Alex is a twenty-three year old woman from China who studies fashion marketing in London. She also does daigou on the side.

“I started [doing daigou] for friends and I only charged for shipping,” she says. “Then more and more people added me on WeChat and Weibo. If it’s a total stranger, why not make some money?”

Daigou is what is known as a gray market, or an unauthorized sales channel. In particular, it refers to Chinese shoppers who travel overseas to purchase goods so they can resell them illegally when they return to China. In some cases, like Alex’s, daigou agents ship their goods internationally and don’t return to China to make the sale.

The daigou market is a lucrative one, estimated to be worth 34 – 50 billion RMB in 2015, according to a report by Bain & Company. It’s one of many channels that Chinese consumers can access for Western luxury items, such as women’s wear, jewelry, and cosmetics, or other desirables like vitamins and food products. The daigou phenomenon has drawn both awe and criticism from countries like Hong Kong, Australia, and Japan, which are often targets of daigou agents, due to the sheer volume of purchases made by Chinese shoppers. In some cases, daigou agents have been known to temporarily empty a country’s supply of a certain product, like baby formula in Australia during Singles Day, a major online shopping holiday in China.

“It is an ecosystem created by Chinese people that is not defined by physical land,” says Jacqueline Lam, a co-founder of Mihaibao (觅海宝), a cross-border e-commerce platform targeting Chinese consumers. “It’s a market between Chinese people all over the world. It’s fascinating.”

Mihaibao wants to disrupt the existing daigou market by scaling and legalizing it. The platform connects Chinese consumers directly with high-end Western brands, such as Gucci and Giorgio Armani, while offering the lowest price globally for the product at the local currency automatically.

“Daigou cannot do that,” says Ms. Lam. “You cannot send a daigou traveling around the world, buying different products at the optimal price. So what we’re doing is we’re making money from efficiency in the system.”

In addition to price optimization, Mihaibao strips foreign VAT (value-added tax) off its prices, which allows the platform to add Chinese import taxes – legalizing the process – and still make a profit. Without paying Chinese taxes, Mihaibao cannot build a long-term, sustainable business and receive government support, says Ms. Lam.

Mihaibao also prides itself on its cultural understanding of Chinese consumers. Through its partnerships with Western companies, the startup hopes to help foreign brands cater to the tastes of Chinese consumers.

“They’re very smart shoppers,” says Ms. Lam. “They want much more information than Western shoppers and they care about different information.”

She cites a Giorgio Armani coat as an example. “They will care that it was made in Italy or France, but not made in Portugal,” she says. “Chinese customers now care where their original product is from. If something is Western but made in China, they might feel cheated.”

Also, because of issues of trust and authenticity of goods in China, product images need to be more detailed, says Ms. Lam. They have to show every angle of the product and convince Chinese consumers that it’s the product they want, she says.

There are many players in the daigou space, like other cross-border e-commerce sites and overseas websites including Tmall, JD, Shopbop, Net-A-Porter, and Kaola.com (网易考拉海购). However most make a compromise between authenticity and price. For example, consumers who shop on lower-end platforms like Alibaba’s Taobao run the risk of purchasing counterfeit goods.

There are offline channels for Western goods as well, such as domestic department stores and outlet malls, but an increasing number of Chinese consumers are opting for online options. According to a report released by Bain & Company, cross-border and overseas websites accounted for about 12% of all Chinese luxury goods spending. The daigou market, on the other hand, is declining because of crackdowns on daigou by Chinese customs officials, as well as other factors like global pricing by brands and governmental support of cross-border e-commerce in China.

As a startup that wants to legalize China’s gray market, it would seem natural for daigou agents like Alex to resent Mihaibao. But the company is employing daigou agents and leveraging their existing client bases in return for a commission on sales.

“[My] customers get parcels from the merchants, not from me personally, which is really good for building trust,” says Alex. In addition, by giving Mihaibao control over the supply side of daigou, she doesn’t have to spend time browsing through different stores and shipping packages.

In the future, Mihaibao plans on expanding to other verticals outside of fashion. Currently, the platform offers traditional luxury fashion brands, as well as more unique products from other high-end designers which appeal to younger generations of Chinese shoppers and Chinese people who have returned from working or studying abroad. In December 2015, the company received a round of $1.6M of seed funding from a list of high-profile investors including John Wu Jiong, Alibaba’s first CTO and Yahoo’s first Chief Architect.

Image credit: Mihaibao

Correction (1/27/2016) 17:30: This post has been updated to correct a factual error. Mihaibao received its round of seed funding in December 2015, not January 2016.

Eva Xiao

Eva Xiao is a tech reporter based in Shanghai. Contact her at eva.xiao@technode.com or evawxiao (wechat & twitter).

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