Your essential guide to grey markets in China

Chinese shoppers are responsible for a full one-third of luxury goods purchases globally. But curiously, only about one fifth of those sales are happening in mainland China.
What’s going on?

Chinese shoppers are responsible for a full one-third of luxury goods purchases globally. But curiously, only about one fifth of those sales are happening in mainland China. 

What’s going on?

Several things, but among the most important from a brand protection perspective is China’s ripe and rollicking demand for goods sold through grey markets.

Grey Markets: The China Case

Grey market goods - or “grey” market in the U.S. - are authentic branded products sold to consumers through unauthorized channels, either online or off. These sales are not necessarily illegal, and regulations governing their control vary by country.

In China, a history of high import tariffs and limited access to desirable Western brands has traditionally led wealthy Chinese consumers to make their luxury purchases while traveling in the world's fashion capitals.

A fear of purchasing counterfeits was another factor driving demand for grey market goods, Matthew Dresden, a U.S.-based IP attorney and China Law blogger, explains:

“[G]rey market goods exist because there’s a market for them, and that market exists because grey market goods are either cheaper or have better availability. But in China there’s a third driver of the grey market: quality. 

It’s ironic because in the US, grey market goods have a strong whiff of caveat emptor; if you buy a product outside the normal channels you accept the risk that it might be lower quality. But in China, the calculus is flipped: because counterfeiting is so rampant, the chance of buying a fake is considered to be much lower if the goods come from overseas.'

The historical connection between counterfeits and grey market demand in China is creating exciting opportunities to protect brands and consumers with smartphone-based digital authentication technologies. 

But before we get into those, let’s take a closer look at China’s unique history of grey market trading.

Traveling for Luxury

In today’s connected global marketplace, Chinese consumers are avid followers of western brands, particularly in luxury. The fact that luxury goods have historically cost much less outside of China - by half or more in most cases - has been a major driver.

The combination of strong demand and high domestic prices birthed a class of personal shoppers known in China as daigou. Typically young Chinese women, daigou make their living by traveling abroad and carrying home suitcases stuffed with desirable luxury goods.

Before the internet and peer-to-peer marketplace platforms were built out in the early 2000s, daigou would take orders on behalf of specific wealthy clients. Today, e-commerce platforms allow daigou and their descendents to reach virtually anyone in the country - giving them a role in as much as 70% of China’s luxury consumption.

Changing the Game

The latest chapter in this story is still being written - for brands and consumers alike.

Beginning in 2015, the Chinese government began changing its policies to undermine the daigou economy and make shopping in China more attractive for Chinese consumers. 

Import tariffs on online purchases shipped into China have gone up. Tariffs on luxury goods sold through Chinese stores and websites have gone down. And daigou caught smuggling luxury goods into the country face significantly stiffer penalties.

For brands, the changes mean it's no longer enough to roll out the red carpet for Chinese customers in Paris, London or Seoul. Reaching China's luxury shoppers - and its burgeoning class of wealthy millennials - means setting aside a brand's reservations about counterfeits and joining China's growing online sales platforms and social channels.

It remains to be seen how these changes will influence luxury brand pricing, and in turn the demand for grey market goods, says Fflur Roberts, head of global luxury goods research with Euromonitor:

“The Chinese government hopes that the higher tariffs will encourage stronger luxury goods demand in the domestic market. However, the price differences between China’s formal market and the grey market will continue to prevail, and, if anything, could on the one hand turn the grey market into a more attractive shopping platform but on the other hand it could encourage fake branding which is already commonplace in the grey market.”

Digital Solutions Can Help

If you are looking for advice about controlling grey market distribution of your brand in China or other countries, you’ll want to speak with an experienced attorney. 

Innovative brands will also be interested in new digital strategies that make it possible to tap the vast Chinese market - or any desirable location - without putting a brand at greater risk for counterfeits and grey market speculators. 

These “product authentication” services empower consumers to quickly and easily verify that a product with your brand label is authentic and not a fake in disguise. 

In cases where out-of-channel products are materially different and not eligible for warranty protections, a brand can use authentications to alert consumers, give documentation to assist with returns, and redirect them to an authorized brand dealer. 

Ultimately, a product authentication technology does not block the sale of grey market goods directly. Instead, it uses consumer interest in buying authentic goods to gather the who-what-when-where of a sale - allowing your brand team to track grey market sales and identify the dealers and channels involved.
It's a digital approach for a digital era, and one proving to be particularly effective in China.