How Luxury Brands Can Battle China’s Online Gray Market

Tmall has clamped down on Burberry fakes since the brand opened up its new Tmall e-boutique. (Burberry) From sketchy tariff-free items smuggled into the country to blatant counterfeits, China’s e-commerce sphere is full of questionable “gray-market” goods when it comes to luxury. With the potential to dilute a brand’s image and harm sales, companies are taking the issue seriously and have recently been finding several new ways to combat the problem. The main channels for online gray-market sales are currently on China’s largest e-tail marketplaces, which include Alibaba’s C2C Taobao and B2C Tmall, as well as competitor Jingdong. Gray-market goods take the form of daigou sales, which include items purchased abroad and smuggled into the country to avoid high tariffs, and counterfeits—which sellers will often claim are real in order to sell for a higher price. Luxury brands are concerned about this market for a number of reasons. For starters, sellers who claim that fake items offered are real can take away sales from customers who would be able to pay more for authentic items. If they remain fooled by the fakes and encounter quality issues, the brand’s image could be diminished. On the other end of the price spectrum, while ultra-cheap, obvious fakes aren’t necessarily fooling anybody, a flood of counterfeits can lead to overexposure and hurt a brand’s image in China. According to findings in L2’s recently published Digital IQ Index, the top brands subject to gray-market sales over the past year on Tmall included Swarovski, Armani, Ralph Lauren, and Burberry. As a result, companies are working to stem the tide of gray-market goods available online. Luckily for them, Alibaba’s newly announced U.S. IPO has prompted the company to strengthen its efforts to fight fakes as it looks to boost its image to foreign investors. The company signed a deal with LVMH to fight counterfeits last year, and recently announced that it will be enacting automatic removal of items flagged as fake. Meanwhile, Burberry decided to take matters into its own hands by opening up a Tmall shop in April, becoming the first major international luxury fashion house to do so. Since its launch, L2 reported that all the gray market items have been removed, making a search for the brand yield only items from its official shop. In addition, the brand is also facing a major problem with fakes on Jingdong, but almost a third of those have been removed since it started its Tmall shop. The gray market problem is far from solved on China's top e-commerce platforms, but now that Jingdong has gone public with its own U.S. IPO, we're likely to see more improvement in battling fakes. Luxury brands will have to be constantly vigilant however, since counterfeiters are constantly utilizing new technology to find places to sell: recent reports have found that mobile messaging app WeChat is becoming China's new hotbed for counterfeit goods.

How Luxury Brands Can Battle China’s Online Gray Market

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Published May 26, 2014

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How Luxury Brands Can Battle China’s Online Gray Market