If you think selling replica bags and luxury accessories is shady, take a journey to the different fashion markets. The frontiers are unmarked, and the lines are blurry.
From sketchy tariff-free items smuggled across the border to blatant counterfeits, the e-commerce sphere is full of questionable “gray-market” goods when it comes to luxury.
The gray market refers to the trade in goods from unofficial suppliers. The way this often works in luxury fashion is a retailer buys the product at wholesale from a designer, and instead of selling it directly to end consumers, sells it to another retailer or agent who isn’t approved by the brand and typically lacks the same aura of exclusivity as official sellers.
The product is legitimate but sold via an unofficial channel, hence the term gray. (This is distinct from counterfeit goods, which are “black” markets).
Retailers engaged in this practice typically buy the product at wholesale prices, about one-third to half of the recommended retail prices
Often gray market sales are a play on price differentials. Retailers engaged in this practice typically buy the product at wholesale prices, about one-third to half of recommended retail prices, and then resell it for a smaller margin to unauthorized retailers. When that unauthorized channel is based in another country — typically China, Japan, South Korea, and the Middle East for luxury products — this is known as “parallel imports” because the product is sold in a market for which it was not intended and without the permission of the company that created it.
Few luxury brands will discuss the practice, though most participate in some form, including GUCCI, PRADA, DIOR, LOUIS VUITTON and VALENTINO.
.
“Brands tolerate a gray market activity for the sake of making their short-term results better — never mind the long-term damage,” says Luca Solca, head of luxury goods at Exane BNP Paribas, referring to the impact on carefully cultivated luxury brands of having their products appear in sales channels that are less exclusive than official retailers.
“It appears what happens is retailers will often over order on a wholesale basis and then resell at a small margin to an agent often in China or elsewhere. This agent will then open a legitimate online channel to generate direct-to-consumer sales or pretend they are an authorized distributor and sell to unsuspecting boutiques often selling the product at a substantial discount,” Lock explains. This, in turn, “undermines any product that is positioned at recommended retail prices through an authentic channel, be it online or bricks or mortar.”
Much of the “parallel” market for luxury goods stems from boutiques in Italy, where smaller, independent stores dominate, as well as other markets in Europe home to luxury brands and the US, according to Mario Ortelli, managing partner of luxury advisors Ortelli & Co.” Traditionally, the Italian and European stores, priced in Euro, have the lowest prices, and Italy, compared to other markets in Europe, is the one with the highest number of wholesale accounts, so this is a source for the gray markets.
One of the best-known examples is Daigous, or purchasing agents who cater to Chinese demand for foreign goods, particularly luxury wares. Daigous typically buy products in a region outside China where an item is cheaper, then mail or travel back to China with the goods to sell them for profit.
The price differences between markets can be striking. According to research recently published by Money.co.uk, a customer in Europe will pay a little over $2,800 for an Yves Saint Laurent sac de jour, but the same bag will cost more than $3,700 in South Korea. A shopper can purchase a white Fendi canvas baguette bag for roughly $2,620 in continental Europe. That same item will cost about $3,350 if bought in mainland China.
Taking advantage of such disparities has become a big business. Last year, the gray market was estimated to be worth up to 8 percent of the $257 billion personal luxury goods market, said Luca Solca, an analyst at the research firm Sanford C. Bernstein.
“Traditionally, plenty of luxury brands either turned a blind eye to or even indulged in sales from the gray market as it meant quick cash and a chance to beautify their reported numbers from wholesale retail partners, especially on non-moving or excess stock,” Mr. Solca said. “But in recent years that attitude has had to change as the market morphs into something that has become more and more difficult to control.”
One fashion insider who spoke on condition of anonymity said handbags and accessories are top of the list for gray market vendors, alongside “hot” items like BALENCIAGA sneakers and anything from GUCCI.
The brands most at risk are those that are most in demand, especially when it comes to their iconic, high-value, perennial products like CHANEL’s 2.55 handbag. Those products offer better margins and less risk for unauthorized retailers. Comparatively, a €300 BALENCIAGA T-shirt that’s only in season for four months offers a shorter life cycle and lower margins, so it is less appealing.
One fashion insider who spoke on condition of anonymity said handbags and accessories are top of the list for gray market vendors, alongside “hot” items like BALENCIAGA sneakers and anything from GUCCI.
But what if you chose to buy from Cettire, a website offering discounts of up to 30 percent on the latest fashion styles? However, with the arrival in recent years of companies like Baltini in Italy, Italist in the United States and Cettire, which listed on the Australian Stock Exchange at the end of 2020, gray sales have been ending up in millions of digital shopping baskets.
A number of Daigous have formed large-scale collectives, and companies like Beyond have emerged for easier cross-border transactions from the United States to China. Recently, Western businesses using similar gray market tactics at scale have emerged, including Cettire, which expanded rapidly during the pandemic, and unauthorized watch dealers like Authenticwatches.com and Chrono24.
Particularly in Southern Europe, the genuine product has often had a way of coming out the back door of a factory or off the back of a truck and eventually into the hands of consumers looking to pay less than full price.
Cettire was started in 2017 by Dean Mintz, a reclusive young founder with no previous experience in fashion, and offers global consumers deep discounts on some of the best names in luxury, including PRADA, GUCCI, CHANEL and SAINT LAURENT.
According to its initial public offering prospectus, sales between March and June 2020 grew 331 percent from a year earlier. Cettire raised $49 million when it went public in December, and its share price soon swelled more than 400 percent.
Cettire could be seen as a case study in how a company operates around the gray market. It claims to sell about 160,000 goods from around 1,300 high-end fashion brands on its “unique proprietary platform” via a process known as dropshipping. Dropshippers are online sellers that don’t keep any products in stock. Instead, they buy the item from overseas and ship it to the customer when an item is purchased.
Cettire takes a commission on the sales, primarily of products made and priced in Europe to customers in the United States and Asia. Like Farfetch, a London-based site, Cettire is a middleman between boutiques and customers. Cettire has no direct relationship with luxury brands.
“The luxury gray market is not new, thanks to fashion’s notorious inability to really get a handle on its production volumes,” said Julie Zerbo, a lawyer and the founder of The Fashion Law, a website exploring the legal and commercial challenges facing the industry. “Particularly in Southern Europe, the genuine product has often had a way of coming out the back door of a factory or off the back of a truck and eventually into the hands of consumers looking to pay less than full price.”
Luxury brands are now effectively competing against themselves. Exactly how much they stand to lose is difficult to quantify. But most are acutely aware of the gradual thinning of the veneer of exclusivity that they have worked hard to establish and that has already been partly diluted by the heavy discounting of off-season stock by department stores and outlets.
A customer in Europe will pay a little over $2,800 for a Yves Saint Laurent sac de jour, but the same bag will cost more than $3,700 in South Korea.
Now, many brands are working with consultants and local governments to develop new ways to combat the gray market after previous attempts to control the practice — like buying back and destroying unsold stock — led to backlash over sustainability issues.
“If brands don’t want to be a victim of these platforms, then they have to button up their distribution and reduce wholesale volumes to protect their image,” Mr. Solca said. Brands like GUCCI, PRADA, and BURBERRY have recently trimmed wholesale orders in an attempt to cut back on the appearance of ubiquity and the risks of heavy discounting.
“Eventually, this market will contract, but for now, there are plenty of price-sensitive luxury consumers who are willing to purchase authentic goods at a discount through gray channels,” Mr. Solca said. “That demand won’t go away any time soon.”