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Op-Ed | How to Fix Luxury’s Alibaba Problem

Alibaba’s role in the grey market is a bigger issue than counterfeit sales, and a problem luxury brands can help fix, argue Brian Buchwald and Andrew Roth.
Products sold by daigou on Alibaba's | Source: Taobao
  • Brian Buchwald,
  • Andrew Roth

NEW YORK, United States — Over the last three months, Chinese consumers purchased 115,000 authentic Coach products worth $14 million on Taobao (Alibaba's largest marketplace) and Jingdong (known as JD). When annualised, this equates to 455,000 products and $56 million in revenue. An impressive accounting for Coach, for sure — except Coach didn't actually sell any of the items, at least directly.

Coach, like other brands that Bomoda analysed in the past six months, has a significant challenge in the form of Alibaba and, to a lesser extent, JD. But the fight these brands are currently waging and the bag of tricks they are leveraging won’t bring about a solution.

This week, the International Anti-Counterfeiting Coalition (IACC) suspended Alibaba's membership. Since  Alibaba was admitted to the IACC in April, Gucci and Michael Kors quit the group and the IACC board received an anonymous email threatening a mass walk-out unless Alibaba was ejected. The final decision came after it emerged that IACC president Robert Barchiesi has stock in Alibaba, a fact that had not been disclosed to IACC members.

The position taken by IACC members is predicated on their disdain for the counterfeit market, in which hundreds of thousands of sellers leverage Alibaba’s scale to sell — and resell — goods. However, while the market for counterfeits is real, it is also less of an issue than many brands claim. A Bomoda analysis uncovered that of the roughly 15,000 Rolex watches sold on Taobao last month, almost 100 percent were counterfeit. But how many consumers intending to purchase an authentic Rolex would use Taobao to do so?

In truth, for brands such as Coach, Gucci and Michael Kors, fake goods make up a minority of their sales on Taobao. It is also true that Alibaba is increasing its attempts to combat the black market through a mixture of software and human intervention. The counterfeit market is a challenge to brands’ China businesses and is worthy of being proactively addressed — but it is also more of a nuisance than an existential threat.

The true issue is the grey market, which continues to thrive through Taobao, JD, WeChat, Instagram and others. Resellers (daigou) purchase luxury goods in New York, Paris and Tokyo and leverage these marketplaces and networks to resell these same goods in China. Through this arbitrage, the Chinese consumer has figured out her own path to ownership of a luxury good and, as a result, the brand has lost control over pricing, the customer relationship and quality assurance.

How does this happen? It is one part Charles Darwin and one part Adam Smith. Survival of the fittest is the current nature of the Chinese consumer, in a market where luxury goods are typically sold at a premium relative to pricing abroad and where legitimacy of domestic purchasing can be a headache. The daigou makes purchases on the consumer's behalf in foreign markets where prices are cheaper and products are guaranteed to be authentic. The daigou charges a premium to the international price, yet at a discount to the domestic price, thereby satisfying the price-sensitive local consumer.

The counterfeit market is more of a nuisance than an existential threat. The true issue is the grey market.

Some of the grey market is within brands’ control; some of it is outside their control; and some of it they may not fully grasp.

In their control is the price differential between official sales of their products in the West versus China. This includes not just full-price items, but also outlet pricing and promotions. The Chinese consumer is smart: she knows when Mother’s Day sales are occurring in the US, and it galls her that she cannot take part domestically. The taxes and tariffs placed on luxury goods sold to domestic Chinese consumers, on the other hand, are outside the brands’ control.

Similarly, brands should assess the inventory on offer to Chinese consumers and their Western counterparts. It is not just about what is in Vogue China, on local websites or in the stores in Sanlitun (a shopping district in Beijing) — the Chinese buyer also knows what is in US Vogue, on a brand's Western website, and what is on display on 5th Avenue. Those are the most coveted items.

Localisation is also vital. Many brands point to ROI as the reason why they don’t have Chinese-language customer support, strong domestic CRM capabilities on WeChat or favourable shipping policies. ROI is traditionally negative for a six to twelve-month timeframe, but more meaningful investment in true localisation may take even longer.

E-commerce build-out is also critical, either on a brand's own site or in partnership with Alibaba or JD. Prada may not believe it is selling meaningfully in China online, but tell that to the Chinese consumers who collectively purchased 9,000 authentic Prada products worth $3.1 million on Taobao and JD in the last month. It is tough to hold the platform or the consumer accountable, if a brand is not offering a viable alternative to daigou.

Finally, and perhaps shockingly to some, luxury brands' legitimate distribution partners unwittingly support grey market sales. Nordstrom, Saks Fifth Avenue, Net-a-Porter and Shopbop obviously take no direct interest in supporting daigou. However, with their sales promotions and discounted pricing versus China's domestic pricing, these distribution partners have become, in effect, massive arms dealers, filling resellers' coffers with in-demand products. Better coordination between a brand and its legitimate distribution partners is vital to stem the tide of products flowing into China's grey market.

To be clear, none of this absolves Alibaba and other platforms of their roles in propagating the grey market. But it would be foolish for brands to overlook the investment and efforts Alibaba has recently made to aid brands in their attempt to curtail daigou and the grey market. It is up to Western brands to meet Alibaba through both compromise — and perhaps partnership — in order to gain access to the platform's vast consumer base and suite of tools. Put another way: Alibaba is the devil a brand knows; daigou is its metaphorical opposite.

Brian Buchwald is the co-founder and chief executive officer and Andrew Roth is the chief strategy officer of Bomoda.

The views expressed in Op-Ed pieces are those of the author and do not necessarily reflect the views of The Business of Fashion.

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