As prices continue to rise and government hints at a crackdown on wealth, China’s parallel imports deserve attention

Luxury brands have easily increased prices in China, with Bernstein finding that the average median price of luxury goods in mainland China is 60 to 75% higher than in Europe. Regarding the price increases that occurred during the pandemic, the prices of Louis Vuitton pocket accessories would be up 46.4% in April 2021, the largest increase in the market, followed by Chanel’s Mini Square Classic Flap (up 31.9%) and Louis Vuitton’s 26 and Multi Pochette toiletries (up 28.9 and 28 %, respectively). Further down the list are other Chanel models, as well as Dior, Prada and Gucci bags, all of which have seen double-digit increases.

Many Chinese luxury consumers have traditionally not been put off by the usual – and sometimes striking – price increases of brands, and in fact, brands like Louis Vuitton, for example, have actually targeted the Asia-Pacific region, in particular, with its styles in precious skins and fabrics. The overall willingness of consumers to consistently shell out larger amounts for luxury goods may start to change in the not too distant future, however, as the Chinese government has made it clear that it seeks to curb the growing inequality of wealth in the world. country. . Chinese wealth redistribution surge “is potentially bad news for the luxury industry,” Wall Street Journal says Carol Ryan wrote this week, noting that “a small group of very wealthy individuals – numbering only 110,000, according to Jefferies’ estimates – generate about a quarter of all luxury sales to the Chinese.”

The risk of a tax hike “could dampen those big spenders,” which could prove significant for luxury brands, which in many cases generate around 50% of their income in the Asia-Pacific region. (At the same time, a “reasonable adjustment in excess income” to achieve “moderate” wealth for a larger pool could ultimately bode well for luxury brands as more could afford to spend. ) Hit China’s biggest spenders, which pushed luxury group share prices down this week, a move to curb excesses could also give China’s parallel import market a boost.

Parallel imports into China

Referring to the activity of importing products originally purchased on – and destined for – one market into another without the express permission of the trademark holder, parallel imports – or gray market products – have long been existed in conjunction with the luxury goods industry. There are arguments to be made about the benefits brands derive from this unauthorized economy, with Kiel University economics professor Horst Raff and Simon Fraser University economics professor Nicolas Schmitt claiming that a parallel import system is beneficial for brands because retailers “order stocks before they know demand is fulfilled [for the goods]And in many cases in fashion, “the sale value of these products declines at the end of the demand period”, that is, at the end of a given season.

“For these types of goods, let retailers sell the unsold inventory [outside of a brand’s authorized retail network] reduces the risk of destructive competition between retailers “(and destruction quite literally),” results in larger orders with brands, higher profits for brands and higher consumer surplus, “according to Raff and Schmitt . Ultimately, “banning parallel imports can have detrimental effects on a manufacturer’s profitability”, while “allowing parallel imports is a simple mechanism whereby the retail price does not drop dramatically when the state of demand is proving to be weak, “while” providing incentives for retailers to place larger orders than they would otherwise.

Despite such potential gains (which at least some brands have quietly reaped over the years), parallel imports often abound to the chagrin of luxury brands, many of which aim to maintain their meticulously crafted licensed distribution channels and avoid growth. sales outside of these owned and operated networks. At the same time, they also demand the ability to carefully control the terms of sale of their goods, including prices, merchandising, quality control, exclusivity terms, etc.

Chanel, for its part, has been open about its goal of getting rid of the gray market for its products. “We have reduced the parallel market a lot, mainly in Asia, and we have double-digit growth in our stores in mainland China,” said Bruno Pavlovsky, fashion president of Chanel, in 2016, referring to the repression of the brand. against unauthorized sales, including its decision to “narrow the price differentials between the United States, Europe and Asia” from 2015 in an attempt to deter unauthorized third parties from purchasing products in one region and offer them in another.

The state of the law

With this stance in mind, and as brands continue to raise prices in China amid growing indications that the government will take action to combat extreme signs of wealth, as it has done to no avail. insignificant in the past, they are likely to give new attention to parallel imports into China, even though there is “no clear legal provision preventing parallel importation of branded products,” according to Kangxin lawyer Alexandra Chopenko, based in Beijing.

“The current trademark law and other national laws do not explicitly prohibit parallel imports,” according to Chopenko, noting that “goods imported by third parties that legally circulate in the offshore market and end up being offered to consumers in China do not violate the Chinese trademark law and related provisions. And Chinese consumers are particularly eager to engage in the parallel market, as noted by the burgeoning $ 52 billion company of daigou buyers, which buy genuine luxury goods outside of China and bring them back to the country, thus avoiding various import taxes.

“In China, especially when buying a luxury product,” Chopenko said, “consumers are sometimes more willing to buy from parallel importers, such as buyers of daigou, simply because it There is more confidence that products from overseas are genuine, as counterfeiting in China is particularly rampant.

While parallel imports are technically permitted in China, assuming the goods are declared to customs and the appropriate duties paid, courts have sided with trademarks in some gray market goods cases, namely when there is a consumer safety issue at stake. In 2009, for example, a Chinese court sided with the Michelin group, which accused tire dealers Tan Guoqiang and Ou Can of having infringed its trademark in as part of their gray market tire sale. At the heart of the court’s decision was the fact that the defendants had not obtained specific Michelin certification before offering the tires, which were intended for the Brazilian market, thus posing potential quality and safety issues.

With this in mind, the court considered that “the quality standard designated by the Michelin brand and [its] reputation as a leading tire manufacturer would be tarnished ”by the unauthorized use by defendants of Michelin trademarks in connection with the sale of gray market products. The case was characterized as a sign of “progress of trademark infringement lawsuits of parallel imported products in China”. However, for products, such as clothing and accessories, that do not pose equivalent health and safety concerns, it can be difficult for brands to protect themselves against parallel imports in the same way.

Trademarks, however, may not be entirely without recourse. Chopenko states that in the event that a distributor falsely portrays itself as an official distributor of a brand, this “may be grounds for building a legal case against him”.

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