Daigou on Layaway? How Online Payments Could Change the Face of China’s Luxury Gray Market

Daigou

Gray market Louis Vuitton items on Taobao.

China’s vast online gray market, which has in recent years been powered by young shoppers purchasing in-demand items overseas and re-selling them to buyers within mainland China, has long been a headache for the world’s largest luxury and premium consumer brands. According to a report by Bain & Co., Chinese consumers made an estimated 70 percent of luxury purchases in 2014 either online (via third-party or daigou agents) or on trips abroad.

Meanwhile, the daigou market continues to grow despite efforts to crack down. Over the course of the last year, a handful of major players—among them Burberry and L’Occitane—launched official stores on Alibaba’s Tmall platform, after assurances that this move would see Alibaba rid the platform of gray market resellers. However, there are few signs that China’s vast daigou market, and its legions of consumers—who may live in far-flung rural or smaller urban areas that will probably never get a true luxury boutique—is fading.

As Business of Fashion noted earlier this year:

According to the China Research Center, the daigou market was worth ¥74.4 billion (about $12 billion) in 2013 and is forecasted to exceed ¥100 billion in 2014. There are thought to be over 20,000 daigou operating between Hong Kong and China alone, although about a thousand were arrested last year. Shopping agents are legal if items are properly declared and import duties are paid. But most daigou attempt to dodge these fees by underreporting the value of goods, or failing to declare them at all.

While some major brands continue to invest in expensive brick-and-mortar stores even amid uncertainty about the domestic China luxury market, many of their target shoppers have moved completely online to seek out deals, learn about new collections, and conveniently buy and arrange shipping. Although Alibaba’s massively popular online platform Taobao remains a key driver of this activity, more recently the convenience and real-time nature of mobile apps like WeChat have become more important.

Although the size of China’s daigou market continues to encourage new start-ups like Red to spring up, seeking a piece of the lucrative pie, WeChat’s place in the daigou world is more natural and seamless, as the app is already a part of daily life for hundreds of millions of Chinese consumers. Active sellers can essentially position themselves as overseas private shoppers for buyers back home, posting photos of in-store inventory, inquiring about sizes, and finalizing the transaction in-app via TenPay (WeChat parent company Tencent’s online payment system).

Most recently, both Alibaba—via its Alipay payment system—and WeChat have rolled out new features that could increase the sophistication levels of daigou agents’ small businesses even more. Alipay’s “Lease Note” function allows users to loan money to friends, giving them the option to set interest rates and repayment windows that will automatically be taken from the lendee’s account. Those whose Alipay accounts have insufficient funds will be reminded by Alipay to make payments.

As Flamingo Shanghai points out:

Lease Note emerges from a very particular cultural context. It’s common in China for people—especially younger people—to spend all their income by the end of the month, and to ask friends to lend them some cash for extra shopping or to cover bills. For many, it feels like an obligation to give support to friends in need, and most of the time they’ll let the friend decide when they want to return the money. Though the money may be given reluctantly, it’s seen as important to earning good favour (人情) in their relationships.

WeChat, too, has rolled out options for users to split bills—a popular option for “going Dutch” on dates, taxi rides, or dinner.

While these payment features are compelling in the way they leverage cultural norms in China—e.g., the way it’s normal to ask friends for a small loan, which in Western markets may be seen as embarrassing—what’s even more compelling is the way they can be used by daigou sellers. It’s feasible that a daigou merchant with an existing buyer base on Taobao or WeChat would be able to offer products on a payment plan, giving less well-heeled buyers the chance to get that Gucci or Balenciaga bag now.

This type of feature has the potential to drive gray market sales in new markets throughout China, and among younger consumers with less disposable income. But beyond that, advanced functionality like bill-splitting or virtual layaway means that brands will need to face an increasingly sophisticated gray market in the months and years ahead. Despite their best efforts to entice Chinese shoppers to buy locally in-store or on official Tmall shops, daigou looks like it’s largely here to stay.

 

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