A Bursting Bubble: What is the Parallel Market of Luxury?

Last April, while presenting its quarterly results during the traditional video conference with analysts, the top executives of LVMH expressed concern about the phenomenon of "daigou", private buyers who import goods purchased more or less indirectly to evade taxes and resell them through unofficial channels, practicing prices contrary to brand listings and fueling the so-called luxury gray market. «For your image, there is nothing worse," commented Bernard Arnault, «it's dreadful». But what is the gray market? If the black market concerns stolen, counterfeit, or untraceable goods, the gray market deals with goods purchased in areas where distribution happens either through direct retail or multi-brand stores. At the same time, the brand is scarce due to its exclusive distribution. It's no coincidence that LVMH, along with Kering, Prada Group and others, «are very, very careful in their contracts with retailers», explained an industry insider who shall remain anonymous. «A thousand clauses specify that the merchandise must be sold only at retail, only in-store, or only through their own website to the end consumer. But they started protecting themselves only because, in the past, the situation had slipped out of their hands». The parallel or gray market (technically called "the parallel”) is a secret that «no one talks about», as other sources have told us, a symptom of «a system that is leaking from all sides» keeping the margins of retailers high despite the retail crisis, and helping brands record healthy sales growth percentages by falsifying the actual performance of all parties involved.

How did the parallel market originate?

«The parallel market originated in the 1990s for the Japanese market,» explained the manager of a retailer who shall remain anonymous. «The Japanese went crazy for Italian brands that were completely closed in those years. So they came to Italy and bought, bought, bought, and then resold them in their country through various channels that could be unofficial physical stores, websites, or even teleshopping in some cases». Over time, the market has evolved from individual buyers to entire companies managing huge cargoes and million-dollar turnovers. Margins for those selling to other sellers are calculated in tens of millions. The channel moves from Italy to Asia: «from here, the goods are shipped to Hong Kong», our source explains, «and from Hong Kong, who knows. Everything goes to China, Korea... who knows where else». Another retailer talks about routes all over the world: «Before China, there was Russia. Probably in the future, there will be India, while now the 'parallelists' are focused on South and Central America and South Africa». But do all orders start from Italy? Oftentimes, yes. «The parallel is a purely Italian phenomenon», explains one of the retailers we interviewed. Others mention Germany and Canada; others still blame the USA, but all of them happen to accuse large multi-brand e-commerce, with Farfetch leading the way, opening an entire new category of issues for them.

Going back to Italian territory, the perhaps shocking fact is that the parallel market sustains the life of stores with a ghost economy without which they could not even exist. «A false economy within Italy», as defined by the creative director of a Milan-based brand. «The reason is, unlike all other countries in the world, the presence of numerous multi-brand stores: in Italy per se, we have three or four hundred. Their totality makes 70% but also 90% of their turnover abroad. There are provincial boutiques that invoice seventy, eighty million in sales – who do you think buys all that merchandise?» says another. Faced with the situation, retailers are half accomplices, half forced: «The budgets and data are given to us by the brands», explains a source, «the company has to meet targets, and so we have to meet them too. The system forces you to double up, even if you don't want to. Many historic Italian stores have to maintain seventy, eighty million in turnover. Keeping those numbers is an Olympic sport».

How Does the Parallel Market Work?

There are two ways to engage in the parallel market, and both revolve around the figure of the "parallelist", a wholesaler conducting «regular but unofficial» transactions. The first method is the so-called pre-order, and the second is that of the actual daigou. In the first case, the "parallelist" contacts one of the authorized stores of the brand and participates in its order as a kind of invisible partner, buying several million worth of merchandise that is then purchased at Italian prices and introduced into that vast semi-underground network that takes it to the four corners of the world. In the second case, that of the daigou, a single agent goes to a store «and maybe buys fifty thousand euros worth of merchandise. So the boutique gives him a discount of twenty, thirty, or forty percent, and he takes everything home tax-free. Remember that in all markets outside Europe, brands apply geo-pricing to retail prices, which are on average 20% or 30% higher depending on the country and market: a figure that takes into account the local spending power, the desirability of the brand in that country, but also customs and import duties. Gray market operators buy their merchandise in Europe, reselling it with an average markup of 20%, which keeps their margins similar to those of official retailers». Now, these numbers may sound abstract to those outside the logic of retailer trade (which we will return to shortly), but to give an actual measure of how vast this underground market is, according to a report by Re-Hub, the Chinese daigou market has grown by 40% from 2019 to today, reaching an impressive turnover of 81 billion dollars.

While some of our interviewees consider the parallel market to be something endemic («It will always exist,» pontificates one, «where there is exclusive distribution, there is a parallel market»), one of them blames the brands: «It's the CEO who decides from the beginning. They lower margins for big brands. Everyone wants to get close to Chanel, do direct distribution, control the price from start to finish. They increase their margins at the expense of multi-brands that need to sell with a mark-up of 2.5 or more. But big brands markup at 1.9 or 2 with a constrained product and on which VAT must be paid. Companies raise prices and lower margins, retailers don't profit from it, to do so, they would have to sell at the pace of a baker.» It all takes on grotesque tones when «the CEO or the commercial director makes direct parallel agreements to control prices in both markets».

But if the retailers we interviewed were happy to talk to us, what happens in the brand offices is protected by the most ironclad silence. «Managing the parallel market well from a commercial point of view, holding it tight, keeps the price high and does not affect your official sales», explains one of the interviewees. The situation has reached a point where encrypted sites have even been created where buyers can place online orders, turning the semi-submerged economy of the gray market into a kind of e-commerce. Paradoxically, parallel sellers have also created retail e-commerce sites (appropriately obscured in Italy, France, and Switzerland), whose names have also been published by The New York Times: Cettire, Baltini, Italist. Good luck viewing their homepage; it's impossible if you're Italian. It features everything found in boutiques with a discount of several hundred euros. Specifically, Baltini promises up to a 35% discount on over 70,000 different items, including Bottega Veneta bags, Marni garments, Gucci, and Tom Ford, and all conceivable brands. Observing Cettire's page, you notice a Gucci Jordaan loafer, which costs $920 on the brand's official site, sold for $637. In a stroke of supreme irony, these same sites have a section dedicated to sales.