My Insider View: Why is the recent China's Daigou regulation is important for the Luxury World

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Some background first, you may have never heard of Daigou (meaning "on behalf of purchase") refers in a nutshell to individuals who buy items like luxury handbags or infant formula overseas and resell them to customers in China. This parallel import system took off due to the huge price gaps that existed between overseas and domestic markets. so this way, some daigou could acquire products at 30-40% discounts abroad and sell them locally while still offering lower prices than official stores.

Now let’s talk about Hainan, Hainan Island became a hotspot for daigou luxury shopping during COVID travel restrictions. Resellers rushed there to buy duty-free products from the many luxury boutiques. This created a huge growth in Hainan's duty-free sales, from $1 billion in 2014 to a projected $16 billion in 2022. During my years in China, I have worked on a number of projects to help luxury brands build experiences for their customers in Hainan. For example, I recall working on a project to develop a mobile app for a luxury brand that allowed customers to book appointments for personal shopping and styling sessions. I also worked on multiples projects to create pop-up stores for a luxury brand that featured exclusive products and experiences. Everyone was building experiences, it was intense competition and really a fun time for us advertisers. The luxury market in Hainan was always a showcase for the latest trends in digital luxury, fashion and design. Luxury brands from all over the world were opening concept stores and launching products in Hainan.

Why it matters?

The luxury market in Hainan is important globally for a number of reasons. First, China is the world's largest luxury market, and Hainan is one of the most popular destinations for Chinese luxury shoppers. Second, the Hainan luxury market is growing rapidly and the island's attractiveness as a travel destination. Third, the Hainan luxury market is increasingly becoming a global hub for luxury brands, as they seek to tap into the growing demand for luxury goods from Chinese consumers?

However, stricter regulations on cross-border e-commerce have been introduced to oversee Daigou resellers. This move comes from various concerns, one of which is the potential disruption of luxury brands' efforts to manage their pricing and distribution within China. Additionally, Daigou resellers can sometimes sell counterfeit or grey market goods…

Now some Hainan's luxury shops stand empty as daigou shoppers disappear. Many resellers can't operate profitably anymore. Duty-free sales growth slowed dramatically in 2022, hurting Hainan's luxury retail sector. Duty-free sales in Hainan dropped approximately 30% in 2022 compared to 80%+ in prior years.

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While painful in the short-term, industry experts believe the crackdown will benefit luxury brands over the long haul. Official distribution channels will be strengthened, pricing control improved, and a more sustainable business fostered. I remain confident that Hainan will continue shining brightly as a luxury destination. Having witnessed the innovation and resilience here firsthand, I believe this market can reinvent itself.

Businesses catering to luxury shoppers must adapt to the new environment. Shifting focus from daigou to direct local sales is key. Investments in brand building, customer experience, and product quality/authenticity will pay dividends down the road. For firms playing the long game, ample opportunities still await in Hainan's luxury retail market.

But in the long term, the crackdown on Daigou resellers could actually benefit the luxury market? Why you will ask ? This is because it could lead to more sales for luxury brands through their official channels. Brands will be more careful to ensure that their products are sold through authorized retailers.

So basically the crackdown on Daigou resellers is a short-term pain for a long-term gain. It will help?build a more sustainable and profitable business in Hainan in the long run.

1.??? Focus on building relationships with luxury brands. This will give you access to exclusive products and experiences that you can offer your customers.

2.??? Invest in your brand presence and marketing efforts. This will help you to attract new customers and build trust with existing customers.

3.??? Offer a seamless and convenient shopping experience for customers. This includes making it easy for customers to place orders, track their shipments, and return or exchange products.

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The path forward will require brands and businesses to directly engage mainland travellers in more meaningful ways. Strategic partnerships, digital innovation, and hyper-personalized experiences will be key to fostering a new generation of loyal customers.

Luxury brands must also elevate the localized consumer experience within China itself. Expanding boutiques rapidly into Tier 3 and 4 cities, while training staff and implementing digital tools to deliver tailored services, will help close the gap left by daigou. Additionally, luxury players need to urgently build up their digital and e-commerce capabilities domestically. Getting ahead of the curve on new platforms and beta programs, while improving online product accessibility and promotions, will reduce dependency on daigou purchasing.

The stage is set for fresh thinking and new heights!

Disclaimer: Opinions are my own and not the views of my employer.