What the hell is daigou?

Here it is, idiots: dumbshanghai’s first guest post! Scroll to the end of the article for a brief author bio.

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Fueled mainly by rising incomes, gift-giving culture, and individualism, the market for luxury retail products has flourished in Mainland China, seeing rapid growth for the greater part of the last decade. Luxury stores now light up the streets of core urban shopping districts, and brands like Cartier, Gucci, and Prada have expanded as far as Taiyuan and Nanning. The appetite for luxury goods has grown so large that one high-end consumer said that Louis Vuitton has become “a brand for secretaries” – suggesting its growth across income levels. However, many international luxury retailers have seen such growth slow recently as Chinese consumers become more sophisticated and price sensitive. More remarkably, this deceleration has not been limited to luxury goods.

Many mainstream consumers are no longer willing to pay the lofty price tags for imported goods, especially when they can buy the same products abroad for 20-30% cheaper. This has given rise to daigou (代购), a gray market for imported retail goods, reported by the Wall Street Journal to be worth an estimated RMB 75 billion. Daigou, or representative shopping, is a phenomenon which has evolved over the past few years to help consumers buy luxury goods cheaper than they could in China by avoiding locally leveraged taxes. At the inception of daigou, a Chinese traveler would buy a few extra items abroad for friends or family. While such a practice is still common, the scale of demand in China and the price discount for buying certain items abroad have encouraged some mainlanders to turn daigou into a bona fide business: buy abroad, import directly.

This business model works lawfully when shoppers use their personal allowance to bring in goods duty free, but in many cases shoppers are buying in bulk and avoiding reporting the goods to customs. In fact, there have been media reports of Chinese students buying goods while on school holiday on behalf of private customers and netting large commissions on each purchase. Many brokers utilize social media platforms like Weibo and WeChat to sell to their extended networks. Others sell on Taobao or other online marketplaces.

A decreasing euro and Japanese yen have fueled the daigou market, widening the gap between domestic and foreign retail markets. In late 2014, prices in Chanel’s European outlets quickly became 40% cheaper than those in Mainland China. As a result, Chanel lowered prices in China by 20% in March 2015 to try to bridge the price gap. Many other foreign retailers are likewise lowering their prices to stay competitive with the daigou market.

Contrary to some reports, higher prices in China do not necessarily result in higher margins for retailers. Tusting—which produces handmade luxury handbags and leather goods in the U.K.—noted that shipping costs and import taxes do in fact drive up costs and keep margins in line or even lower than they are in their home market. Some retailers have opened up online shopping portals themselves to compete. They are able to offer a discount from in-store sales since they can avoid the rental costs associated with prime retail locations.

The grey market’s looming impact on domestic retail sales has indeed caught the eyes of local authorities. Not only does the gray market reduce retail sales, but it also leads to a significant loss in government tax revenues. In response, on May 15 this year, the Ministry of Finance announced that it would temporarily reduce the tariff rate on selected imported goods about 50%. Affected imported goods include apparel, footwear, skincare, and diapers (see chart below). The tariff cuts are intended to minimize the damaging effects of daigou by helping to close the price gap on products sold overseas and in China.

daigou 1

Despite the cuts, it is unlikely that new rates will have a significant impact on domestic consumption. The import tariffs are only one of three taxes levied on foreign imports. Importers still need to pay consumption tax and a value-added tax (VAT), both of which have been left untouched by the central authorities (see chart below). Cosmetics, a major portion of the daigou market, have a 30% consumption tax levied on their retail value in addition to a 17% VAT. Thus, the small import tariff rate reduction will have a negligible impact on domestic prices.

daigou 2

Some Chinese customers forego domestic consumption entirely and buy internationally for reasons of uniqueness, quality, and product safety. For example, sales of imported baby formula surged in Mainland China following a safety scandal in the mid-2000s, and the imported product is still widespread and preferred over its domestic alternative. Unsurprisingly, the presence of fake products also deters consumers from buying domestically.

In some sense, the growing daigou market is indicative of Chinese consumers’ increasing global awareness and price sensitivity. Consumers can easily go online to compare country-by-country prices to ensure they are getting the best value for their money. Additionally, international brands have become ubiquitous and no longer yield the social premium they once did. Many international brands need to reposition themselves in the market to cater to a more sophisticated and well-traveled consumer base and can no longer rely on luxury branding to justify high prices. Until retailers’ costs reduce to a level of global competitiveness, it’s unlikely the daigou market will go anywhere.

This piece has been edited by dumbshanghai for formatting and clarity.

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Sean Linkletter, better known to me as 豆浆 (or Soymilk for those of you who don’t read Chinese), is a research analyst for Jones Lang LaSalle based in Tianjin. He’s been passionate about finance shit like this for as long as I’ve known him. He probably knows his stuff.

Got shit you’re passionate about that you want featured on dumbshanghai? Shoot me an email at deasonrachel@gmail.com.

As always, thanks for reading!

Next week on the blog: Why the hell do Chinese people cut in line?

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