Headline: "The Surge of the Grey Market in China Challenges Luxury Brands"
The luxury goods sector in China is undergoing a significant transformation as consumers increasingly turn to gray market and second-hand channels. This trend arises as luxury brands raise prices amid a weakening economic environment, prompting shoppers to search for more affordable alternatives. LVMH, the world's largest luxury group, reported a 3% drop in quarterly profits last week. This marked its first quarterly sales decline since the pandemic, with waning demand in China and Japan contributing to this downturn.
Similarly, Italy-based S. Ferragamo experienced a decline in quarterly revenue due to slowing demand from Chinese consumers. Max Piero, CEO of luxury intelligence consulting firm Re-Hub, highlighted persistent price differences between China and other countries as a key factor driving the growth of the gray market in China.
Estimated to be worth $57 billion annually, this market has gained momentum with the popularity of platforms like DeWu, which offer luxury goods at discounts of over 20% to 50% compared to flagship stores in China. Sales across 48 brands on DeWu rose 19% year-on-year in the second quarter, surpassing 7 billion yuan (approximately $984.4 million). Yi Kejie, a marketing content manager and luxury consumer, cited rising prices of luxury brands as a primary reason for turning to the secondary market.
The growth of this market is also linked to China's slowing economy. September saw retail sales rise by only 3.2%, signaling problems for global luxury brands that derive about a quarter of their global revenue from China. The increasing interest in second-hand and gray markets presents challenges for luxury brands aiming to maintain their sales in China.
Despite the rise in the gray market, executives from LVMH, representing brands like Louis Vuitton and Dior, have stated they do not intend to enter the second-hand market or offer a more affordable range of products. They believe stringent distribution controls reduce their exposure to parallel markets.
However, the second-hand market itself faces challenges with oversupply. The rapid increase in sellers has led to a decline in average purchase prices and about a 10% drop in average order values. Despite these challenges, items from brands like Louis Vuitton and Coach continue to sell quickly.
The second-hand luxury market in China, including platforms like Plum, ZZER, and Alibaba's Xianyu, has seen an annual compound growth rate of over 30% since 2020. ZZER founder Zhu Tainiqi forecasts around 20% growth for the sector in China this year. Zhu also noted that some consumers would allocate a portion of their spending to second-hand and gray market items while continuing to purchase new luxury goods.
Zhu emphasized the importance of trust and authenticity verification in the second-hand market, stating that consumers are likely to purchase if they find attractive deals on products with verified authenticity. This consumer behavior highlights the evolving dynamics of China's luxury goods market as it adapts to changing economic conditions and consumer preferences.