Suppose you want to buy a Rolex. Then you can do this at an authorized Dutch jeweler. For the silver-blue Rolex Yacht Master II, for example, you pay 24,200 euros at an official point of sale. If you search for this model on Google, something crazy happens. You end up on a site, Chronex, where the model suddenly costs only 22,370 euros. The same goes for a Prada bag, the Galleria model, named after the Milan shopping arcade. It costs 1,850 on the official site and only 1,612 euros on a luxurious-looking webshop called Cettire. Then you still have more than 100 euros left. How is that possible?
It’s been called the “dirty secret” of the luxury industry: the gray market. Unlike the black market, where counterfeit products are traded, gray market products are authentic – from designer bags and watches to the latest collections from the major fashion houses. They are offered with substantial discounts – sometimes up to 35 percent – on minimalistic webshops with a luxurious look. Only: These online platforms have no direct relationship with the luxury brand they offer products from – they are unauthorized sellers.
For years, the luxury industry turned a blind eye to the gray market. “But now that this branch is growing fast, you notice that the big brands are getting nervous,” analyst Luca Solca of research firm Sanford C. Bernstein in Geneva emailed. The gray market is currently worth around 18.2 billion euros worldwide, Solca estimates. That amounts to about 8 percent of the personal luxury goods market. What exactly is going on? Three questions.
1. How does the gray market work?
Historically, this has been a branch that has remained out of sight of the western consumer, wrote The New York Times recently. It was mainly an Asian phenomenon. Because luxury products are traditionally produced in Europe, they are cheaper here, without import duties. For example, a calf leather bag from Yves Saint Laurent costs 2,390 euros in Europe, compared to 3,260 euros in South Korea, according to figures from the British money.co.uk. Chinese traders, daigous called (after the Chinese word for ‘surrogate shopping’), take advantage of this price difference by purchasing luxury products in Europe and offering them at a discount in Asia again. They achieve this by making clever use of loopholes in the law.
Sometimes the luxury brands participate in this ‘parallel’ market. fashion website Business of Fashion writes that Chinese traders, who are not affiliated with an official point of sale in their home country, be spotted in the Paris and Milan showrooms of major fashion brands.
However, this phenomenon does not only take place in Asia. “For luxury brands, the gray market is a way to boost their own sales and get rid of excess inventory,” said analyst and luxury expert Luca Solca. Luxury brands have an official distribution network. When there is a new collection of a brand, authorized customers (such as a boutique, jeweler or online store) place an order. Sometimes that is an order that is too large on purpose, so that they can resell part of it to an unauthorized, third party in the gray market – an outlet, for example.
Everyone seems to benefit from this approach. The brands, because in this way they can show rising sales figures to hungry shareholders. The authorized customers, because they can resell the products purchased at wholesale prices at a profit. The players in the gray market offer these bags, watches and clothing at a discount, but still make a profit because they have been able to buy them at a favorable price.
According to Business of Fashion Several sources have confirmed that major brands such as Gucci, Prada, Louis Vuitton, Dior and Valentino are participating – or at least participating (although the above brands declined to respond to questions from the site). The Financial Times writes that it is for official watch dealers was a useful system to get rid of excess inventory.
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In short, this system functioned more or less for a long time, only the luxury brands seem to be losing control over the ever-growing gray market in recent years.
2. What’s the problem?
For about five years now, the Financial Times, more and more online stores are added. These target Western consumers and imitate the luxurious aesthetics of authorized online outlets in a sophisticated way.
These gray webshops offer luxury products at sharp discounts and end up high in search results on Google with aggressive marketing techniques. They sell under names such as Baltini, Cettire and Chrono24.
Because more and more people buy luxury items online – by 2025 a quarter of total luxury sales will take place digitally, research agency Bain & Company predicts – more and more people will come into contact with gray webshops.
As a consumer it is often unclear whether you have ended up at an official point of sale or not. If not, it could have consequences. Then, for example, you are not covered by warranty if your bag or watch breaks.
A bigger problem is that gray sales harm the luxury brands themselves, says analyst Luca Solca about this self-cannibalizing system. “In the short term, they earn extra money from the gray market. But in the long run it causes damage, because you get online price differences in this way.”
If you want to buy a Chanel bag and would previously go to the store yourself, or to the official webshop, you can now look online for a copy with a discount. This makes the suggested retail price increasingly difficult to justify, says Solca. Why would you pay full price?
And that while luxury brands often take years to build an image that radiates scarcity and exclusivity – allowing them to charge high prices for their products. “There are huge investments behind this in marketing,” says Manon Rieger-Jansen, who is a partner at law firm Bird & Bird and who specializes in luxury and copyright. Also, as a brand, you can no longer build a relationship with your customer if they succeed at an unauthorized point of sale.
Guram Gvasalia, co-founder of the hip clothing brand Vetements, mentioned the gray market in an interview with the Financial Times from 2017 the “dirty secret” of the fashion industry. That same year, Jean-Claude Biver, head of luxury group LVMH’s watch division, spoke of “the industry’s cancer” in an interview with Reuters. „If you have the illusion of prestige, the dream [die je verkoopt] and puncturing sales prices (…) it means a slow death for luxury goods.”
But precisely because of the pandemic, says Manon Rieger-Jansen, people have started to buy even more luxury products online. Due to raw material shortages and problems with the international supply chain, you see prices rising at the same time. Chanel bags, for example, have become 15 percent more expensive in the past year – pushing people to look for a discount even more.
3. How to handle this system?
Online stores that enter the gray market crawl through the cracks in the law, says lawyer Manon Rieger-Jansen. The property rights of a luxury brand expire once they have sold a lot through their distribution system. “You could only legally tackle unofficial outlets if they detract from the aura of a luxury brand. If you offered a perfume from Gucci for sale next to toilet cleaning products at the drugstore, so to speak.” Because the gray webshops have a slick appearance with photography that matches it, it is difficult to take steps against them.
Moreover, brands that want to tackle the gray market often don’t even know where the ‘leak’ is, wrote The Financial Times earlier. They release several collections a year and have an enormous network, with a complicated infrastructure. This makes it difficult for luxury brands to control where their products end up. And even if they know who is pushing their products to the gray market, the business paper writes, they are cautious about legal action, because these are valuable business relationships with whom they have carefully built over years.
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Still, there are signs that the luxury industry is trying to curb the gray market. For example, Gucci, Burberry and Prada would keep a closer eye on their distribution, writes The New York Times. For example, the latter, Prada, has in 2020 warning letters sent to customers who, in their eyes, misbehaved.
There is also a French startup, Data & Data, which has been operating since 2015 on the basis of big data seeks to trace trade flows in the gray market. The company keeps track of which products are offered at heavy discounts, and which are therefore overproduced. Last year, about 70 percent of Swiss watchers were affiliated with Data & Data writes Vogue Business.
And in 2020, the luxury concerns LVMH, Richemont and fashion house Prada founded the Blockchain Consortium, which uses technology to trace the trade in its own products.
But on a ‘grey’ webshop such as Italist.com it is not yet noticeable that this stands in the way of gray trade. A Gucci bag from the current winter collection is touted on the Italist homepage for 2,412.99 euros – almost 80 euros cheaper than on Gucci’s official website.
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