Challenging the daigou business model

According to Chinese market consultancy iiMedia Research, China’s cross-border e-commerce generated $1.1 trillion in sales in 2018. Market research company eMarketer estimates that a quarter of Chinese population will shop online for overseas products by 2020. The Chinese Electronic Commerce Law passed in October last year aims to regulate China’s expanding e-commerce industry and oversee daigou business.

Daigou, or “buy in the name of” in Mandarin, designates overseas shoppers buying foreign products for their mainland customers. Back home, those goods, more often luxury handbags and cosmetics, are sold through e-commerce platforms such as Taobao or Jingdong or messaging apps. This grey market has been around for some time now and emerged in response to China’s higher-priced luxury goods and taxes on imported items. Though South Koreans are also prone to this activity, daigou business largely concerns Chinese entrepreneurs, around 1 million individuals according to Sixth Tone.

In 2015, a Bain & Company study estimated Chinese daigou business to be worth 11€ bn; a major shortfall for China’s tax collector as these budding entrepreneurs were not registered as businesses. China new e-commerce law introduces new regulations to these budding entrepreneurs rendering their business model obsolete and less profitable for their customers. In particular, daigou will now be subject to taxation consequently increasing the price of their items online.

Long term benefits for the luxury industry

The countries and brands most exposed to daigou’s visits are likely to see short-term cuts in their revenue. Global Blue estimates that Daigou Tax Free ShoppingA number of countries offer VAT/GST refunds to international... More sales in store (SIS) accounts for 5% of Chinese total SIS in Europe and 16% in APAC. Daigou are in particularly targeting Italy in Europe and Japan in the APAC region.

But it is not all negative for the luxury industry. In parallel, the new e-commerce law also introduces higher tax exemption limits, benefiting the luxury industry. Single purchase limits increased from $288 to $720 and the yearly purchase limit now sits at $3,780 compared to $2,900 previously.

The depreciation of daigou business model means product sold by foreign luxury brands and retailers in China will be more competitive to purchase for Chinese customers. The law will also limit bulk buy purchases from commercial buyers on certain iconic handbags and cosmetics, therefore preserving these items’ aspirational image and exclusivity.