The return of the daigou in China

There's never a dull day for the luxury house execs in Paris, Milan, London, New York and the world’s other centres. It was only a few years ago when strategies to reach Chinese luxury shoppers changed dramatically. The pandemic saw consumers and their daigou shoppers unable to travel, causing them to shift their purchases to retail channels within China.

Luxury brands responded by expanding their China footprint in earnest. The years following the pandemic saw China dominate new luxury store openings, accounting for 41% of global store openings in 2022 alone. Hainan Island became an increasing part of luxury brand expansion plans and luxury brands went online in droves, with more than 200 brands now on the Tmall Luxury Pavilion.

This surge in China investment is now being followed by a period of price sensitive consumer behaviour. This isn’t just impacting luxury brands, but across the board, with brands like IKEA launching 500 new ‘affordable’ items within the next 12-months. Similarly, L'Oréal “sees a lot of opportunities for its mass offerings as consumers seek 'value-for-money”.

Despite a growing portion of Chinese consumers watching their pennies, L’Oréal notes that Chinese consumers will continue to make luxury purchases, as long as brands give them enough reason to. The company's luxury brand Yves Saint Laurent appears to be doing just that, growing at double digits during last quarter.

Luxury brands that give consumers the right social currency continue to perform. We’ve seen this with the premium health and wellness community which drove Lululemon’s sales up by 34% last quarter. Luxury-leaning Arc’teryx tapped into the booming outdoors category and was the main contributor to Amer Sports’ 52% growth in the first half of the year. Chinese consumers’ thirst for experiences over stuff has seen operators that we’ve spoken to in the luxury travel segment, “never been so busy.”

Luxury carmakers also think China’s outlook looks bright. This month, Mercedes Benz announced a $2 billion investment in China, following BMW's decision to invest $2.8 billion and Volkswagen-Audi $2.7 billion earlier this year.

Many commentators blame consumers’ increasing price sensitivity for falling luxury sales in the mainland. Whilst this is a factor, shifts to more pre-pandemic-style shopping behaviour is also contributing.

Chinese travellers’ tax-free spending abroad reached 132% of 2019 levels in June driven by a large share of luxury purchases abroad. Some of these purchases were for personal use, but many are driven by the return of daigou purchasers servicing the grey trade. Despite initiatives to make costs consistent for luxury goods across the world, the reality sees stark variances. A sinking yen has made Japan significantly cheaper than China for many luxury goods, and countries like France and Italy are often cheaper too.

The return of daigou is evident by the volume of luxury goods selling online through grey market platforms. The largest grey platform, Dewu, has seen sales of many luxury brands 2-15 times higher than on their official stores on Tmall. With some authentic products selling at less than half the price of Tmall, it is no surprise.

The shifts back to pre-pandemic shopper behaviour reinforce that many Chinese consumers still want to give the impression of wealth. But even affluent consumers are prepared to sacrifice some of the convenience, experience and assurance of traditional purchasing methods to save a buck.

Should luxury brands be shutting down all of their stores in China? No, they may want to evaluate the performance of some stores, but just like in the pre-covid days, flagship stores are as much a marketing initiative as a place for transactions. Stores are among the most tangible touch points to showcase a brand’s story and meaning, providing experiences that reinforce the exclusivity, heritage and craftmanship unlike anywhere else in China.

Much like before the pandemic, luxury brands need to optimise both China-based touch points, as well as those frequented by Chinese tourists and daigou to maximise the opportunity. China Skinny can assist with that.