Necessary Closing of the Gap: How Luxury Brands Can Bag Daigou Resales

October 30, 2024

Counterfeiters and second-hand resellers have lived rent free in the minds of fashion enthusiasts, professionals, and scholars for years. But what about daigou resellers who are orchestrating the decline of luxury brand sales? Could these reseller pose a greater threat than counterfeiters? Daigou is a form of trade that started in China in 2008 in response to a health scandal.¹ Infants' powdered milk was proven toxic, and the Chinese population started buying milk abroad to resell in China for a profit.² Today, daigou looks quite different. Daigou resellers are buying luxury goods overseas, and reselling them in China for a higher price.³ In addition to the money laundering and tax evasion criminal activity that has been linked to this unauthorized form of retail commerce,⁴ the rise of global price disparities and the proliferation of the daigou trade present significant challenges for luxury fashion brands.⁵ In an era where exclusivity and brand integrity are paramount, unauthorized reselling and parallel imports not only dilute a brand's image, but also undermine carefully structured pricing strategies across the world while putting consumers at risk of purchasing counterfeit products. China's market and economy stand at the forefront of this issue. China is the most expensive market for luxury goods worldwide.⁶ Items are priced on average 24% higher in Beijing compared to Paris.⁷ From January to June 2024, daigou sales rose by 23% while luxury brand sales declined by 5%.⁸ This article explores the various legal challenges that luxury brands face due to the daigou trade and provides potential solutions to address parallel imports, price harmonization, and preserving brand integrity.

Challenges Luxury Brands Face

A simple solution to luxury brands' daigou dilemma could be to raise prices overseas so that Chinese consumers cannot purchase items for less abroad. However, luxury brands must constantly walk a tightrope when controlling cross-border pricing and distribution-antitrust laws, the exhaustion of rights doctrine on one side, price harmonization, and brand integrity on the other.

For example, companies in the European Economic Area (EEA) may set up the distribution system of their desire, and they may not restrict consumers from purchasing products from a manufactured-authorized retailer or an authorized retailer from advertising and selling products, including those across national borders. ⁹ On December 17, 2018, the European Commission fined a well-known, global lifestyle and clothing brand for allegedly restricting retailers from online advertising and selling cross-border to consumers in other EU Member States, an activity known as "geo-blocking."¹⁰ Though the brand was fined nearly €40 million, the Commission reduced the fine by 50% in return for the brand's cooperation. This case serves as a reminder that while price harmonization is crucial for luxury brands, it must be approached with care to avoid antitrust violations abroad.

Another legal challenge concerns the first sale or exhaustion of rights doctrine, recognized in numerous jurisdictions, such as the US and EU. This doctrine limits a brand's ability to control the resale of its products once released into the market by the brand.¹¹ Before Brexit, the doctrine of exhaustion prevented brands selling in the EU from restricting further sales of products legitimately placed on the market anywhere in the European Economic Area (EEA).¹² Post-Brexit, intellectual property rights in products first placed on the market in the UK are not exhausted in the EU, and vice versa.¹³ In other words, there is no reciprocal arrangement between the EU and UK, and the rights-owner of one can object to further sales of such products in the other.

In addition to the legal limitations on controlling parallel imports, the rise of daigou channels increases the risk of counterfeit products entering the market. The lack of authorized distribution channels can open the door to fraudulent products being sold alongside genuine luxury goods, further damaging brand integrity. Daigou trading has also been connected to criminal activity, such as money laundering.¹⁴

Targeted Brand Protection Strategies

Luxury brands can mitigate risks posed by daigou trade channels by tightening their supply chain controls and revising their wholesale relationships. For example, brands can incorporate buyback provisions into their contracts with retailers to prevent surplus goods from being resold through unauthorized channels. These provisions would give the brand the right to repurchase unsold goods, thereby controlling where and how the products are resold. Luxury brands can also take steps to strengthen supply chain controls to prevent overproduction and the leakage of surplus stock into unauthorized markets. This can include closer monitoring of inventory levels, implementing stricter audit processes for authorized distributors, using technology to track products from production to sale, and cracking down on bulk reselling.¹⁵

In addition to supply chain controls, brands can utilize advanced monitoring tools to detect counterfeit products and unauthorized daigou channels. This can include engaging in active online monitoring by monitoring platforms such as Taobao, WeChat, DeWu, and YMatou to track gray market and counterfeiting activities.¹⁶ Monitoring may also take the form of digital tracking mechanisms, such as RFID tags or blockchain-based systems, to authenticate products and trace their movement through the supply chain.¹⁷ Additionally, partnering with customs authorities can help identify and seize counterfeit goods before they reach consumers.

Long-Term Legal and Regulatory Solutions

While individual brand strategies are essential, there is power in numbers. Various luxury brands engaging in long-term advocacy for stronger legal protections and regulatory reforms could give luxury brands a better fighting chance against daigou resellers.

Luxe Lobbying

Luxury brands should engage with international organizations, such as the World Trade Organization and World Intellectual Property Organization, to push for policies that support the protection of luxury brands on a global scale. Advocating for more robust international trademark protections and import regulations may combat parallel imports.

Local Law Reform

Brands should also partner with local governments to address economic and trade practices. For instance, differences in value-added tax (VAT) and customs duties appeal to the daigou market because daigou traders can enhance their profits by claiming a higher VAT refund when they leave the country in which the luxury goods were purchased.¹⁸ Luxury brands can advocate for reforms that obliterate VAT refund forum picking. Luxury brands with a presence in China should also work with the Chinese government to implement anti-dumping style tariffs.¹⁹ In 2019, the EU increased its imposed duties to 79.3% on imports of Chinese electronic bicycles.²⁰ As a result, imports from China dropped more than 80%.²¹ The same plan of attack could work in reverse in China with the cooperation and enforcement of the Chinese government.

The legal and economic challenges luxury brands must overcome to combat global price disparities and the daigou market are significant, but not insurmountable. By adopting a combination of strategies-from contractual provisions and supply chain controls to artificial intelligence tools and long-term advocacy-all hope is not lost for luxury brands. With the right approach, brands can continue to thrive in an increasingly interconnected world despite changes consumers in certain economies may face.

1. Fanny Tang, In China, the Resale Market (Daigou) Is Impacting Luxury, Luxury Tribune (May 30, 2023), https://www.luxurytribune.com/en/in-china-the-resale-market-daigou-is-impacting-luxury. ↩
2. Id.↩
3. See id.↩
4. National Crime Agency, Chinese Underground Banking and 'Daigou', NAC/NECC v1.0 (Oct. 2019), https://www.nationalcrimeagency.gov.uk/who-we-are/publications/445-chinese-underground-banking/file. ↩
5. Carol Ryan, Luxury Brands' New Snag? Handbag Arbitrage, The Wall Street Journal (Sept. 13, 2024, 5:30 AM), https://www.wsj.com/business/retail/luxury-brands-new-snag-handbag-arbitrage-575bb1b7?mod=hp_listb_pos3. ↩
6. Wholesale Industry and Market News Editorial Team, Luxury Brands Facing a Challenge: The Rise of Arbitrage, Wholesale Managers (Sept. 14, 2024 at 8:44 am) https://wholesalemanagers.com/news/luxury-brands-facing-a-challenge-the-rise-of-arbitrage/. ↩
7. Id.↩
8. Id.; Ryan, supra note 5. ↩
9. European Commission Press Release IP/18/6844, Antitrust: Commission Fines Guess €40 Million for Anticompetitive Agreements to Block Cross-Border Sales (Dec. 17, 2018), https://ec.europa.eu/commission/presscorner/detail/en/IP_18_6844. ↩
10. Id.↩
11. American Library Association, Copyright for Libraries: First Sale, American Library Association (May 29, 2024, 4:37 PM), https://libguides.ala.org/copyright/firstsale#:~:text=The%20%E2%80%9Cfirst%20sale%E2%80%9D%20doctrine%20(,purchased%20it%2C%20you%20own%20it; Bluetooth SIG Inc. v. FCA US LLC, 30 F.4th 870, 872 (9th Cir. 2022) ("Under the first sale doctrine, 'with certain well-defined exceptions, the right of a producer to control the distribution of its trademarked product does not extend beyond the first sale of the product.'"). ↩
12. Directorate-General for Communications Networks, Content and Technology, et al., Notice to Stakeholders Withdrawal of the United Kingdom and EU Rules in the Field of Exhaustion of Intellectual Property Rights, Eur. Comm'n (June 25, 2020), https://commission.europa.eu/document/download/e1b7e67f-652a-49f1-8609-ee697001d1c9_en?filename=exhaustion-ip-rights_en.pdf.↩
13. Id.↩
14. National Crime Agency, supra note 4. ↩
15. Lisa Nan, 'Daigou' Trade's Threat To Luxury Brands In 2024, JingDaily (Sept. 27, 2024), https://jingdaily.com/posts/daigou-s-threat-to-luxury-brands-in-2024; https://sekkeidigitalgroup.com/the-influence-of-daigou-in-china/. ↩
16. Id.↩
17. Mohamed Dabo, How RFID Technology Combats Retail Counterfeiting, Yahoo Finance (Oct. 1, 2024, at 2:16 AM), https://finance.yahoo.com/news/rfid-technology-combats-retail-counterfeiting-061619899.html↩
18. Ryan, supra note 5.↩
19. Andrea Bolitho, How Does the EU Protect Businesses From Unfair Trading Practices? Euronews (Apr. 9, 2024), https://www.euronews.com/business/2024/04/09/how-does-the-eu-protect-businesses-from-unfair-trading-practices. ↩
20. Reuters, EU Extends Tariffs on Chinese Bicycles, Fearing Import Flood (Aug. 29, 2019, 9:18 AM) https://www.reuters.com/article/business/eu-extends-tariffs-on-chinese-bicycles-fearing-import-flood-idUSKCN1VJ1M3/. ↩
21. Bolitho, supra note 19.↩