Daigou (代购) is a form of surrogate shopping in China as a means to receive cheaper luxury goods from duty free shops and foreign countries. Along with the growth in tourism, the luxury market, and increased disposable income, the Daigou market in China has developed rapidly in the past ten years. Until 2014, the market enjoyed continuous growth, reaching approximately ¥80 billion. However, it was estimated to shrink to ¥34–50 billion in 2015, as a result of price adjustments by key brands to reduced Daigou sellers’ margins, government efforts to tighten control over Daigous and the emergence of more overseas purchase channels.
The four main challenges of China’s daigou industry
The impact of COVID-19 for Chinese Daigou industry is huge but is waning
COVID-19 has brought great damage to the industry due to travel restrictions, shipping delays, and lower consumer confidence. According to CLA’s survey on the Daigou industry, over half of respondents said that business decreased by at least 15 percent from the one before COVID-19.
However, it is pleasing to see that, as China has made astonishing process in its recovery from the pandemic, demand has grown for Daigou services, starting in April 2021. According to the same survey, 32% of respondents expected more spending on Daigou sellers and overseas e-commerce platforms.
The promulgation of the Chinese E-commerce law: Daigous need to pay taxes now
In addition, the promulgation of the Chinese E-commerce law also struck the Daigou industry in China. The E-commerce law requires the natural person, the legal person and unincorporated organizations engaged in business activities of selling goods or providing services through the Internet and other information networks to register as market entities and pay taxes. Since then, as an e-commerce operator, Daigous must register and pay taxes in accordance with regulations.
Some of them say that with the reduction of profit margins, the prospects of engaging in this industry in the future are not optimistic. “If found by the customs, I have to pay 30% of the tax on ordinary products and 60% of the tax on luxury goods and cosmetics. For example, if a purse is 20,000 yuan and if I’m caught by the customs, I’ll be asked to pay for more than 10,000 yuan. This means the trip will definitely be money-losing and all my hard work will be wasted.” said Li Li, a Daigou.
The cross-border and overseas websites/apps are taking the market share of Daigou in China
The cross- border e-commerce platforms dedicated to providing easy access through user-friendly websites/apps, offered timely and thoughtful customer service and invested a lot in marketing to increase customer awareness. All the three things above, together with more convenient cross-border payment tools like Alipay and Union pay, increased accessibility and availability of cross-border e-commerce which encouraged purchasing via it. Also, customers, especially among the emerging middle class, are becoming more knowledgeable and confident in conducting overseas purchases online by themselves.
Consumers are gaining more trust in cross-border websites/apps, due to improved user experience, product quality and pricing. This puts much pressure on the Daigou, leaving them less customers and profit opportunity.
The explosive growth of Chinese duty-free retails, especially in Hainan province
Chinese consumers’ enthusiasm for duty-free products has not diminished because they cannot leave the country. Rather, they turned their attention to duty-free retail in Hainan, a shopping paradise where the Chinese government has given strong policy support to stimulate domestic demand.
The prices of beauty products in Hainan are 20% to 40% cheaper than domestic counters. In addition, Sanya International Duty-Free Shopping Center also has an additional discount of 10% off for three regular-priced beauty products. Despite all the discounts, the prices of some beauty products are still not as favorable as overseas duty-free retail channels such as Lotte Duty Free Shops in South Korea. However, they still attract those who cannot travel abroad due to travel restrictions.
The statistics from customs show that from July 1 to October 31st, 2020, Haikou Customs supervised a total of 12.01 billion yuan of duty-free sales, a year-on-year increase of 214.1%; and there were 1.783 million shoppers, a year-on-year increase of 58.8%.
Shopping at the Hainan duty-free area is becoming the preferred channel for Chinese consumers, since they no longer need to wait for Daigou sellers to return to the country, and do not risk paying for ungenuine products.
Source: Jiemian News, People crowded the Sanya International Duty-Free Shopping Center
Chinese Daigou’s industrial chain and the profit logic behind
The infographic below depicts the industrial chain of Chinese Daigou, through procurement, logistics and sales sections. During the whole process, Daigous earn profits from the price differences of the products, rebates from the duty-free retails and tax reduction.
Source: daxue consulting, Chinese Daigou’s industrial chain
The more professional a Daigou seller is, the higher profit margin and the larger the economy of scale they create, allowing them to get lower purchase prices and lower average postage. Taking Korea as an example, if a product in China is 147 RMB, a Daigou is able to buy it for only 63 RMB or even cheaper and sell it back in China at a price of 95 RMB. The gross profit rate of this product is 34%, which is very high in retail business, and thus making it a lucrative job.
Source: daxue consulting, The cost and profit of Chinese Daigou purchasing goods in Korea and selling in China
Source: daxue consulting, theoretical infographic showing the profit model of a Chinese Daigou
Hot items amongst Daigou: the luxury goods and daily necessities
Reasons to buy luxury goods from Chinese Daigou: lower prices or limited editions
Approximately 15% of luxury goods consumption in China comes from Daigous. In addition, cosmetics from top international brands account for more than half, followed by bags, watches, and jewelry.
The first reason for this is that they offer much cheaper price for the luxury goods. The current tax rate in the Chinese luxury goods market is the highest in the world. Data from Chinese Ministry of Commerce shows that the prices of 20 brands of high-end consumer goods in watches, luggage, clothing, wine, and electronics are about 51% higher than in the US, and 72% higher than in France. Hence, Chinese customers still can save a lot of money buying the products from the Daigou.
Secondly, Daigous have access to the special limited editions, of which the regular consumers don’t. Clients are willing to pay double or even triple the price to acquire exclusive products from Daigous.
Source: Baidu image, Hermes bag, one of the luxury goods that ordinary consumers can hardly buy directly by themselves
Reasons to buy the daily necessities from Chinese Daigous: high quality
Although China has an abundance of land, resources and great variety of very affordable food, incidents like 2008 Chinese milk scandal and ″Leather milk″ scare in China have largely destroyed the confidence of Chinese consumers in certain domestic food products. Buying imported food, especially like milk powder from a Daigou in a fair price has become the choice of many middle-class consumers. But luckily, with the strengthening of China’s national food safety supervision and the improvement of laws, the confidence of Chinese consumers in domestic food is gradually recovering.
Despite the ongoing improvements of the Chinese’s manufacturing industry and its leading position worldwide, it still struggles to innovate and fights ingenuity. Many Chinese consumers are still willing to purchase via Daigous for their daily necessities like Japanese rice cookers and European suitcases. However, products like Xiaomi Smart Home Appliances are regaining consumer’s attention. It is fair to expect a gradual decrease of imported daily necessities in the future.
Takeaways for the Daigou market in China：
- China’s Daigou market is getting more regulated by the government.
- It is a lucrative industry but has relatively high entrance barrier. Large consumer base, efficient purchasing ability and unique buying channels are important for Daigous.
- The Chinese Daigou industry is facing fierce external competition and may experience a major industry change
- Chinese Daigous still have a significant impact in the luxury goods and cosmetics industry.