Knoppers, a German snack biscuit, is the most recent beneficiary of China’s daigou trade — Chinese shoppers who purchase foreign goods abroad to resell illegally in the mainland at cheaper prices. The biscuit is relatively unknown and sold exclusively at Aldi stores in few countries but once daigou traders began featuring the product in their inventory, demand began to soar. After heavy promotion in their channels, one daigou says they have seen as many as 1000 orders for Knoppers boxes in one day.
Knoppers is not the first product to experience a dramatic sales as a result of daigou trade. Weet-Bix, a healthy breakfast cereal that essentially amounts to edible blocks of wheat, now sells for 50$ AUD a box in China — ten times the price listed in Australian supermarkets. Daigou generated demand for foreign infant formula resulted in a national shortage in both Hong Kong and Australia. With such a strong influence on the Chinese market daigou trade is an opportune sales channel to a huge consumer base, and the only one that is currently unregulated by Chinese import laws. In 2015, the daigou market had an estimated worth of somewhere between 34-50 billion RMB.
Operating as a grey market, daigou are able to avoid the 30-80% price increase on imported goods due to China’s heavy tariffs. Chinese consumers are extremely price sensitive and respond well to the discounts afforded by daigou trade despite it’s illegality. Constituting 80% of the world’s luxury purchases, these proxy purchasers see a large demand for high-end products. A rise in consumer education concerning food safety and health consciousness has led to a soaring demand for foreign food products, like the aforementioned breakfast cereal and infant formula.
who are daigou traders?
Exchange rates, taxes, and duties can force an imported item’s price up 80% in mainland China. The locational price preference drove the creation of the daigou markets. Why would Chinese consumers pay such high prices when significantly cheaper, yet identical, options are available right across the border?
Daigou trade takes multiple forms. Some operations travel to foreign countries and stock up on products to resell back home. Hong Kong sees thousands of mainland Chinese travelers a day, purchasing everything from iPhones to infant formula to sell back in their own country. With a lack of taxes and increased access to foreign products in combination with geographic proximity, Hong Kong is an attractive market for daigou. Traders strained Hong Kong’s economy so much that the government actually established a two can limit for infant formula crossing over the border into China.
Another form of daigou are shoppers living in foreign countries who make purchases for mainland Chinese. These are typically younger Chinese women living abroad as students or stay-at-home, educated on popular Western brands. Operations are very small, usually with one women based abroad purchasing the products in bulk and another based in China redistributing them to the end customers. While some daigou operations can have up to three to four employees, this is a rare case.
Daigou trade relies on their small sized operations to avoid the import taxes that gives their products a significant price advantage. Traditional companies exporting their goods to China are subject to import taxes and strict regulations, making reaching Chinese consumers a lengthy and complicated process. By sending their product in small packages for redistribution, daigou avoid the notice of the Chinese government.
These proxy purchases know how to make the cheapest purchase and deliver in the most efficient manner. Often, they stock up on popular products during traditional Western sales day or weekly promotions in store and then take from their inventory to meet demand over the entire year. Foreign websites, such as the American version of Amazon, which are unavailable to mainland consumers are also utilized. Some of the larger daigou entities have business deals with delivery companies in China, who waive fees and get discounts for their continual business. These women know their consumer, know the Chinese market, and know the best channels to get their product from abroad to the end customer.
Daigou women are not only a business, they are a brand. Most of these buyers act as Key Opinion Leaders (KOLs) within their social media communities. Their consumers value their opinions and will purchases the products they promote.
where are they located?
These personal shoppers are found all over the world, wherever the demand can support their business. With the recent surge in demand for Australian products from Chinese consumers, Australia’s daigou trade is currently getting the most buzz. Consumers associate Australia with ‘healthy’ products more than any other country and their demand reflects this. Brands offering nutritional products and infant formula, like Swisse and Blackmores, are in high demand. Currently, Australia houses over an estimated 4,000 diagou.
American and European daigou tend to focus their inventory of luxury goods and beauty products. Imported goods have always had an allure to Chinese consumers, conveying a sense of wealth and high-fashion by merely being western. More specifically, American daigou typically deliver beauty products, France daigou send clothing home — although all countries in the region see a high demand for their designer products. China is the world’s largest consumer of luxury goods and daigou provide a much cheaper alternative than retail purchases in the mainland.
Countries who host these underground operations are typically hostile towards daigou. They believe daigou strain their supply and limit products available for the intended consumer. Although this is true, they cannot deny the ability for daigou trade to significantly increase demand for products, even if the products had been losing customers in their original market.
how do they operate?
Daigou are an e-commerce trade channel. Most of their customer communication occurs through WeChat — a Chinese messaging service that is similar to FaceBook, Weibo — similar to Twitter, and online stores. Personal stores are set up on e-commerce platforms like TaoBao, where customers can browse, shop, and review daigou. An extremely personal shopping method, most daigou customers know their buyer personally or through word of mouth. In a country like China, brand trust is a huge problem. Consumers have a long and sordid history with a lack of product safety and quality, hence the demand for imported products.
A mark of the rampant counterfeit products in the Chinese market, even an industry based on consumer trust is not invulnerable to the issue. The daigou industry is filled with fake products made in China but packaged to appear foreign. While e-commerce platforms have a rating function, these are often not trusted by consumers. Producers can easily manipulate their reviews and increase their own scores. In this distrustful purchasing environment, daigou have adapted to ease their customers worries. Buyers often livestream their purchases and provide photographs of receipts and product barcodes as proof of purchase.
Daigou trade has been successfully operating for years and businesses have had conflicting responses to their influence. Some businesses choose to cooperate with daigou sellers in order to reach the otherwise unreachable consumers. For operations without the ability or funds to establish retail or CBEC channels in the mainland, many find that the grey market is the only option to test the market. These companies avoid the meticulous, time consuming, and expensive product registration and certification process associated with legal distribution and companies are able to keep their prices competitive by avoiding import regulations.
Daigou traders also provide their own branding. As KOLs, consumers automatically trust their recommendations and will purchase the products they promote. Unknown brands are able to reach consumers who may otherwise never even hear of their products through this channel.
In Australia, Daigou have begun hosting conferences to connect their services with potential business partners looking to expand into Asia. Conferences in Australia registered almost 3,000 people in 2015, including representatives from name brands like Blackmores and Ugg. This is a step towards officially recognizing an underground channel as a legitimate trade pathway into China.
Other companies disagree on the benefits of daigou trade. When you hand over your product to daigou, you loose control over your brand image and product quality. There is no guarantee the original product will make it to the end consumer as intended. The producer must sacrifice control of their brand and product to work with proxy purchasers. These companies choose to maintain control over their product, cut out the middleman, and establish their own operation in China.
Some daigou claim cutting ties with their channel and reducing their profit is a dangerous move. In order to make daigou irrelevant, companies must cut their prices in China below those listed abroad to remain competitive. Daigou may also react to their loss of profit by advising their consumer base to not purchase the product any longer. Since consumers trust the daigou knowledge on product safety and quality, they would listen to their advice. There is debate about this effect as each daigou entity has an inherently small consumer base.
Australia’s Bellamy’s Organic Infant Formula certainly felt the influence of the daigou. From 2014-2016, the company grew six times its size. Australia’s infant formula sales trebled. This growth is a direct result of daigou exports of the brand’s infant formula to Chinese customers demanding high quality infant formula.
With sales this large, Bellamy began to undercut daigou traders to raise their own profit. The company slashed their prices on their CBEC platforms and effectively edged out the competitive pricing offered by daigou. In response, traders halted all cooperation with Bellamy and began recommending other brands to their customer base and Bellamy’s market shares experienced a significant drop. The cooperation and resulting fallout of Bellamy and daigou traders are a representation of how daigou can both drive sales and just as easily have the opposite effect.
WHICH STRATEGY IS BEST?
If there are pros and cons to daigou trade, which is the most profitable? For smaller businesses looking to expand into China, utilizing the grey market could be an opportunity to test the consumer response to products. However, companies have to be wary of the power they are granting daigou traders and the dangers of smuggling. If their shipments are caught by customs, there will profit loss with no chance of return.
For larger companies this is a more complicated question. An organization must weigh the pros and cons of forming legal business ties with China. This includes time and monetary costs of meeting regulatory requirements and establishing brick-and-mortar stores and online channels. While this option is certainly more costly, a business is able to maintain control of their brand and product quality, an assurance not available to companies cooperating with daiguo.
Knudsen&Co understands the power and utility of daigou traders. Companies are able to brand and market their products effectively — for free. For example, Swisse Wellness who has a daunting daigou resellers network with more than 110,000 private resellers involved. However as a company’s brand grows past the testing stage in the Chinese market, we recommend maintaining a careful balance between traditional sales channels and daigou. Companies are unable control their brand once it is in the hands of not just one third party – but thousands of different sales points. It is a safer choice to invest in traditional sales and marketing channels as a brand becomes more established on the Chinese market. Finally, it is a matter of time until the Chinese government will begin to regulate this sales channel as well, so companies must understand that daigou trade is only a preliminary solution.
In late October of 2016, Amazon launched a Chinese version of their Prime membership. It includes tax free cross-border shipping from Amazon’s Global Store for a yearly price of 388 RMB (around 50 USD). This provides an CBEC platform for international products without the price increase seen at other CBEC following new regulations. For comparison, an imported protein powder costs 380 RMB via Amazon while retail stores and official CBEC channels come in around 500 RMB. Amazon is now in direct competition with daigou trade.
Amazon Prime will be able to provide the product quality assurance consumers lack from daigou. There is no worry that Amazon will deliver a counterfeit product. There is also no concern of an undelivered product as Amazon has legal import entry into China, although it is unclear how long the Chinese government will allow this. Miss Chen, a Chinese consumer, told Knudsen&Co that she would not purchase Amazon Prime, as she believes the government will take down the site within the year (and Prime is a year-long subscription).
What Amazon has in security, it lacks in consumer choice. Prime only delivers limited products and most of the luxury items available are not on-season. The new generation of Chinese luxury consumers are not merely purchasing such items for the wealth association, but are genuinely interested in current fashion trends. They want to purchase in-season items that daigou can provide but Amazon can not.
This raises the question of luxury goods official store websites. Chinese consumers are extremely wary of online platforms — which is why most daigou serve their friends and family. They tend to distrust brand websites, even if they are ‘official.’
If Amazon is allowed to continue unregulated by the government, the daigou will see some direct competition for the first time.
THE FUTURE OF DAIGOU
The Chinese government has continually made political and economic moves to drive their economy towards a consumer-driven model. This entails keep purchases within their own borders. As a result, foreign companies have suffered from the recent increase in trade barriers, meant to even the playing field between domestic and foreign goods.
Cross-border e-commerce channels have been the most recent victims of increased regulation, now priced equal to retail channels after heavy tax increases. The only way for Chinese consumers to bypass heavy price increases on imported is to utilize grey markets outside of the regulation of the Chinese government.
Managing director and sector head, global luxury goods at Exane BNP Parabis Luca Solca said, “a larger portion of Chinese consumers spend their luxury dollars abroad,” either as tourists are through daigou services. The government is not blind to this loophole. Recent increased border controls were aimed at daigou shipping activity, although the effectiveness is debated. Considering the omniscient presence of the Chinese government, it is not unlikely that new regulation will soon be introduced to further eliminate proxy purchases. Solca comments, “More than ever, we expect [European and Chinese luxury] prices to converge in fiscal year 2016.”