The hidden market funneling luxury handbags into China

Editor’s note: This is Part 1 of an investigative series co-published with Dark Luxury, a newsletter examining the intricacies behind the luxury industry. Part 2 will be published tomorrow. One morning in early 2024, two Chinese tourists entered the Louis Vuitton store on Paseo de Gràcia in Barcelona, intending to buy handbags. The pair was ready to splash out, contributing to the $40 million that’s spent on average every year at flagship Louis Vuitton stores around the world. But this was no ordinary shopping spree. As one of the tourists browsed the store, he sensed he was being watched. Another man had entered the store shortly after them and was lingering nearby, watching him and his partner. “It’s not illegal what I’m doing,” he might have thought of his browsing, echoing a conversation with his partner earlier in the day. Shaking off an onset of nerves, he followed the plan, catching the attention of a staff member. With their help, he picked three bags, total price tag, 5,450 euros ($5,682), including tax. “Nothing too flashy,” he reminded himself. Not too expensive. Mid-market. His nerves jangled again when approaching the cash register. “I’d like to pay in cash,” he said, retrieving an envelope containing 6,000 euros ($6,243) in notes. Despite a raised eyebrow from the Louis Vuitton assistant who had assisted with the selection, the transaction proceeded, and he took the bags, and almost 500 euros ($520) of change. As the pair left the store, a woman, who was to be their landlord for the next two days, sat nearby. She greeted them, took their purchases and stuffed them into her coat. She dumped the paper Louis Vuitton shopping bags on the bench and left. The tourists may not have known it at the time, but they were acting for gangs at the forefront of a thriving gray market in China estimated to be worth up to $100 billion, which takes advantage of the difference in price between luxury goods sold in China and abroad. This kind of “handbag arbitrage” has been happening for years, but the Chinese gangs who operate the scheme recently introduced a new feature: Using tourists to secure goods and later cash in on EU VAT refunds offered by European countries to encourage sales. Despite leaving the store with valuable handbags, which could be sold for a profit in China, the work of the tourists was not done. ‘Pocket money’ In all, the tourist couple made three separate transactions over two visits, buying six bags worth 10,600 euros ($11,032). Each time, they handed over the bags (and the change) to their host within sight of the store. Having completed their work, and both being ready to leave Barcelona, they were driven to the airport, along with a group of two students who had also participated in the scheme. There, the final part of the scheme fell into place. Dark Luxury can reveal for the first time, how daigou are also exploiting the EU’s VAT refund schemes, adding additional potential profit to the resale of every handbag. Many EU countries operate VAT refund schemes that say the products must be taken out of the country by the original buyer. Luxury goods in Europe are typically subject to the highest rates of VAT. Italy charges 22%, Spain 21%, France 20% and Germany 19%. After their second and final trip to the Louis Vuitton store, they were taken to the Barcelona Airport’s VAT refund stand, where the pair secured a VAT rebate of 2,242 euros ($2,335), of which they received nearly 700 euros ($729). The remaining profit went to the group of daigou who ran the scheme. The tourists were told that the bags had been sent to China to be sold at a shop there, but it’s impossible to tell where they ended up. In all, the tourists were recruited to buy 10,600 euros ($11,038) worth of handbags. Back in China, the gang could have sold the bags for as much as 13,000 euros ($13,540), securing a profit of around 4,000 euros ($4,166) after factoring in the VAT refund and the tourists’ cut, presuming they also avoided customs duties in China. In London, retailers have been lobbying the UK government to reintroduce the VAT refund scheme, despite a report that most purchases would have happened anyway. The UK’s National Crime Agency in a 2019 report warned of the “growing prominence of daigou” and “the increase in the exploitation” of the government’s VAT reclaim scheme. How it works Tourists recruited to buy 10,600 euros worth of handbags Tourists claim VAT refund of 2,242 euros 30% or about 700 euros is paid to the tourists 70% or about 1,570 euros goes to the Chinese gang operating the scheme The Chinese gang ships the handbags back to China, evading customs authorities, and resells them for 13,250 euros Estimated profit to the gang, excluding other costs = 4,220 euros How tourists got involved The tourists here used Xiaohongshu (also known as RedNote), a Chinese app similar to Instagram, to find somewhere to stay in Barcelona. It was their only choice after discovering the city’s hotels were fully booked. Run by a husband and wife team, the apartment offered more than just rooms to rent. After offering the tourists a chance to earn pocket money, the landlord laid out the scheme. The next day they were driven to the Louis Vuitton store before it opened. In the car, each was given 6,000 euros ($6,249) of cash in paper envelopes, as they revised their instructions in their head. Once inside, they were to pose as customers shopping for their family and praise the sales staff “for being beautiful or nice.” After gaining the attention of the staff, they would ask to see a selection of 2,000 euro ($2,083) handbags, which they were briefed to request over Chinese instant messaging app WeChat. The couple were told not to select more valuable bags to minimize the risk of raising suspicion of fraud. “I managed to take a photo of the bags and send it to them on WeChat without the staff noticing,” said one of the pair, who then received confirmation to buy it. All the while, the pair suspected they were being watched. They were aware of a Chinese man who had joined the queue with them, who was now lingering nearby in the store, perhaps to ensure they didn’t dash with the cash. China’s gray market Chinese shoppers and traders known as “daigou,” or “To buy on behalf of,” have long travelled abroad to buy luxury goods in Hong Kong, Macau, Tokyo and elsewhere in Europe and the US. Daigou are a key part of the thriving “gray market” in China, a $40 billion to $100 billion industry that is believed to have contributed to the recent share price declines of luxury businesses. This gray market trade is well known to the executives who run LVMH, the parent company of Louis Vuitton. Shoppers in mainland China are reportedly increasingly turning away from local boutiques and instead buying new handbags from platforms like DeWu, a fashion trading platform with hundreds of millions of users that offers massive discounts on new luxury products. One expert described the DeWu as an “800 pound gorilla” since it is now estimated to make up an estimated 70% of the country’s gray market. Recruiting tourists The couple featured in this story discovered this activity by accident, but the gangs who operate the gray market don’t wait for unwitting tourists to end up at their Airbnb. Dark Luxury has discovered that they use Xiaohongshu to actively recruit accomplices, posting ads offering the opportunity to earn “pocket money.” Before they left the country, and knowing that such purchases were something they could never have afforded on their own modest incomes, the tourists took photos of the haul to tease their family. Continues tomorrow.

Gangs, tourists funnel luxury handbags into China: Part 1

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Gangs, tourists funnel luxury handbags into China: Part 1