China’s Surrogate Shoppers
The article below is from our BRIEFINGS newsletter of 25 March 2019
Outside traditional retail and e-commerce in China lies a relatively obscure “grey channel” for reaching Chinese consumers: a network of resellers, or “daigou,” who travel across Asia to purchase in-demand products for resale in China. After years of helping to spur growth for select luxury brands and retailers who cater to the trade, the daigou face several headwinds. Christine Cho of Goldman Sachs Research explains.
What are the daigou and where are they most active?
Christine Cho: The literal translation of daigou means “surrogate shopping” – these are people who travel abroad to buy products and bring them back in their luggage for resale in China. For years, daigou have been providing accessibility and affordability to consumers in China amid significant supply and demand imbalances of global brands. They often operate in groups, and they are incentivized by lucrative margins from arbitraging prices. We most commonly see daigou buying from Korean duty free stores because large discounts are available when purchasing goods in bulk. While not as lucrative, we also see daigou visiting Japanese department stores and drugstores in Japan for unique products and brands that are unavailable onshore.
What are the most popular goods resold?
CC: Cosmetics is by far the most popular daigou category, accounting for more than half the sales of Korean duty free stores. This is because of the large price gaps versus mainland China and the relative ease of carrying the products home. We estimate that for the global luxury sector, daigou accounts for about 5% of global sales, a relatively small percentage.
“For years, daigou have been providing accessibility and affordability to consumers in China amid significant supply and demand imbalances of global brands....legislation change could be disruptive to an industry that was largely unregulated.”
- Christine Cho, Goldman Sachs Research
What do you expect the future to look like for daigou trade?
CC: We’re cautious. From an industry perspective, we’re seeing greater accessibility in China – reducing the demand for people who bring these goods back from abroad. Chinese duty free shops are also popping up with competitive pricing and regulatory support. More and more department stores in China are also starting to carry foreign products. From a regulatory standpoint, there have been cuts on import tariffs and consumption taxes, which have shrunk the price gaps between products sold domestically in China and those same products sold overseas. This price gap is crucial to the daigou business model – it’s what incentivizes them and makes them money. We estimate the price difference has narrowed from 30-50% a few years ago to only 20-30% today.
What about the shift to online shopping? Is that having an impact?
CC: It is. There’s a new e-commerce law in China that aims to shift consumer traffic away from daigou and towards cross-border e-commerce. Since January 1st, a daigou must be formally registered as an SME, which has serious negative tax implications. In order to get approval for online reselling, a daigou must declare the sources of their foreign goods to the authorities and pay the respective tariff when entering China, pressuring margins. If strictly enforced, this legislation change could be disruptive to an industry that was previously largely unregulated.
Who would be most affected by these changes?
CC: We see three groups bearing most of the impact. Firstly, the daigou themselves. Once monetary incentives start to fade the need for the daigou intermediary is going to fade, and quickly. Smaller daigou will be squeezed out of the market or they may turn more toward daigou brokers to source their products. Larger daigou will need to verify product sources, which will pressure margins. Secondly, the retailers whose sales depend on daigou trade. Korean duty free stores, which make nearly half of their revenue off daigou resellers, will be hit hard. Lastly are global brands that have benefited from sales through this challenge. They’ll certainly be affected, but we see the challenge as more short-term since they can shift their focus to alternative channels such as e-commerce. While this will come with short-term costs, in the long-run these brands should be able to reach similar levels of profitability as duty free shopping, while gaining more control over brand messaging, prices and inventory.