Luxury imports are big business in China, with the country’s burgeoning middle and upper classes driving global demand. Still, many Chinese consumers don’t go to their local Louis Vuitton or Gucci outlet to make purchases; they instead buy from private re-sellers online.
Many of these re-sellers are so-called daigou, personal shoppers who travel abroad where branded luxury goods can be cheaper and personally bring them back to China. The practice operates in a legal gray area, and Chinese authorities have finally started to crack down and are inspecting returning tourists’ bags for undeclared goods, sending shares of some luxury brands tumbling.
The crackdown by Chinese border authorities was confirmed by LVMH’s CFO Jean-Jacques Guiony on Wednesday. Since October 10, LVMH shares have fallen by 7.7 percent. Kering SA, the owner of Gucci and Yves Saint Laurent, saw its shares fall by a whopping 9.7 percent in that time. Moncler SpA, Estee Lauder Cos., and Tiffany & Co. fell by 10.3 percent, 10 percent, and 6.1 percent respectively.
Chinese authorities are cracking down on daigou sellers for a variety of reasons. But likely chief among them is growing concerns in Beijing about falling consumer confidence and spending power. Chinese authorities want to ensure that Chinese consumers spend more at home to shore up the domestic economy. The figures for daigou spending can be massive and help drive sales of luxury outlets around the world.
During the heights of the South Korean travel ban that followed the THAAD dispute and tumbling figures for Chinese arrivals, spending in the country’s duty-free outlets reached an all-time high of $13.6 billion. But authorities in South Korea pointed to Chinese tourist spending as the primary driver of growth, even as Chinese tourist arrivals plummeted. Daigou spending seems to be the likely source of the rise, but it’s challenging to gauge the exact figure.
It’s not necessarily a bad turn of events for brands, although it’s almost certainly bad news for duty-free retailers. For brands, it means they’ll have more control over how their goods are presented and marketed in China, without having to worry about re-sellers affecting the brand image or competing with official outlets.
On the other hand, not being able to acquire luxury goods in China for a bit cheaper will likely drive down global sales, although local official outlets will be unaffected or even see a bump in sales. The daigou practice developed because of China’s heavy import taxes, making all manner of foreign goods much, much more expensive at Chinese retailers than international outlets. The Chinese government has for some time attempted to ease the severity of these practices in order bring more sales home, but prices in China remain among the highest in the world’s major economies. Without a major policy shift into lower prices, it’s hard to say whether or not overall sales will suffer over the long-term, but it will likely result in a substantial dip in overall sales across the board for brands.
For duty-free retailers in South Korea, Japan, Australia, and elsewhere, it will mean less revenue. Chinese tourists looking for a bargain on a handbag or cosmetics will continue to come to shop, but those looking to buy in bulk for resale will decrease substantially.