What rational shopper would pay full price for a handbag in a luxury store when a parallel trader sells it brand new and authenticated for 30% less? Luxury companies say a weak Chinese economy is behind their slumping sales, but more might be going on than meets the eye.
China’s daigou trade, which roughly translates as “buying on behalf of,” is an $81 billion business that specializes in parallel imports of everything from European luxury goods to Korean cosmetics, and even high-tech Japanese toilet seats. Regional price and tax differences make it cheaper to buy some goods outside China, which creates an arbitrage opportunity.
China is the world’s most expensive major market for the purchase of luxury goods. Shoppers pay 24% more on average in Beijing’s posh stores than they would for the exact same products in Paris, according to Bernstein analysis. The U.S. is the second-priciest market, with a 16% markup.
Daigou traders scour the world for the cheapest places to buy luxury goods. They then resell the goods back home at a discount to local prices and can juice their profits by claiming a VAT refund.
This parallel market is growing a lot faster than the luxury industry in China. Daigou sales rose 23% in the first half of this year compared with the same period of 2023, according to an analysis of top luxury brands on parallel market platforms such as DeWu by data analytics company Re-hub. Luxury brands’ sales in China slumped 5% in the first half on average, based on estimates from Bernstein luxury analyst Luca Solca.
The temptation to buy from a daigou is strong now that cautious Chinese shoppers are in a mood to save money. Based on Re-Hub’s analysis, a Moncler puffer jacket can cost about a third less from a daigou, while a Cartier Love Ring sells at a 37% discount to official prices on average.
Luxury brands also might have inadvertently pushed shoppers into the arms of daigou sellers by hiking their prices so much in recent years. Luxury prices are up 55% on average compared with 2019 levels, HSBC data shows.
The daigou market is becoming more professional. A few years ago, a student studying overseas might work as a daigou to earn some money on the side. They could buy four or five Louis Vuitton handbags in Paris, maybe even livestream the purchase, and ship the bags to clients in China.
Today the market is dominated by corporate traders who buy in bulk from contacts throughout the luxury-goods supply chain. “Buying at the European wholesale price is the best price for luxury goods in the world,” says independent luxury consultant Chun Li.
A department store that has too much inventory left over at the end of the season can offload it to a parallel trader. Say the retailer paid a wholesale price of €400, equivalent to $442, for a luxury handbag that has a €1,000 sticker price but never sold. A daigou trader might offer anywhere from €420 to €520 for the bag, depending on the health of luxury demand, as part of a bulk purchase. The department store doesn’t make as much profit as it would selling the bag at full price to a shopper, but it avoids making a loss.
Daigou trading is usually perfectly legal. Goods are bought legitimately in other markets and, in most cases, import taxes are paid on them. But luxury brands have mixed feelings about it. Louis Vuitton’s billionaire owner, Bernard Arnault, frowns on daigou and tries to choke off parallel sales of the brand’s goods by having virtually no wholesale business. Other labels turn a blind eye and knowingly ship to wholesale clients that offload unsold inventory to daigou. They don’t like the situation, but the alternative of missing their sales targets is worse.
The downside is that daigou undercut brands’ full-price sales in China. This matters more today because luxury companies poured tens of millions of dollars into new Chinese boutiques during the pandemic to serve shoppers who could no longer travel overseas to buy their luxury baubles. This investment isn’t paying off as much as it should: Consumers window shop at a brand’s flagship, but daigou traders often pocket the final sale.
Luxury companies could end the arbitrage with the stroke of a pen by charging the same price everywhere, but this would cause fresh complications. Cutting prices in China would dent profits and send a signal to Chinese consumers that the goods aren’t as valuable as previously thought. Hiking prices in Europe is the least harmful option for profits on paper. Local shoppers might not stomach a further 20% rise in the cost of designer goods, though.
Luxury bosses might be underestimating behavioral changes that are happening on the ground in China, according to Thomas Piachaud, head of strategy at Re-Hub. “Brands may tell themselves, ‘Oh, weak sales are due to the economy.’ But there are shifts happening that aren’t connected to the economy.”
Europe’s luxury stocks are down 24% on average this year, so brands need a recovery in Chinese sales fast. Demand for designer goods might actually be better than it appears in their increasingly quiet stores. The problem is that daigou traders are the ones meeting it.
Write to Carol Ryan at carol.ryan@wsj.com
