The price of duty-free: Hainan grapples with ‘daigou’ dilemma

After graduating from university, Qu Qiang began working at a company, which sent him abroad to Japan and South Korea, several times a year. Friends often asked him to help them purchase products overseas. Consequently in 2018, he became a full-time daigou, buying goods overseas and selling them at home to circumvent taxes. However, using big data, Yangzhou customs’ anti-smuggling bureau identified irregularities in Qu’s duty-free shopping activities and found that from September 2021 to June 2022, he had used other people’s information to smuggle goods purchased in Hainan duty-free, evading taxes amounting to $52,158 (378,171 RMB). In 2023, Qu was sentenced to one year in prison and fined $55,169 (400,000 RMB). Under Hainan’s offshore duty-free policy, travelers have an annual duty-free shopping quota of $13,792 (100,000 RMB) per person, with no limit on the number of purchases. Any amount exceeding that quota is subject to import taxes. However, some individuals have found a “business opportunity” within this policy, by purchasing others’ duty-free quota. But that trade is closing. Government’s ‘daigou’ crackdown In recent years, China has intensified its regulations combating the daigou trade. Customs, public security, and market regulation departments have rolled out anti-smuggling awareness campaigns in malls, airports, train stations, and freight stations. Informational pamphlets distributed to the public explain the Hainan offshore duty-free policy and include related smuggling cases to warn citizens against becoming complicit in such “scam purchasing” smuggling schemes. Meanwhile, police officers are visiting shopping centers to remind merchants that misusing offshore duty-free shopping quotas to organize bulk shopping for resale is strictly prohibited. An industry insider who has held senior managerial positions in Hainan’s travel retail industry, and requested to remain anonymous because he is not authorized to talk to the media, tells Jing Daily: “The daigou trade has shifted from group operations during the pandemic to a solo model. This change doesn’t mean large-scale daigou have disappeared entirely, but they have gradually lost their ties with Duty-Free Operators (DFOs). “In response to government crackdowns, DFOs have terminated ties with daigou, fearing severe penalties. Despite this, the price difference between taxed and duty-free goods still tempts some daigou to continue.” Thomas Piachaud, head of strategy at Re-Hub concurs. “While crackdowns on the gray market undoubtedly help the overall governance of the channel,” he says, “there will always be avenues for gray market goods to find their way into China, even legally – price arbitrage coupled with currency fluctuations allows for agents to be able to make margins on products even while ensuring the legality of their sales.” The daigou business remains strong in 2024, with growth rates for many of the top brands across the gray market significantly outpacing their global revenue growth numbers and growth rates on key e-commerce platforms, Piachaud adds. “This tells us that consumers are still turning to daigou as a way of saving money on purchases, or being able to access goods they cannot in China,” he says. In an economic downturn, consumers are more cautious and rational about how they spend on non-primary goods and prioritize price convenience among all factors. Hence, they will are unlikely to turn down the better prices offered by daigou. Is ‘daigou’ good or bad for luxury? For luxury brands, the disadvantages of the gray market trade outweigh the benefits in the long run. “In the strictest sense, if the product is purchased at some point through official channels, daigou business is not necessarily bad for brands,” says Piachaud. “In the current environment, taking market share against competition and creating new brand loyalists and followers can help boost brands. “However, lack of wholesale control can lead to erosion of margin potential in China, and the presence of counterfeit goods can undermine trust in brand quality. It is a tightrope that requires a careful balancing act between global and local, while ensuring not to undermine brand potential,” he adds. For instance, from a channel perspective, Estée Lauder has long relied on duty-free channels to sell products at reduced prices. Reports in 2019 indicate that 23% of Estée Lauder’s sales in China are attributable to duty-free channels, versus Shiseido and L’Oréal’s 10%. Over-reliance on duty-free channels presents a paradox for Estée Lauder. Many netizens have complained about the significant price difference between duty-free stores and regular counters. For instance, Estée Lauder’s Advanced Night Repair serum sells for $96 (695 RMB) at regular counters, but only about $41 (300 RMB) at duty-free stores. Chris Vernicek, commercial financial director at Amika and brand ambassador of social commerce technology company Yaso, tells Jing Daily, ”Duty free shouldn’t focus so much on daigou, but they are a significant customer base that can’t be ignored. Brands that don’t deeply understand their customers may miss out on sales and market share.” According to Euromonitor data from last year, Estée Lauder’s market share in China has been overtaken by L’Oréal. Currently, the top three groups in China’s high-end cosmetics market are L’Oréal, Estée Lauder, and LVMH, with market shares of 18.4%, 14.4%, and 8.8%, respectively. ‘Daigou’-free travel retail? In contrast, L’Oréal has taken a conservative yet responsive approach to the Hainan duty-free market “Our top priority is to protect our brand and our interests in the Chinese market,” Nicolas Hieronimus, CEO of L’Oréal, says. Protecting brand equity is a key reason for L’Oréal’s increasing market share in China. By raising prices in Hainan’s duty-free shops, L’Oréal aims to narrow the price gap between these stores and other domestic outlets, thus preventing excessively large discounts, or unreasonable pricing in the travel retail sector. To this end, in 2021, the company established an internal committee composed of executives from the China team and the Asia-Pacific travel retail team to collaborate with the aim of ensuring that travel retail pricing and promotions do not harm profitability in China. Meanwhile, luxury brands have approached the issue cautiously. Dior and Chanel are considering integrating their Hainan operations into their domestic business segments. Watch brands maintain brand exclusivity by controlling styles and quantities, with Cartier even launching Hainan-exclusive models, similar to the operations of outlet stores. Re-Hub’s Piachaud says, “Where possible it is favorable to create differentiated portfolio strategies for the different channels. Offering products not on a like-for-like basis, does not allow for direct price comparison, however, this must be balanced with not confusing consumers – beauty brands have been guilty of this as a response to daigou, by offering an increasingly complex system of free gifts, giveaways and promotions.” Vernicek forecasts that the daigou market will slow in the future. “Brands become more accessible online and across borders through omnichannel approaches,” he says. “It will be difficult to differentiate when mainland Chinese brands offer products that are just as good or better than those available abroad.” But with or without daigou, brands should still be optimistic about the future of Hainan. After all, China has only one Hainan Island – a tropical vacation destination with the world’s highest duty-free allowance that can be accessed without a passport.

The price of duty-free: Hainan grapples with ‘daigou’ dilemma

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Published July 15, 2024

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The price of duty-free: Hainan grapples with ‘daigou’ dilemma