Chinese grey market dominates online sales of luxury brands

China's grey market, where new and authentic goods are sold at deep discounts, is increasingly eclipsing the official sales channels of some global luxury giants in the country's dominant e-commerce space, according to a new report.

For high-end outerwear brands Moncler and Canada Goose, sales of some of their most popular products were 2.5 to 15 times higher on Dewu — China’s largest grey market platform — than on their official stores on e-commerce platform Tmall during the peak shopping season from October to March, data consultancy Re-Hub said in a report released Tuesday.

Dewu’s growing popularity is weighing on the share prices of major companies from LVMH to Kering SA, whose profit margins have been squeezed by the trend. By shopping on the country’s parallel market, consumers are essentially buying high-end items at deep discounts from abroad, bypassing the domestic channels that brands have spent a lot of money to build and maintain.

Re-Hub did not exclude returns and cancellations from Dewu sales, while Tmall's figures do not include those factors.

Luxury jewelry makers Cartier and Van Cleef & Arpels also recorded up to 6.8 times more sales on Dewu than on Alibaba Group Holding Ltd.-owned Tmall in the first half of this year, according to the report.

According to the report, Cie Financiere Richemont SA's Cartier has seen its best-selling products sold at discounts of up to 54 percent — among the biggest on Dewu — in the first half of this year. As of the date of analysis, Aug. 22, a Cartier ring that officially sells for 18,200 yuan ($2,555) in mainland China was being promoted on Dewu for 66 percent less.

Such deals are increasingly attractive to China's middle-class consumers, who have become more price-sensitive in the face of a slowing economy and a collapsing property market.

On the same day, a Fendi bag with an official price tag of 29,500 yuan sold for half that price on Dewu, while popular items from brands including Louis Vuitton, Dior, Gucci and Prada sold for 20% to 40% less, the report said.

For some items, prices on Dewu were much lower than official prices in Japan and France, indicating that price arbitrage during travel to take advantage of weakening currencies and lower taxes is only part of China’s grey market growth story. Deepening discounts could be due to brands raising official prices over time or because resellers have direct links to brands’ distribution networks, allowing them access to lower prices, Re-Hub said in the report.

Some brands have taken steps to curb the growth of the gray market, the report said, citing anecdotal evidence. Some brands, such as Louis Vuitton, have systems in place to identify individual traders in stores and blacklist them as buyers, according to Re-Hub. Other measures include restricting wholesale channels and tracking the flow of products into China.