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Is It Game Over for China’s Grey Market Sellers?

A global pandemic is bad news for any number of businesses, but for Chinese daigou agents, strict travel limits and tighter regulations are putting the future of their entire industry at risk.
A shopper browses handbags and wallets inside a Furla SpA store in Hong Kong | Source: Getty Images
By
  • Casey Hall
BoF PROFESSIONAL

SHANGHAI, China —  When Xiao Xiang began working on his PhD at a university in the southern boomtown of Shenzhen a few years ago, he quickly came to two realisations: first, a little extra money would be nice. Second, his financial problems could be solved by going shopping.

If he spent a few hours of each weekend shopping with his friends across the border in neighbouring Hong Kong (a tax haven free from the tariffs on imported goods levied in the mainland), it was easy enough for Xiao to resell the beauty products he purchased to his 800 contacts on WeChat with a small mark-up, pocketing the difference.

So, Xiao became what is known in China as a daigou agent, one of an army of globally deployed professional Chinese shoppers who buys on behalf of others.

It was easy money, especially for students with extra time for side hustles, and demand was high from consumers within China.

China's opening up to the West came with an explosion of overseas trips and students sent to study abroad. That helped propel the grey industry, with purchasing agents of varying levels of professionalism in Paris, London, Milan, Korea and Hong Kong driving sales worth $7.5 billion each year, according to one 2016 estimate from Bain & Co.

It was easy money, especially for students with extra time for side hustles, and demand was high from consumers within China eager to access high-quality, internationally-branded products for less. According to Xiao, his clientele has long been partial to brands including Estée Lauder, Lancome, SK-II, MAC and Kiehl's.

This year, of course, the ability to pop across international borders for shopping trips has been virtually eliminated. The 170 million outbound trips Chinese travellers racked up in 2019 are likely to drop by somewhere between 58 and 78 percent in 2020, according to United Nations estimates.

The pandemic has been a disaster for many daigou agents. More than 80 percent of surrogate shoppers (largely based in the US) said in April that Covid-19 and its related travel restrictions, store closures and broader economic impacts had a negative effect on their business, according to a survey conducted as part of a joint research project between China Luxury Advisors (CLA) and YouWorld. For professional shoppers based overseas, longer postage times combined with lower consumer demand from China were cited as causing the biggest business headaches.

“It's getting harder and harder to do daigou,” explained Xiao, who has been relying on friends in Hong Kong to buy products and have them couriered to Shenzhen since the border closed to Chinese tourists at the end of March. Though he is quick to clarify that it’s not just the pandemic making life difficult.

“There is a lot of competition and [harsher government crackdowns] so I am making only a little money from daigou these days,” he added.

For many brands, Daigou represent a potentially important, though uneasy, sales channel. But regardless of whether brands embrace or disdain them, they can't ignore how the sector is shaping up.

Relationship Status: It’s Complicated

For luxury brands in particular, the grey market represented by daigou can help to boost sales. But it comes at the expense of precious brand control and causes headaches over how to allocate resources in certain markets to actually reach consumers, making for an uneasy partnership at the best of times.

But in a year in which sales are going to be harder to come by for brands in Europe and the US than any other in recent memory, the loss of sales to big-spending daigou agents will be felt keenly.

For many brands, Daigou represent a potentially important, though uneasy, sales channel.

More than 83 percent of surveyed daigou agents purchased over $10,000 worth of products every month in an ordinary year (pre-pandemic), with almost half spending more than $25,000 each month, according to the CLA and YouWorld report, “Decoding Daigou: China’s New Social Commerce”

Fu Liu has lived in Milan for seven years, first relocating to study, but soon pivoting to luxury daigou reselling as a way to earn money on the side. For a long time, according to Fu, sales assistants from brands such as Gucci and Prada would chase away daigou sellers they caught taking photos in their stores.

Since the pandemic hit, however, sales commission-starved associates have been actively reaching out with special offers. Even with this change in attitude, however, Fu is unsure how much longer she can keep her daigou business going.

“Since 2018, the business of purchasing agents has been on a downward trend. The number of students who come to Italy to study abroad has doubled [and] everyone became a daigou as soon as they landed. Fortunately, I did it long enough,” Fu told Chinese media outlet 36Kr.

As Fu and Xiao both point out, the pandemic is just one in a series of blows daigou agents had to absorb in recent years, as the lure of easy money increased competition and lowered profit margins considerably.

Since 2016, successive rounds of Chinese tariff reductions and global “price harmonisation” policies from brands have also played their part in closing price disparities between imported goods sold on the Chinese mainland and elsewhere.

Then in 2018, the government announced a crackdown on daigou agents bringing back more than the individual allowance of 5,000 yuan ($278) worth of duty free goods into China, jailing some who flouted customs regulations to show their seriousness. In January last year, a new e-commerce law came into effect that meant daigou would have to declare and pay tax on their grey market income, further complicating their previously smooth stream of extra cash.

But even with all these factors coming into play, there still remains enough of a difference between the prices and availability of products within China and in international markets for people like Xiao to persist for the time being.

On Xiao's WeChat moments, where he advertises products for sale, Tom Ford Scarlet Rouge lipstick, a popular colour in China, is advertised for 258 yuan (or $38), the same product on Tmall's Luxury Pavilion costs 450 yuan, or $66; Clarins' Double Serum is 568 yuan ($83.70), compared with 695 yuan ($102.40) on Tmall; and a 50ml bottle of SK-II Genoptics Aura Essence is 880 yuan ($130) through Xiao, compared to 1540 yuan ($227) on Luxury Pavilion (though buying through the latter channel gets you two bottles of SK-II Facial Treatment Essence thrown into the bargain).

The pandemic is just one in a series of blows daigou agents had to absorb in recent years.

“I constantly read articles about this, that or the other being the death blow for daigou, but it’s not. There’s such a low barrier to entry, you basically need a phone to be a daigou and away you go,” said Tom Griffiths, commercial director of digital marketing agency Verb China.

“The only way daigou will stop is if the three conditions that create the daigou market — scarcity of product, [concerns about the] veracity of product and price difference — if they disappear, then daigou will disappear,” he added.

Instead, he and other China market strategists see the daigou trade evolving into one dominated by more professionally operated groups, rather than individuals, more likely catering to niche products and brands that aren’t widely available or are yet to be introduced to the China market.

A More Professional, Niche Future

“It used to be a bunch of young kids at school and making a bit of money on the side sending products back to their circle of friends. But it’s become much more institutionalised, with [daigou] corporations getting better deals than the average student would get,” explained Mark Tanner, managing director of Shanghai-based marketing and research firm, China Skinny.

Australia already has an official body for the trade, the Australia China Daigou Association (ADCA), and both Tanner and Griffiths envision a future in which there might be similar bodies set up in Europe or North America (geo-political tensions notwithstanding) that focus on trading in luxury products.

For niche brands, even at the higher-end of the price spectrum, Tanner says there could definitely be advantages to co-opting the trust that daigou agents have cultivated within their selling circles, not only as a way of seeding sales in China, but also for brand awareness purposes.

“A lot of the best performing brands in China have become the best performing brands because daigou [initially] brought them in and then [the brands] were able to enter the market and do something interesting on the back of that,” Tanner said.

Of course, the rise of cross-border e-commerce in China also means that smaller brands can sell their products directly to consumers using platforms like Tmall Global, potentially cutting out the need for daigou. But brands have long struggled to rise above the din on these platforms, which are seeing thousands of new entrants signing up each year.

A lot of the best performing brands in China have become the best performing brands because daigou [initially] brought them in.

According to Tmall Global, between April and August this year, the number of new brands launched on the platform increased 125 percent. More than 200,000 products debuted on the platform between January to March this year as China endured the worst of it’s coronavirus-induced lockdowns and more general restrictions.

This is a far cry from the more intimate relationship between a daigou and their community of consumers, who often see them as a trusted source of information and arbiter of style, giving them more sway over consumer choices than other marketing avenues might have.Griffiths recommends brands interested in utilising daigou forget about directing messaging or requesting specific content as they might with an influencer, and instead give daigou something they can use to greater effect within their circles, exclusive products and discount codes being the chief examples.

“A daigou isn’t interested in having a flashy image that could have come from anywhere, what sells for them is physically having the product in their hands,” he said, predicting that, while the post-pandemic market for daigou will look different to the one seen in the past, the phenomenon will remain an important channel for years to come.

Historically, ignoring daigou and hoping the trade disappears has not been a particularly effective strategy. Perhaps in a post-pandemic future, brands will try a different approach.

“The bad thing about crises like this is that they happen, the good thing is that they end,” Griffiths said. “Eventually [this pandemic period] will end and when it does, daigou will come roaring back.”

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China Decoded wants to hear from you. Send tips, suggestions, complaints and compliments to our Shanghai-based Asia Correspondent casey.hall@businessoffashion.com.

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