China’s Secret Traders: Dominating the Grey Market through Daigou

Ian SoderEcommerce0 Comments

Chinese consumption has been flourishing over the last decade. As we can see from our previous blog post, an up-and-coming, ambitious generation of Chinese consumers are striving for top quality goods, often from luxury brands. Historically, however, purchasing luxury goods inside of China are much more expensive in comparison to purchasing them outside of China.

So…how does a typical Chinese consumer shop to avoid high amounts of spending for the goods that they so heavily desire? One of the main practices is known as Daigou (代购), literally translating to “buying on one’s behalf”. The practice has been going on for several years especially as markets digitalize. Now, the legitimacy of daigou as a practice is being put in question by the Chinese government.

photo from cengage.com

What is Daigou?

Daigou is a method that Chinese consumers use to attain unique and luxury goods. It also helps them attain goods that are difficult to have access to in China, for a much cheaper price. Essentially, goods are bought abroad in America and Europe and brought back to China through daigou. Goods sold via the daigou channel evade the many taxes that are placed on the same goods sold through traditional channels in China.

Origins

Chinese people throwing out contaminated milk powder- photo from ibtimes.com

As a business, Daigou started as early as 2008, when the infamous Chinese milk scandal made local consumers start to distrust local brands, especially those related to health and wellness. In 2008, A Chinese company, called the Sanlu Group, produced baby powder tainted with melamine, a toxic chemical. As a result, hundreds of thousands of infants and young children became sick, and a few even died.

This event, and other domestic scares, led to a huge boom in health and wellness product purchases from abroad. Toothpaste, cosmetics, medicine, and other products became huge for daigou and for the increasingly health and quality-conscious consumers that they served.

Progress

By 2011, e-commerce platforms such JD.com and Taobao gave daigou a whole new market. According to Charlie Gu, director of China luxury advisors, this allowed daigou more easily reach consumers other than just their family and friends.

Chinese consumers now became conscious of how to access higher-quality goods. Instead of buying locally, consumers increasing their purchases from daigou suppliers based in Europe, the United States, South Korea, Australia, and other areas.

Who is involved?

The structure of daigou trade consists of several “doctors”, or daifu (大夫), each individually monitoring a specified amount of “nurses”, or hushi (护士). The nurses consist of normal, everyday people that are making a living of going to the United States or other countries, buying goods in bulk, and individually shipping these goods back to China for consumers.

Personal shoppers associated with Daigou can be located in multiple locations. Some include people located in the United States who are working or traveling. Daigou shoppers are often young to middle aged women who are highly educated on Western brands and trends. For example, it is quite common for students to be involved with daigou. Take 18-year-old college student Uki Shao studies in Melbourne, Australia, who sells lotions, accessories, lotions, and other products to Chinese consumers.

daigou student shopper- photo by newsapi.com.au

Those involved with daigou take advantage of specials at specific stores, outlet stores, and even Western Ecommerce sites such as Amazon. Others people involved with daigou are located back in China and manage the shipment of product to consumer in the Chinese mainland and report to the “doctor”. All who are involved with Daigou make it possible for Chinese consumers to purchase higher quality, foreign goods for lower prices, rather than lower-quality, domestic goods for sometimes even higher prices.

Operations/logistics

Digital Ecommerce is the very basis of Daigou trade. Daigou nurses and doctors set up their individual stores on Ecommerce sites such as TaoBao or Tmall to avoid tariffs. Customers can also conveniently see what kinds of goods they can shop for online. Communication between a consumer and their Daigou representative is done through Weibo, China’s version of Twitter, and WeChat, China’s number one communication app. Consumers can even pull up and review specific stores on WeChat itself.

Meeting and connection with daigou traders often comes through word of mouth through friends, family, or one’s community. Chinese consumers are usually only a few degrees of separation away from knowing someone involved with Daigou. In order to gain trust from consumers to ensure the high quality of goods, daigou often take pictures of receipts, bills, and barcodes of specific products.

How large is the daigou trade market?

The daigou market accounts for a large chunk of the overall purchase of luxury brands. According to the consultancy Bain & Company, approximately 55-75 billion RMB (8-11 billion USD) is spent every year on daigou sales in China.

photo from businessinsider.com

This market is a subset of the total Chinese cross-border, e-commerce market. In 2018, the cross-border trade market size is predicted to reach 758 billion RMB (USD $116.2 million) according to McKinsey and iResearch. This is a crucial portion of China’s anticipated 6.5 trillion RMB (USD $1 trillion) total e-commerce market.

Differences in Prices Abroad vs. China

The main motivation for Daigou is the fact that luxury items are cheaper when purchased from abroad in comparison to being purchased in China.

Luxury

A luxury item in China can cost as much as 80 percent of what the same exact item would cost in Europe, says the New York Times. Here are some examples of specific items with varying prices by country, according to Deliotte (prices in USD):

  • Louis Vuitton Speedy 30 Bag: China ($1,115), U.S.A. ($970), U.K. ($802)
  • Brunello Cucinelli cashmere sweater: China ($1,287), U.S.A. ($995), U.K. ($808)
  • Balenciaga Foulard Fringe dress: China ($1,665), U.K. ($1,312)

While prices can fluctuate and sometimes one can find a decent deal, luxury brands in China are just generally more expensive. In China, Burberry is 37 percent more expensive than their average global price, and Louis Vuitton is 25 percent more. With these higher prices in their home country, no wonder why Chinese consumers are looking abroad to purchase luxury goods.

Other Goods Popular With Daigou Trade

Besides luxury brands, daigou greatly flourishes around other types of goods. These items are especially those that simply cannot easily be found within stores in Mainland China, including baby formula, cosmetics, and food products such as acai or chia seeds.

Chinese consumers definitely favor purchasing health and wellness products abroad. China’s milk scare and other instances have exhibited China’s lack of quality for health and wellness products. Thus, the Chinese commonly look elsewhere for these types of products. For example in Australia, the breakfast-staple food Weet-Bix receives huge praise from Chinese consumers, as well as hair products from a brand called Alchemy, and products from the health brand Bioisland.

Model Alyssa Chia promoting an Australian brand Weet-Bix, sold as Nutri-Brex in China- photo by news.com.au

Daigou: Negative Impacts on China

Less Production for local companies

Although the daigou business is booming, Chinese government officials have noticed that the consumption via daigou channel has created favoritism toward foriegn brands. This has taken away from the local economy and domestic consumption.

Mintel International Group, Ltd. director Matthew Crabbe notes that the Chinese government fears the “unfair competition” that is created for local Chinese companies. Zhou Ting of Shanghai’s Fortune Character Institute also notes that daigou have made the Chinese government lose tax revenue, and also cause disorder for “luxury brands supply and pricing systems”.

Foriegn Duty-Free Stores Flourishing

As a result of taking advantage of deals and cheaper prices abroad, duty-free stores at airports, malls, and other areas have received great increases in revenue. This has been the case in South Korea, as the South Korea Duty-Free Association stated that July 2017’s duty free sales reached $637 million, which is an 8.8 percent increase from the year before. Large sales to daigou shoppers is quite beneficial for duty free stores. This is especially true when these stores are having a difficult time of gaining revenue.

Legal Issues

Since the beginning of daigou trade, the Chinese government has been trying to track down daigou shoppers who have been involved with suspicious activity. Some examples include:

photo by wvmetronews.com

  • In 2013, a flight attendant was convicted for buying cosmetic products from duty free stores in South Korea and selling them to consumers in mainland China. She had gone through customs numerous times and had claimed the products to be merely for her “personal use.
  • In June 2015, a daigou trader from Ningbo was sentenced to 18 months in prison for bringing in over $193,500 USD worth of handbags from abroad and evading the associated taxes.
  • In 2016, the Australian Agricultural Department started cracking down on daigou shoppers shipping baby formula back to China. Before bringing products back to China, Australian export requirements, as well as Chinese import requirements must be met. For baby formula in particular, shipments over 10 kilograms require the use of a proper export company with health certificates.

New Government Regulations

In order to crack down on daigou, the Chinese government has introduced some new measures. Their newest revision came in April 2016, with three main changes:

  • Marginal tax increases
  • Limits on value of purchases to show that purchases are for “personal use only”
  • A list of “permissible” foreign products that are allowed to be bought online

Despite these regulations, daigou still remains quiet prevalent, as experienced shoppers know the keys of manipulating the system.

Alternatives To Daigou

Besides restrictions from the Chinese government, there are other channels that restrict the operations of daigou. And, these channels still allow Chinese consumers to access foreign goods from home.

Opening up Shop on Chinese Platforms

Alibaba’s Tmall and Taobao dominate the Chinese online shopping market. As early as 2014, international companies have opened up stores on these Chinese platforms, to allow Chinese consumers to have cheaper purchases of luxury goods. Companies who have opened up stores on Tmall and Taobao include:

Walmart’s Store on Tmall

  • Burberry
  • Tesla
  • Calvin Klein
  • Chanel
  • Estée Lauder, and more

Although many international brands have had success on Taobao and Tmall, there is still the concern of authenticity. Luxury brands really worry about the lack of the same in-store experience that consumers receive through the platforms. Also, foriegn companies fear that their goods will be sold next to counterfeit or fake items on the platform, which remains a difficult problem.

More Duty Free Stores in China

In February 2016 the Chinese ministry of finance announced the opening of 19 inbound duty-free shops in China’s airports. This is part of a movement to help make buying luxury goods within more attractive to Chinese consumers.

Amazon Prime

In October of 2016, Amazon brought its Prime membership to consumers in China, opening up another cross-border E-commerce channel. However, Amazon is in the midst of great competition with Chinese platforms like Taobao and Tmall. Therefore, they only account for about one percent of the market in China. Amazon even attempted to open up their own store on Taobao before to attract more consumers.

Future

Despite the governmental restrictions and emergence of other channels, the future of daigou still remains to appear quite steady. With a booming upper-middle class and a rise of youthful consumers, there will definitely continue to be daigou who manage to get product to consumers as cheaply and quickly as possible.

photo by pammarketingnut.com

In order to combat trade through daigou, different companies- both domestically in China and those internationally- should pay more attention to increasing their brand awareness, and not just the price of a good. Bruno Lannes, a partner at Bain & Co consulting, states that companies need to make sure consumers buy their product “for the right reasons”, which can include “the heritage, the craftsmanship, and the experience.”

Relating to the Value/Purpose of GoldenElms

An undoubtably huge factor to consider when addressing Chinese consumers is trust. One of the most valuable assets of the daigou is that they are trustworthy. They take pride in having a personal connection with their shoppers.

This same trust associated with daigou can now be found under the services offered by GoldenElms and The China Incubator. This new platform brings the same authenticity of American products to Chinese consumers through the platform “wolegang.com”. GoldenElms offers a nice niche in between the daigou going directly to a company for purchase of cheaper goods, and the large company that opens up a store on Tmall or Taobao. The same in-store experience will now be brought to Chinese consumers online, as they will have direct access to authentic companies throughout the U.S.

For more information regarding the services of GoldenElms, please join our community to find out more!

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