Luxury brands are grappling with a growing issue: arbitrage. The disparity in designer goods’ prices between Europe and China has led to a surge in resellers profiting from this gap, creating a complex challenge for high-end labels to tackle.
The crux of the issue lies in China’s daigou trade, a multi-billion dollar business that revolves around the parallel importation of luxury items, cosmetics, and other high-demand goods. Due to regional price differences and varying tax structures, luxury goods are significantly cheaper outside China. This price discrepancy creates a lucrative arbitrage opportunity for resellers.
China stands as the world’s most expensive market for luxury goods, with items priced on average 24% higher in Beijing compared to Paris. This stark contrast in pricing incentivizes daigou traders to buy goods in regions where they are cheaper and resell them in China at a discount, undercutting local retail prices. The allure for consumers is clear: why pay full price in a local store when the same authenticated item can be acquired for up to 30% less through a parallel trader?
The daigou market has been expanding at a rapid pace, outstripping the luxury industry’s growth in China. In the first half of this year alone, daigou sales surged by 23%, contrasting sharply with a 5% slump in official luxury brand sales. The allure of discounted luxury goods is strong, especially among cautious Chinese shoppers looking to save money in an uncertain economy.
Interestingly, luxury brands may have unintentionally fueled this trend. Significant price hikes in recent years—up 55% on average since 2019—have driven more shoppers towards daigou sellers. While these traders were once primarily individuals purchasing a few items for resale, the market has since professionalized. Today, it is dominated by corporate entities that buy in bulk from contacts throughout the luxury supply chain.
While daigou trading is generally legal, luxury brands are divided on how to address it. Some, like Louis Vuitton, attempt to curb parallel sales by minimizing their wholesale business, while others turn a blind eye, allowing unsold inventory to find its way to daigou traders. This approach, while not ideal, helps brands avoid missing sales targets and offloading excess inventory.
However, the growing daigou market poses a significant challenge to luxury brands’ full-price sales in China, particularly as they have invested heavily in new Chinese boutiques during the pandemic. Consumers now often use these boutiques for window shopping before making their purchases through daigou channels, depriving the brands of direct sales.
Eliminating this arbitrage opportunity would be challenging for luxury brands. Standardizing prices globally could harm profits or potentially diminish the perceived value of their goods in the eyes of Chinese consumers. Raising prices in Europe could be the least damaging option, but it risks alienating local shoppers.
This situation reveals a deeper behavioral shift in the Chinese market, beyond the immediate economic concerns. Luxury brands may need to reassess their strategies to adapt to these changes, as reliance on traditional sales models seems increasingly at odds with current consumer behavior. While European luxury stocks are facing a downturn, a swift recovery in Chinese sales is crucial. Yet, for now, it appears that daigou traders are the ones truly capitalizing on the demand for luxury goods in China.
You can find more information about arbitrage in our article, What is Arbitrage?
Luxury brands are grappling with a growing issue: arbitrage. The disparity in designer goods’ prices between Europe and China has led to a surge in resellers profiting from this gap, creating a complex challenge for high-end labels to tackle.
The crux of the issue lies in China’s daigou trade, a multi-billion dollar business that revolves around the parallel importation of luxury items, cosmetics, and other high-demand goods. Due to regional price differences and varying tax structures, luxury goods are significantly cheaper outside China. This price discrepancy creates a lucrative arbitrage opportunity for resellers.
China stands as the world’s most expensive market for luxury goods, with items priced on average 24% higher in Beijing compared to Paris. This stark contrast in pricing incentivizes daigou traders to buy goods in regions where they are cheaper and resell them in China at a discount, undercutting local retail prices. The allure for consumers is clear: why pay full price in a local store when the same authenticated item can be acquired for up to 30% less through a parallel trader?
The daigou market has been expanding at a rapid pace, outstripping the luxury industry’s growth in China. In the first half of this year alone, daigou sales surged by 23%, contrasting sharply with a 5% slump in official luxury brand sales. The allure of discounted luxury goods is strong, especially among cautious Chinese shoppers looking to save money in an uncertain economy.
Interestingly, luxury brands may have unintentionally fueled this trend. Significant price hikes in recent years—up 55% on average since 2019—have driven more shoppers towards daigou sellers. While these traders were once primarily individuals purchasing a few items for resale, the market has since professionalized. Today, it is dominated by corporate entities that buy in bulk from contacts throughout the luxury supply chain.
While daigou trading is generally legal, luxury brands are divided on how to address it. Some, like Louis Vuitton, attempt to curb parallel sales by minimizing their wholesale business, while others turn a blind eye, allowing unsold inventory to find its way to daigou traders. This approach, while not ideal, helps brands avoid missing sales targets and offloading excess inventory.
However, the growing daigou market poses a significant challenge to luxury brands’ full-price sales in China, particularly as they have invested heavily in new Chinese boutiques during the pandemic. Consumers now often use these boutiques for window shopping before making their purchases through daigou channels, depriving the brands of direct sales.
Eliminating this arbitrage opportunity would be challenging for luxury brands. Standardizing prices globally could harm profits or potentially diminish the perceived value of their goods in the eyes of Chinese consumers. Raising prices in Europe could be the least damaging option, but it risks alienating local shoppers.
This situation reveals a deeper behavioral shift in the Chinese market, beyond the immediate economic concerns. Luxury brands may need to reassess their strategies to adapt to these changes, as reliance on traditional sales models seems increasingly at odds with current consumer behavior. While European luxury stocks are facing a downturn, a swift recovery in Chinese sales is crucial. Yet, for now, it appears that daigou traders are the ones truly capitalizing on the demand for luxury goods in China.
You can find more information about arbitrage in our article, What is Arbitrage?
