Currency Fluctuations Will Fuel China's Gray Market—Unless Brands Take Action

    As currency fluctuations widen the luxury price gap between Europe and China, brands like Chanel and Patek Phillippe are slashing prices to combat China's rampant gray market.
    The Chanel store at Shin Kong Place mall in Beijing. (Jing Daily)
    Jing DailyAuthor
      Published   in Macro

    The Chanel store at Shin Kong Place mall in Beijing. (Jing Daily)

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    From the euro to the Swiss franc, European currency fluctuations will only serve to exacerbate rampant gray market sales in China, which have long been a source of headaches for global luxury brands.

    In response to a weakening euro, which has caused a yawning price gap between China and Europe (with prices for some luxury goods becoming 70 percent more expensive in China), luxury brands are finally taking action. This week, Chanel announced that it is slashing prices in China and upping them in Europe to address the price differential, a bold move that analysts expect other brands to follow in the weeks ahead.

    Switzerland’s recent currency shakeup has thrown another wrench into the works, and watchmakers continue to struggle to respond. This week, Tag Heuer announced an 8 percent price drop in Switzerland, China, the United States, the Caribbean, and Central and South America, a 7 percent decrease in the UK, and a 13 percent drop in Hong Kong. Other watch companies making similar adjustments include Cartier and Patek Phillippe.

    “There is no reason why a Patek Philippe watch should be much more expensive in a given market compared to others!” wrote Patek Phillippe President Thierry Stern in a candid letter to the brand’s retailers. “This would not be fair to our local clients; and even more importantly, such differences would fuel the gray market!”

    There’s no doubt as to which gray market he was referring—China’s online daigou sales, or luxury goods purchased abroad and sold on platforms like Taobao to avoid tariffs, have had an enormous effect on the global luxury market. In the short term, the illegal trade causes significant retail growth for luxury brands in non-mainland locations such as Europe and Hong Kong while cannibalizing sales within China. The risks outweigh the benefits, however—the unregulated gray market is rife with fake goods claiming to be real, and brands inactive on Chinese e-commerce platforms have no way to control their image, quality control, or after-sales service. It's this loss of control that enticed the likes of Burberry, L'Occitane, and Estée Lauder to join Alibaba's Tmall in 2014, as Tmall eradicates gray market vendors from the platform for brands with official flagships.

    Recent currency fluctuations make it more important than ever for brands to have a strong response in place to fight China's thriving gray market. And it's not just about price: several other elements can comprise a comprehensive strategy, including active e-commerce, superior customer experience, after-sales service, and VIP treatment for buying through the brand itself. The one thing brands shouldn't do is sit idly by and watch others run brand reputation through the mud by selling “discounted” bags from Europe on Taobao.

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