What is the grey market?
So what exactly is the grey market? It’s a term that’s been bandied around a lot recently by industry publications such as The Business of Fashion, but many may not know exactly what it’s referring to. Not to be confused with the black market, which illegally sells counterfeit branded goods, the grey market has been defined as “a market where the product is bought and sold outside of the manufacturer’s authorised trading channels.” (source: Investopedia).
In layman’s terms, this means, for example, an authentic Michael Kors purse which is bought at a lower price via a third party retailer that has not been authorised by the company – in a lot of cases, on sites such as Taobao.com. The benefit to the shopper is that they save money without compromising on the quality of the product, due to the fact that import costs have essentially been cut out of the equation. So what’s the problem? You may be thinking, I save a couple of dollars, plus luxury brands make enough money don’t they? Isn’t it a victimless (non)crime?
The problem with the grey market
We all know the unethical nature of the black market, which essentially counterfeits branded goods and sells them on – in essence stealing creative concepts from designers, both established and up-and-coming and then making profits off this creative IP (intellectual property). However, the issues with fashion law and lack of copyright jurisdiction in the industry are another kettle of fish altogether. The real issue stems from the fact that brands are essentially losing millions in revenue to the grey market, as well as ownership of their branding and communication with their customer base. However, one can argue that the issue stems from the basic rules of economics: supply and demand.
Jingdong as well as Taobao.com, the latter of which is under the Alibaba group, are two of the largest players in the grey market. Though based in China, many Singaporeans also purchase from these sites, and I even have friends based in the UK who are regular shoppers on Taobao! Instagram is also a huge platform for resellers who originally purchase the luxury goods in New York, Paris or Tokyo where the prices are lower due to import costs and taxes, and then resell them in a market where the goods are priced markedly higher. In this manner, the customer who may not be able to afford to go abroad themselves to purchase the product at its lower price point, now have an easy avenue to accessing luxury brands at their European or US price points. Luxury brands have now lost control of their global pricing structures and the direct-to-consumer relationship which they value.
The reasons for the rise of the grey market
One of the major issues facing the luxury goods industry as a whole is the slowdown in economic growth in China, which in 2015 was the fastest growing market worldwide for luxury goods. Then there’s the severe drop in oil prices that has affected the purchasing power of wealthy Russian and Middle Eastern clients; as well as terrorist attacks throughout the world that have caused tourism to drop in prime shopping spots such as Paris. To give perspective on how big the grey market is, a third of the world’s luxury goods are purchased by mainland Chinese shoppers, but only a fifth take place in mainland China itself (Source: The Business of Fashion).
China has recently been attempting to combat this hit on their economy by cracking down on people who are smuggling luxury goods back in their suitcases, having bought them for a cheaper retail price abroad with the intent to sell them on; as well as raising taxes and fines on people they do catch, making any profit they can make by selling them on minimal, and therefore the concept of propagating the grey market less attractive.
I believe however, that the main issue lies in the understanding of consumer psychology and basic CRM (customer relationship management). The customer is savvier, smarter and more informed than ever in 2016. The fact of the matter is, they will shop around to get the best deal, and if that best deal means buying a designer bag at half the price of its domestic retail price via a reputed channel, they will take it.
Possible win-win solutions
To cultivate a domestic luxury market of consumption, many brands such as Chanel and Valentino have lowered their Asian prices to be comparable to their European counterparts. However, due to country-specific tax and import duties, they cannot possibly have complete control over this price discrepancy. Two things luxury brands can work on, however, is buying inventory available in countries where the grey market is prevalent as well as investing in localisation. If you go to Paris, the inventory and products available will be vastly different from that offered by the same brand on Orchard Road. Some of the key products are not brought in, so shoppers may venture abroad to access them, or be tempted to purchase on the still legal grey market. Net-a-Porter, the world’s largest luxury e-commerce site – founded by Natalie Massenet, a true visionary – has flourished precisely because the contemporary customer is online, on her phone and often doesn’t have the time to step into a brick and mortar store.
Yes, physical retail spaces can make for a beautiful shopping experience and are a necessary touchpoint for your consumer to be able to access your brand and its world. However, without a viable online purchasing option, the grey market will only increase and the gap in that customer relationship will deepen. One option is to tap into the power of the grey market through channels such as Alibaba, and partner with them to utilise their customer database and operational knowhow – effectively closing the gap between brand and consumer.
Another interesting way of attempting to unite global purchasing power is via authorised online retail channels such as Net-a-Porter offering exclusives for luxury brands, such as the launch of Coco Crush jewellery by Chanel last year. This is an excellent way of allowing a global consumer base to have the exact same opportunities, and not feel like they are missing out when they see that the UK is having Boxing Day sales on items that still full priced in their domestic market.
If you’re interested in knowing more about the lowering of prices Asia-wide for Chanel and Valentino products, read up here and here.
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