Luxury’s Latest Foe: 40% Discounts on Chinese Resale Sites

Luxury powerhouses like LVMH and Kering SA are facing a fast-growing foe in China: a grey market that sells brand-new, authenticated goods procured in other countries for discounts of up to 40 percent on the mainland.

Currency exchange fluctuations and Chinese shoppers’ growing price-consciousness has given new life to arbitrage in luxury goods, dominated by an e-commerce platform called Dewu. The value of Louis Vuitton goods sold over Dewu grew 11 percent to 2.6 billion yuan ($358 million) in the first half of 2024, compared to the same period last year, people familiar with the matter said.

That’s over 14 percent of Louis Vuitton’s total estimated sales in China of €2.3 billion ($2.5 billion) for the same period, said the people, who spoke on condition of anonymity. Sales of items from other labels like Christian Dior, Hermès, Chanel, and Prada have also seen double-digit growth in the first half of this year on Dewu compared to the same period last year, the people said.

Dewu’s rising clout is bad news for global luxury giants who are already grappling with slowing growth in China. While the items resold over the platform were still purchased officially from the brands in other countries, contributing to revenue, these parallel imports erode profit margins and lay waste to the billions of dollars that fashion houses have invested in building up stores and operations in China.

It’s unclear if luxury houses are aware of the extent of grey market in China, though executives have flagged the danger of another form of parallel imports: Chinese travellers saving their spending for trips overseas, particularly Japan where the weak yen has made shopping cheaper.

“For the time we still see a lot of Chinese travellers, particularly into Japan, which basically says something about the appetite of Chinese customers for our brands,” LVMH chief financial officer Jean-Jacques Guiony said at an earnings call last week. “But it comes at a notable cost from a profit and margin perspective.”

LVMH’s sales in the region that includes China slumped 14 percent in the quarter through June but soared 57 percent in Japan. With the yen standing at 34-year low against the euro, this means a significant portion of the growth happened at a lower price, Guiony said.

At Kering, revenue in Asia Pacific declined 22 percent in the first half of the year, mainly driven by worsening performance in Greater China, compared with 22 percent growth in Japan, said chief financial officer Armelle Poulou at an earnings briefing last week. A third of spending by Chinese customers took place overseas in the second quarter, mostly in Asia including Japan, she said.

“Dewu is the digital version of a flight to Japan,” said Jacques Roizen, managing director of China consulting at Digital Luxury Group. “The prices that you can get in Japan, you can get them on Dewu.”

Dewu accounted for 73 percent of China’s grey market revenue for 10 top luxury brands across key categories as of August last year, according to a report by consultancy Re-Hub. Alibaba Group Holding Ltd.’s Taobao accounted for 26 percent.

Dewu, LVMH, Chanel, Kering and Hermès did not respond to requests for comment. Prada declined to comment.

Kering’s shares have slumped 7.8 percent since it warned last week of further profit drop in the second half. LVMH’s shares fell 7.2 percent since its first-half results, announced mid-last week, missed analyst expectations.

Discounts and Authenticators

The sellers on Dewu procure luxury items from stores or online platforms in other countries and transport them into China. Thanks to hefty luxury taxes and a disconnect between brand pricing in China and the rest of the world exacerbated by its Covid isolationist period, the trade is profitable for these parallel importers known as “daigou” even after shipping costs and discounts.

On Dewu, a classic large, black Chanel Flap bag is sold at a 33 percent discount, nearly 30,000 yuan ($4,130) cheaper than the official price in China. A small, brown Louis Vuitton Carryall bag with its iconic monogram print — one of the brand’s hottest items in the country this year — is sold at a 20 percent discount. Over 4,000 of the bags have changed hands in just the last three months. Such discounts are highly attractive because these top luxury labels almost never offer promotional price cuts.

Formerly known as Poizon, Dewu was founded in 2015 by chief executive officer Yang Bing as a sneaker resale marketplace. The platform has attracted a growing base of young, tech-savvy users due to its unique operation model — it only features sellers offering the lowest prices and provides authenticators to screen every item before it reaches the buyer.

On China’s social media, tutorials about how to flip luxury goods on Dewu abound. One such video shows the entire process of buying a Gucci belt for €315 ($341) overseas, having it shipped into China via Hong Kong, and then re-selling it on Dewu for $460 — still 20 percent cheaper than the official price in the country.

Overall, China’s daigou grey market is estimated at $81 billion for all industries, with the luxury sector playing a key role, according to the Re-Hub report. Unauthorised sales could represent as much as 70 percent of some labels’ official turnover in mainland China, according to a Bain & Co. report in March.

Parallel importers have also evolved into highly organised and professional businesses, Re-Hub said. They have significant buying power and can obtain large volumes of luxury goods through brands’ wholesale, duty-free or retail channels, according to the report.

Another factor that’s caused China’s grey market to balloon has been excessive inventory from many luxury brands due to an over-estimation of post-Covid demand for their goods, said Frank Müller, founder of consultancy firm the Bridge to Luxury. This has damaged brands’ exclusive images because items are available everywhere, from wholesale channels to different resellers locally.

While top luxury brands like Hermès, Louis Vuitton and Chanel don’t have wholesale businesses and tightly control access to their most popular items, others are now scrambling to address the problem. Burberry Group Plc, which got nearly a fifth of its revenue from wholesale in the year through March, wants to cut this by 30 percent, while Kering and Prada SpA have also said they’re moving away from the channel.

Nevertheless, the damage has been done, said Müller. “Psychologically, we have trained the customers to consider these items commodities, like toothpaste or other things where we look in supermarkets for the best deal,” he said.