Daigou End, How Do The Global Cosmetics Brand Re-establish The Chinese Market

- Nov 12, 2018-

Shares in Japanese and South Korean cosmetics makers have been falling since October as the Chinese government began cracking down on daigou. The so-called daigou refers to Chinese tourists who buy a variety of products, including infant formula and skin care products overseas, and then resell them in China, often to relatives and friends. These shoppers are usually college students who want to make some extra money, or tourists who buy duty-free items.

Beauty is the sum of business. It is not a small sum of money. As my colleague David Fickering (David Fickling) recently wrote, Chinese tourists spent about $762 per person on overseas shopping in 2017, equivalent to private imports of about $100 billion worth of foreign goods. (Jefferies Group LLC) points out that beauty products are the first choice for these travelers. Any additional scrutiny could hurt brands that have profited from the influx of Chinese tourists over the past few years: since late September, The S & P Global Luxury Index) has lost $200 billion in market capitalisation. It also comes at a time when the number of Chinese tourists to Japan has fallen for the first time in six years, with a weaker yuan eroding purchasing power.


Shiseido generates 34% of its sales in China, including through daidy-buying sources: Goldman Sachs has been researching for many years on Japan's Shiseido (Shiseido Co.), Goose (Kose Corp.). And (Amorepacific Corp.) of Emory Pacific, Korea Such as the global cosmetics companies have been quite convenient. These companies have managed to break into the Chinese market without relying entirely on mainland sales. These days are coming to an end-foreign brands need to start selling more products in China to fill the gap.

The reason behind China's resistance to buying is simple: according to Goldman Sachs Group (Goldman Sachs Group Inc.) Mainland Chinese department stores typically cost more than 20 percent more than Japan's duty-free stores and 40 percent more than South Korean duty-free stores. By peddling Japanese goods on online platforms such as Alibaba's Taobao and Tencent Holdings' WeChat, the buyer can get a 10 percent premium. Moreover, in a country where fear of buying fake goods is widespread, products purchased from abroad are considered authentic. As daigou became more popular and improved, the Chinese government began to monitor the largely unregulated grey market. In the first week of October, reports of tighter customs checks on Chinese airports for "Golden week" returnees were scrubbed on social media.

The move comes after the government announced a new e-commerce law that would require operators of daigou and other network platforms, no matter how small, to register with the government and pay post tax. The law will enter into force on January 1. Goldman Sachs points out that the tax on high-end skin care products, which cost as much as Rmb10, 000, is about 30. 5%. China's customs inspections, as well as a punitive e-commerce law that is about to take effect, have hit Shiseido and Goose's share prices, which would be particularly bad news for Japanese cosmetics companies. Because Japanese cosmetics companies' products are more expensive and popular than Korean products (though from moisturizers to "makeup", Japan and South Korea benefit from celebrity promotion campaigns). The new barriers require companies such as Shiseido and Gaoxia to build a better strategy in China-to develop more retail outlets and online platforms and sell them through official channels. By this measure, Shiseido may be in a better position than its Japanese rivals. According to Goldman Sachs, the company already has a larger market share in China, with its main brands selling in 200 department stores. Goose's (Sekkisei) is available in 150 stores, while Decker's (Cosme Decorte) is only available in 10 stores.

Overseas brands are already cutting prices in China to follow suit in the US and Europe. In order to win sales, these brands will need further price cuts in the future. Fortunately, the Chinese government is also lowering taxes on some luxury goods, including cosmetics, for domestic shoppers. Another good news is that foreign companies are not under much competition from local companies: only one of the top 10 top brands in mainland China is Chinese.

Meanwhile, global cosmetics companies should be ready for the end of the price arbitrage game for Chinese tourists