China’s Grey & Fake Market: An Insider’s View

2021 . 01 . 22 | written by Karen Marin

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It takes a lot of courage to have principles and take a stand against what you believe is wrong. I had the distinct privilege of speaking anonymously with the owner of a trading company in China who wanted to expose the dark side of the grey and fake market and, specifically, how it can affect artisan fragrances. To understand the context, let’s start with a definition and then some history.

Sources define the “grey market” as an alternative channel by which authentic product that carries a recognizable brand name or trademark is diverted to dealers, brokers or the open market. Grey market vendors may be unauthorized to sell specific goods, or they may be authorized to sell them in a specific country or region. Typically, they sell the goods at significant discounts. Grey market fragrances tend to be legitimate as opposed to fakes, dupes or counterfeits, although those exist as well. Going back to the 1970’s, luxury fragrances in the Western market that performed poorly or were overbought were often sold off to regional distributors and resold in other countries or regions at wholesale. This practice put cash back in the hands of the brand who could use it to create new products or to fund other projects.

When we look at fragrance usage in China we must understand that for centuries scent was used to perfume interiors through the burning of incense. Fragrance for personal usage and grooming is a relatively new phenomenon that dates back to the 1990’s. Fragrance is aspirational, a luxury product that functions as a status symbol, especially if it is an international brand. Consequently, using a fragrance is a new habit but isn’t based on familiarity or appreciation of specific fragrances, meaning the level of sophistication, knowledge and awareness on the part of the consumer varies greatly.

With this background in mind, I wanted to understand the significance of the grey market vs the official one, how it functions in China, and how goods are sourced.

According to my anonymous contact, the grey market has a long history. The brands that are present come from various countries and they are not always present in official channels, partly due to the complexity of entering the market. As a result, “there are not a lot of choices of brands in the official market but the selection in the grey market is several times greater.” Whereas in the past, there had been a balance between the two markets, now the grey market is significantly larger. Nevertheless, it may not last. “The official market is growing since more brands have built relationships with local official business partners. More customers are learning about artisan fragrances so there is an interest. In the future, there is great potential for the official market to be bigger.”

Understanding that the personal use of fragrance is relatively new, so too is the business of selling fragrances. “Perfume trading and retailing really weren’t open in the past. People who wanted to enter this business had no idea of how to start, where to buy, and who to sell those goods to. But now things have changed.” As it was explained to me, “People who had been working for big trading companies left the previous company and started their own very small businesses. They used the supply source, stolen or diverted from the previous company, and they found a way of selling to people because they had the contacts. They sold goods at a low price to attract clients.” Apparently, this is a widespread problem that most trading companies have experienced. Often it occurs with people who worked in the warehouse, who see the goods come in and know what they are because they are labeled. “Someone on the inside is diverting deliveries. They don’t care what they are selling; they could sell fragrance today, and laptops and cell phones tomorrow. In fact many perfume sellers used to sell electronics in the past, but they have recently changed and now sell perfumes. Who knows what they will sell in the future?” This phenomenon can occur even more easily because goods are often shipped into third party warehouses. So shoes, accessories, fragrances, various goods all pass through the same place. “Those traders don’t know what artisan fragrance brands are, they don’t even use perfume. People are looking at how they can make more money and take advantage of situations. They use large e-business platforms, and they are finding new retailers very easily and selling goods very easily. “

Clearly, China has its particularities, although some of these occurrences are not uncommon in other markets. As a former retailer, business developer and fragrance buyer in the US market, I know products were “backdoored”, theft occurred in warehouses, cartons “fell off trucks” and secondary sales were even listed on balance sheets. The great fallout in China is the destruction of the market price. “Some brands and distributors used to offer limited quantities for grey market but now they are selling large quantities so the grey market is full of goods that used to be on the official market. Sometimes some brands will send their stock to discount websites and stores, to private sales, employee sales (with a discount as high as 70% off) , and pop (flash) sales. I’m not sure if the brands will know where the goods are finally going but some of them do know. Some brands encourage employee sales, and the staff can buy in whatever quantity they want– or they collectively buy with other staff members, and then resell the goods to traders.” Even if these are only one-time sales events, once the prices are more than 20% less than the official retail price, the integrity of the brand is compromised and it won’t be able to reposition the pricing for several years.

Indeed, the price is a key factor for the Chinese consumer. "Small traders don’t care where the goods will be finally going, they don’t care about end retail prices, they may even sell to retailers who have bad reputations. What’s worse is, those retailers fight with each other trying to outdo each other with the cheaper price. For some products, the retail discount can be as high as 50% off, and the total margin can be less than half a euro per bottle (even for expensive brands). Grey market prices are incredibly cheaper than those in the official channel. The two channels used to have their own cake, but now the grey market started rapidly eating the cake of the official channel. The old balance has been broken.``

Fake goods are also clouding the market. “The problem is that so many customers don’t know if the product is legitimate, so their preference is always for the cheaper product, even if it is inferior and no matter where it comes from.” Remember, many consumers aren’t familiar with fragrances, they have never smelled the product and they don’t know what to expect. Undoubtedly, this paves the way for fake goods. My contact explained that some trading companies have bought fake goods because they weren’t familiar with the actual product, and in turn, they have sold to retailers who also don’t know the product, and don’t know that it is fake. “And then even the end buyer doesn’t know! I have seen negative posts about fragrances on social media, but I think they got a fake! Sometimes you can have fake juice in a real bottle, but people don’t know.”

In closing I asked for advice on how brands can protect themselves from falling victim to the grey market. It’s essential to do your homework: interview your distributor, verify where they are selling and at what prices. “The key point is that foreign traders (US & European) must control themselves, not to just sell to anyone. “

Thank you to my anonymous source for your candor and your honesty!

Additional sources:
http://knowledge.essec.edu/en/strategy/luxury-cachet-globalized-world.html
http://that-smell.com/2010/07/06/the-grey-market-and-how-it-works/
https://www.referenceforbusiness.com/encyclopedia/Gov-Inc/Gray-Market.html
https://assets.kpmg/content/dam/kpmg/pdf/2016/02/gray-markets-kpmg-publication.pdf