At Burberry’s store in downtown Shanghai, the company’s signature tartan scarves are on sale for 4,800 yuan (about $678). But if you download the fashion app DeWu and upload a photo of your scarf, it will show you similar-looking items for just RMB 2,939.
In the same luxury mall, the most exclusive in China’s largest city, a Coach jacket costs RMB 4,400 and a Prada hat costs RMB 6,150. DeWu costs Rmb3,499 and Rmb4,939 respectively.
“We can’t guarantee that this is authentic,” said one store employee, looking at images of designer outfits on the app. “Daewoo…what can I say? Of course it’s cheap,” said another assistant.
Founded in 2015 by Jiangxi billionaire Yang Bin as a sneaker buying and resale platform, DeWu is part of China’s vast luxury gray market, where products purchased abroad are resold at discounted prices. It is the center of the market. It’s way below the flagship store.
“There’s an 800-pound gorilla in the room,” said Jack Roizen, managing director of Shanghai-based consultancy Digital Luxury Group. According to estimates, top brand sales on DeWu now account for more than 70% of what he calls China’s “thriving” gray market.
The growth and sophistication of the gray market is having a profound impact on the global luxury goods industry. The luxury goods industry has relied heavily on purchases from mainland China to drive growth for the past decade, but now faces a challenging economic backdrop.
Weak consumer confidence has pushed Chinese buyers to seek lower prices, while declining international sales of luxury goods have also led to an increase in inventory entering the country through opaque gray market channels. There are signs that this is encouraging.
DeWu, which research group Hurun estimates was worth $10 billion as of last year, allows anyone who sets up an account to sell products bypassing the brand itself. Roizen said the company has its own process for authenticating products and is so trustworthy that it is now used as an agent for the unofficial sale of products in mainland China. It has become an important presence.
Shanghai-based DeWu did not respond to a request for comment. The company’s app has been downloaded 350 million times in China, according to state media.
Re-Hub, a luxury information company, analyzed public transactions on the site and estimated that sales of 48 brands on DeWu increased by 19% year-on-year in the second quarter to more than RMB 7 billion. I am.
“What this means is that gray market revenue (in China) will represent a larger proportion of brand revenue in 2024 than in 2023,” said Thomas Piershaw, head of strategy at Re-Hub. , added that this growth “exceeded or significantly exceeded China’s growth rate.” Reported first and second quarter growth rates globally and in China for ‘the majority of brands’.
Most luxury brands do not work directly with the company. However, third parties can buy products through cheaper wholesale channels overseas, particularly in Australia or South Korea, and bring them to the mainland, where prices are generally higher due to taxes.
Piershaw said there are a variety of possible routes, ranging from “backdoors within factories through which some departments enter China” to “direct relationships with branded wholesalers.”
Historically, these so-called daigou purchases were handled through small WeChat groups. But HSBC managing director Erwan Lambourt said there was a “huge shift” towards “start-ups” and “enterprises”.
DeWu’s growth also demonstrates the growing price sensitivity of Chinese consumers. This, combined with a slowdown in global sales, has hit luxury goods groups hard. Barclays estimates that Burberry and Kering, which own Gucci and Saint Laurent, saw organic sales fall by more than 20% and 30%, respectively, in the first half of this year, putting pressure on retailers to trade. Along with extra products.
“There’s a lot of excess inventory, and there’s a lot of discounting, and a lot of it is coming into China,” said a Chinese luxury goods industry executive. According to the person, most of the goods come from Hainan Island, a duty-free island in southern China, and also through traditional gray market routes such as Japan, Italy and the Middle East due to the weak yen.
Top luxury brands such as Louis Vuitton, Hermès, and Chanel carefully manage their distribution networks and have little or no wholesale networks, which is one of the main routes for products to enter the gray market.
“Louis Vuitton products are sold exclusively in Louis Vuitton stores and on the official website,” the world’s largest luxury brand said, adding that it never discounts its products. “Discounted products on the web are always fake.”
LVMH CEO Bernard Arnault said in an earnings call last year that the company is “fighting against so-called parallel exports,” a term used to describe gray market channels.
“While many of our peers need to make money and are not afraid to buy products overseas and sell them through resellers who sell them at a discount in China, we avoid that,” he said. said. “There’s nothing worse for your (brand) image than this. It’s scary.”
Kering is shrinking its wholesale and retail operations globally. But for many others, it’s still an important part of the business. For brands with “large and somewhat unmanaged wholesale channels,” sales on gray market platforms can account for more than 60 to 70 percent of total sales in mainland China, according to Bain.
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On the mainland, DeWu has approached brands directly to encourage them to open official stores on the platform, but few have accepted, according to a person who ran such relationships at the international group.
In the app itself, products are displayed at the lowest available price. Items with original boxes are traded at high prices. Sellers are identified by a long serial number and the name of the city where they are based.
Back at a shopping mall in Shanghai, there were few customers in any of the stores on a weekday afternoon before the National Day holiday. Meanwhile, at DeWu, Burberry scarves remain in high demand, with a long list of recently purchased items.
“If it’s going to happen anywhere, it’s going to happen in China,” Piershaw said of the rise of the gray market. “People are always looking for good deals and looking for easy solutions.”
Additional reporting by Gloria Li in Hong Kong and Wang Xueqiao in Shanghai
