By Iida Kambur – Customer Success Manager for Pointer Brand Protection
In 2008, China suffered a public health crisis when six infants died and as many as 300,000 were made ill by poor quality baby formula. As a result of the compromised domestic supply chain, many consumers started buying directly from foreign markets, both through cross-border websites and through intermediary shoppers called daigou.
The episode was particularly felt in Australia, where some shops limited individual purchases after daigous bought such large quantities for export that domestic stocks were exhausted. For brand protection observers, it was also an event which highlighted the growing gray market practice of daigou buying.
What Does Daigou Mean?
Often translated as “to buy on behalf,” daigou shoppers are, predominantly, Chinese nationals who live overseas and who buy locally in order to ship goods back to China. Chinese consumers employ daigous in order to find cheaper prices abroad, to avoid paying import tariffs (as parcels are sent via personal mail), and to obtain products not officially available in their region.
Although cross-border export channels such as this have grown in legitimacy, they remain a problem for some brands who are concerned about the impact of gray trade and parallel goods. Reports have suggested that there may be in excess of one million daigous globally, generating a possible market value of $2.5 billion annually.
How do Daigous Work?
Although the system received a great deal of attention because of the baby formula crisis, the global network of these professional shoppers has subsequently grown and diversified. Initially, the relationships were established directly through social networks such as WeChat and Weibo, and consumers would send shopping lists directly to these service providers. For a small commission, on top of the cost of buying the goods, shoppers would then send the products back.
According to Angela Zhang, one Melbourne-based daigou who admitted the extent of her business, it’s now possible for her to spend up to 15 hours a day processing orders through WeChat, and to send up to 100 packages a week to buyers. It’s a business that has been so lucrative that she now pursues it as a full-time, well-paid career.
While it may have started with baby milk and personal relationships then, the network has now expanded to include several professional websites and companies who provide the same services in greater volumes. From luxury fashion to pharmaceuticals, cross-border exporting has become a huge business, which is why it also poses a danger to businesses.
Why is it an Issue for Brands?
Gray trade can be a complex area as the laws that govern the movement of goods differ by country and product area, leaving businesses exposed to differing levels of risk and loss.
However, unauthorized reselling is damaging for businesses in several ways and should be considered as part of a successful brand protection strategy. First, there’s the simple issue of lost profits for companies and lost tax revenues for countries. By subverting the legitimate supply chain, these reseller networks export goods which may have been priced differently by the brand for a specific reason. If the tariffs that a business pays to export their products to a country raises the retail price, this may be an issue beyond the brand’s control. Sellers and consumers who undermine this process are actively contributing to a harder environment for the brands they otherwise support.
In South Korea, where it’s known as “surrogate shopping,” it has been reported that duty free sales destined for Chinese markets have risen to unprecedented levels during 2019. It’s been suggested that these increases are partially driven by the legitimization of the reselling networks through websites and umbrella companies. Although the number of individual professional shoppers may be dwindling, their replacement by bigger companies with more buying power means an even greater threat for brands.
For many companies in the electronic, pharmaceutical, automotive, and industrial sectors on the other hand, reducing gray trade and daigou activity is not simply just an attempt to recoup lost profits but to protect customers and to comply with international laws. To take one example, if an electronic device prohibited in one country were shipped without the necessary adjustments, any resulting faults causing injuries or damage to property would be a disaster for the manufacturer and the buyer. In the case of medicines too, the tight controls on distribution can be destabilized to the point where certain regions are left without an adequate supply of life-saving drugs.
In addition to the gray trade issues created by this system, there are also instances where professional shoppers have supplied counterfeit products to buyers, and even where daigou have created online profiles for themselves as residing overseas while living in China. In these cases, the shoppers buy cheaper goods online and then forge official receipts from the country of origin, which are then supplied to their buyers.
Despite the complexities of dealing with the issue then, gray market trading affects businesses in every sector and its significance has only increased due to new cross-border trading patterns like this.
How Can Businesses Protect Themselves from Daigou and Gray Trade?
The good news is that since January 2019, when China instituted a new law concerning daigou services, controls have become much stricter. According to China Daily, such sellers are now “required to register their business, receive a license, pay taxes accordingly and be held responsible for fraudulent goods. Violators are subject to fines up to 2 million yuan ($290,900).” Taxing these services has had the effect of dampening down the sales made by the smaller traders especially.
The bad news for many brands is that although individual sellers appear to be decreasing, bigger groups with the power to buy and sell more goods (and thus to pay for taxes and registrations) have also stepped into the breach. It’s a situation that we will be monitoring over the coming weeks and months in order to keep our clients better informed.
In the meantime, brands must still act to repossess control of their supply chains. Pointer’s Distribution Protect solution uses our Revlect software to effectively monitor parallel imports and to identify suspicious seller activity. Additionally, our Investigations team track product origin, seller details, and price differentials, all of which provide critical intelligence that can be used to progress the enforcement process and help brands protect their interests and their customers.