some form including Gucci, Prada, Dior, Louis Vuitton and Valentino, several sources confirmed. All of these brands declined to comment for this article.

Few luxury brands will discuss the practice, though most participate in some form.

“Brands tolerate grey market activity for the sake of making their short-term results better — never mind the long-term damage,” says Luca Solca, head of luxury goods at Exane BNP Paribas, referring to the impact on carefully cultivated luxury brands of having their products appear in sales channels that are less exclusive than official retailers. The grey market accounts for 5 to 10 percent of sales, Solca estimates.

"This is a huge issue," says Simon Lock, chief executive of online wholesale platform Ordre, which sells luxury labels from Stella McCartney to Charles Jeffrey's Loverboy to a range of boutiques and department stores worldwide. "It appears what happens is retailers will often over order on a wholesale basis and then resell at a small margin to an agent often in China or elsewhere. This agent will then open a legitimate online channel to generate direct-to-consumer sales or pretend they are an authorised distributor and sell to unsuspecting boutiques often selling the product at a substantial discount," Lock explains. This in turn "undermines any product that is positioned at recommended retail [prices] through an authentic channel be it online or bricks or mortar."

Much of the "parallel" market for luxury goods stems from boutiques in Italy, where smaller, independent stores dominate, as well as other markets in Europe home to luxury brands and the US, according to Mario Ortelli, managing partner of luxury advisors Ortelli & Co. "Traditionally the Italian and European stores, priced in euro, have the lowest prices, and Italy in comparison to other markets in Europe, is the one with the highest number of wholesale accounts, so this is a source for the grey markets. Then the other source is the US because traditionally the American brands, like Ralph Lauren and Coach, have got lower prices in the domestic market."

The brands most at risk are those that are most in demand, especially when it comes to their iconic, high-value, perennial products like Chanel's 2.55 handbag, Burberry's classic trench coat or Moncler's puffer jackets, says Ortelli. Those products offer better margins and less risk for unauthorised retailers. Comparatively a €300 Balenciaga T-shirt that's only in season for four months offers a shorter life cycle and lower margins, so is less appealing. Also, if a designer exits a brand, say Givenchy or Burberry, and the brand has unsold stock as they shift into its new designer's collection, they may sell that product in bulk to alternative channels like outlets and it can more easily end up on the grey market, adds Ortelli. One fashion insider who spoke on condition of anonymity said handbags and accessories are top of the list for grey market vendors, alongside "hot" items like Balenciaga sneakers and anything from Gucci.

Retailers will often over order on a wholesale basis and then resell at a small margin to an agent often in China.

So, what should luxury brands do about it?

Vetement’s Gvasalia says it’s a question of supply. Instead of over-producing goods that end up on the grey market, Vetements strictly limits supply to wholesale accounts to help retain desirability, he told the Financial Times. But selling less, albeit at full price, runs counter to the shareholder model of chasing sales growth.

Chanel, which is privately owned and sells its clothing and handbags exclusively via its own stores, took a different approach by harmonising prices globally in 2015 to avoid grey market sales by daigou or personal shoppers who buy goods on commission overseas to take advantage of tax reductions, but also better serve domestic customers in China and reduce reliance on European tourism.

"We were trendsetters in this matter and definitely believe that it was the right decision taken with a long-term vision: the resale market has decreased, the traffic in our boutiques is clearly more balanced and it has given us the opportunity to better serve our clients," says Bruno Pavlovsky, Chanel's president of fashion. "It also helped to fight against parallel resale markets, which benefited from these price differentials and jeopardised the business, the image and the exclusivity of Chanel."

It’s not a position that can as easily be taken by all, particularly smaller brands that rely heavily on wholesale. Arguably, some boutiques in certain markets are also better at selling some items than the brands themselves. There are also tax differences across geographies and fluctuating foreign exchange rates that can substantially impact on price adjustments and be costly for smaller players.

How much a brand tolerates the grey market is the big question.

If a luxury brand has, for example, a large outlet presence, coupled with reasonably sized parallel imports, its luxury status could easily be diluted. Yet, for highly in-demand brands, others argue some degree of paralleling is ok because the value of the brand is so high that a few leaks will not dent its desirability. Insiders say it varies depending on the chief executive, but it’s a decision taken at that level of management.

The tension for brands is keeping up the luxury reputation and prestige of the brand.

"You perfectly know, there are some boutiques taking excessive orders and some brands used to tolerate [this], but nowadays when a brand has strong momentum they are not willing to," says Ortelli.

Legally, brands have some rights to stop the grey market depending on where the product ends up and how it is sold, according to Julia Dickenson, a senior associate at law firm Baker McKenzie, who works with luxury brands. For example, if a product is sold to a luxury boutique in Italy and ends up in a local factory outlet at half price, the brand can claim the conditions in which it is sold damages its reputation and can try to prevent it being sold under EU trademark law.

One common way luxury brands protect themselves is to set up “selective distribution systems,” where in their contracts with distributors they set out how product must be sold, like imagery, location of stores in high-profile shopping streets, the number of staff in store and the training they receive. In 2016, Bulgari won a case in the Court of Catania, Italy, forcing an unauthorised dealer to stop selling its jewellery obtained from the grey market because the store did not meet the quality standards imposed by Bulgari on its distributors, thus harming its reputation.

Given grey market resellers are often based in Europe, why are luxury brands not taking more retailers to court for selling to the grey market?

“Absolutely conversations are taking place regularly between brands and distributors when they know leaks are taking place. Very few will actually make it to court because the brand can more simply stop the leak by engagement with the distributor and, as a final resort, by terminating their distribution contract,” says Dickenson. “These conversations can be difficult, particularly if the relationship with the distributor is a long-standing one, or the distributor is otherwise very important to the brand.” Brands will often start with a warning and move to restricting the volume of product a store receives before taking further action, she explains.

“The tension for brands is keeping up the luxury reputation and prestige of the brand,” says Dickenson, “in the face of the desire to sell more products.”

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