Resellers Hit by Global Pricing but They're Not Giving Up

The price premium for luxury goods sold in China has fallen significantly in recent years. The average price difference between items sold in the Chinese market and those overseas narrowed to 16 percent last year from 68 percent in 2011, according to China’s Fortune Character Institute, which conducts research on luxury consumption habits. This huge drop reflects reduced Chinese import duties on consumer goods since mid-2015 and drastic price cuts on items sold in Chinese retail stores by global luxury brands such as Chanel and Louis Vuitton. Both moves were motivated, in part, by the need to tackle daigou (online resellers or drop shippers), who proliferated along with the rapid development of cross-border e-commerce platforms. Declining Daigou Sales The price adjustment has changed the consumption habit of a certain category of Chinese consumers. Those who previously asked relatives and friends studying or working overseas to buy luxury items on their behalf, or purchased through trusted daigou, to save money have now returned to domestic boutiques. Tang Qi, market specialist with China’s large residential real estate developer China Vanke Co., bought a Louis Vuitton Speedy 25 in Beijing for 7,850 RMB (1,245) in October 2017. Her first choice was the more expensive IENA MM, which cost 10,900 RMB (1,728) in China at the time. Hoping for a bargain, she asked her schoolmate working in New York City if she could get it cheaper, but was told that the price was almost identical after she took taxes, currency exchange rate, and shipping cost into account. (The retail price of the bag in the United States was 1,430 without tax.) “If it’s only a few hundred yuan off, I will not spend time and energy asking my friend a favor to buy the bag for me,” Tang said. “I will also not consider daigou. If I’m spending a large amount of money, I don’t want to take the risk of getting a fake item.” Chanel has been perhaps the most revolutionary among top luxury brands in ensuring prices in its Chinese stores. The average price difference between the Chinese market and the overseas went as low as five percent after it announced a price cut in April 2015. A medium Chanel Classic Flap is priced at 36,800 RMB in China, while its retail price in the U.S. is 5,300 pre-tax, leaving no space for daigou based in the United States to make money on the classic series. A part-time daigou surnamed Tian in north China’s Shijiangzhuang City saw a 30 percent decline in the amount of orders she received over Spring Festival this year. She does not know the exact reason behind the slump but said some of her richest clients choose to go directly to boutique stores now as they have more spending power and less patience when they suddenly want a luxury item. “If it’s small item like a wallet or card holder, people tend to buy it themselves because the price difference is little,” said Tian, a variety show director at Hebei TV Station who earns 150,000 to 200,000 RMB annually. She started her daigou business in October 2012, buying goods from the United States. After one year, she started to ship cosmetics from Japan and then top luxury brands from Italy. She answers inquiries from clients every night after work. Depending on a dozen or so loyal customers out of her 1,000 or so WeChat friends, she’s able to earn 5,000 RMB every month. Better global price matching has hurt many daigou, but it has not been enough to drive them out of the market. There are four ways they are continuing to make money. 1. The Pivot to Casual Luxury Firstly, the price difference in terms of percentage still remains huge among “casual luxury” items. American labels Michael Kors, Coach, and Tory Burch are leading brands in this category. They did not join the price cut wave in 2015 led by top luxury brands. Therefore, daigou on casual luxury have not been affected in this case. A Coach Dinky bag sells for 295 pre-tax in the United States, while its price in China is 3,500 RMB (555), almost 90 percent higher based on the current currency exchange rate, creating a 1,000 RMB profit margin. The price gap might not matter to LV buyers, but it's accounted for about a third of the amount Coach buyers pay for the bag. Qingxiaodai, a daigou agency that originates from Tsinghua University, offers casual luxury bags and cosmetics to the student community. Launched in September 2014, it has been operated by graduates from the university working in Beijing and Japan. It receives about 20 orders from students and their relatives a day, a quarter of which are for bags. They ship cosmetics and bags (by Michael Kors and Coach) from boutiques in Japan, as the shipping fee is lower compared to the United States. “I am aware that the price cut has a negative impact on big brands, as I’ve also helped my clients get expensive bags and the price gap isn’t that huge. But it has no effect on small brands that we are running,” said a woman surnamed Zhang, who's responsible for customer service at Qingxiaodai. Having graduated from Tsinghua in 2014, she works part-time at the agency and full-time at a bank in Beijing. 2. Sourcing From Cheaper Markets Secondly, as many top luxury brands originate from Europe, the European market usually has the cheapest items. And goods in Hong Kong are sometimes even cheaper for certain brands due to the difference in currency exchange rates and tariffs. Because of cheaper prices in these markets, daigou shipping from them to China can still make money. Xixi and her friend Byby own a business called Xixi & Byby Paris Buyer, which ships top luxury bags from Paris to China. They managed to get a staff discount on the bags they buy. The LV IENA MM bag costs €1,080 (1,322) in France after-tax, creating a margin of 3,000 RMB (475) for resellers. The best place to buy Chanel is actually Hong Kong, where a medium Class Flap is priced at 38,500 HKD (4,905). A 3,000 to 5,000 RMB gap is enough to draw daigou to Hong Kong and Paris. But as Hong Kong sits just next to Mainland China, many Chinese consumers might choose to shop there themselves. 3. Hype and Limited Editions A third reason that daigou can still benefit from their businesses is that some goods are so popular that they become very hard to obtain. Therefore, whoever has the ability to get the goods can decide the resale price. In the first half of 2017, Louis Vuitton x Supreme, a men’s fall-winter crossover collection, achieved sales over €100 million (122 million). The secondary market for the collection, however, is valued at €200 million, according to Mr. Chen, founder and owner of a high-end luxury agency called Trends Studio. Chen's customers include Wang Sicong, son of the chairman of Beijing-based multinational conglomerate Dalian Wanda Group. “If customers fail to find hot items at stores, they have to rely on daigou agencies to buy them overseas,” said Chen. “Daigou does not always mean ‘cheaper stuff.’ Some trendy LV items will be sold at a higher price in the secondary market as they are very hard to get.” The purchasing channel matters most to Chen because the right professional buyers are able to find popular items quickly and cheaply enough to leave room for profits. Chen’s job is to focus on business development—enlarging the client base and cultivating customer loyalty—so that more buyers will be willing to cooperate with him. “The profit margin is usually 10-20 percent for the items we get control of before letting it go onto the shelf for sale,” Chen said. 4. Reaching Lower Tier Cities It is worth noticing that many cities in China still do not have flagship stores for luxury brands. While luxury brands are beginning to improve their e-commerce offerings, many people living in these cities still have to use daigou if they don't have an opportunity to travel domestically. “The LV store in my city is small and many items cannot be found there,” said Yuan Yi, a college student from central China’s Wuhan City. Many daigou also pointed out that consumers are lazy and some of them won’t even spend time on price comparison or go out for shopping. They will continue to buy from a trusted agency as long as they are willing to wait for the product. Bruno Lannes, China Head of Consumer Products and Retail practices at Bain & Co, predicts that over 50 percent of Chinese customers’ luxury purchases will take place in China now that luxury brands have established price matching globally. But while prices remain different around the world, and daigou have the channels to stock up on good for which there is excess demand, daigou will remain active players in the market.

Sectors

Insights

Company

Resellers Hit by Global Pricing but They're Not Giving Up