Luxury brands have been readily boosting prices in China, with Bernstein finding that the average median price of luxury goods in Mainland China is an eye-watering 60 to 75 percent higher than in Europe. In terms of the price tag boosts that have played out during the pandemic, prices of Louis Vuitton’s Pochette Accessories are reportedly up by 46.4 percent as of April 2021, the greatest increase in the market, followed by Chanel’s Mini Square Classic Flap (up 31.9 percent), and Louis Vuitton’s Toiletry Pouch 26 and Multi Pochette Accessories (up 28.9 and 28 percent, respectively). Further down on 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 not traditionally been turned off by brands’ routine – and sometimes, striking – price hikes, and in fact, brands like Louis Vuitton, for instance, have actually targeted the Asian Pacific region, in particular, with its most expensive styles in precious skins and canvases. The overarching willingness of consumers to consistently shell out greater amounts for luxury goods may begin to change in the not too distant future, however, as the Chinese government has made it clear that it is looking to crack down on the growing wealth inequality in the nation. A wealth-redistribution push in China “is potentially bad news for the luxury industry,” the Wall Street Journal’s Carol Ryan wrote this week, noting that “a small group of very wealthy individuals – numbering only 110,000, according to Jefferies estimates – generates around a quarter of all luxury sales to the Chinese.”
The risk of higher taxes “may curb these big spenders,” which could prove to be significant for luxury brands, which, in many cases, generate roughly 50 percent of their revenues from the Asia Pacific region. (At the same time, a “reasonable adjustment of excessive incomes” in order to achieve “moderate” wealth for a larger pool could ultimately bode well for luxury brands in that more could afford to spend.) But more than potentially giving rise to a hit to the China’s ultra-high net worth spenders, which sent luxury groups’ stock prices falling this week, a move to curb excess could also give a renewed boost to the market for parallel imports in China.
Parallel Imports in China
Referring to the activity of importing products originally purchased in – and meant for – one market into another without the express authorization of the trademark holder, parallel imports – or gray market goods – have long existed in conjunction with the luxury goods industry. There are arguments to be made about the benefits that brands gain from this unauthorized economy, with Kiel University professor of economics Horst Raff and Simon Fraser University professor of economics Nicolas Schmitt asserting that a system of parallel imports is beneficial to brands due to the fact that retailers “order inventories before they know the realization of demand [for the goods],” and in many cases in fashion, those products’ “sale value drops at the end of the demand period,” i.e., at the end of any given season.
“For these types of goods, letting retailers sell unsold inventories [outside of a brand’s authorized retail network] reduces the risk of destructive competition among retailers” (and destruction quite literally), “results in larger orders places with the brands, higher profit for the brands, and higher consumer surplus,” according to Raff and Schmitt. Ultimately, “Banning parallel imports may have detrimental effects on a manufacturer’s profitability,” whereas “allowing parallel imports constitutes a simple mechanism by which the retail price does not fall dramatically when the state of demand turns out to be low,” while also “providing incentives to retailers to place larger orders than they otherwise would.”
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 authorized distribution networks and to avoid growth of sales outside of those owned-and-operated networks. At the same time, they also demand the ability to carefully control the conditions of sale of their goods, including as the prices, merchandising, quality control, conditions of exclusivity, etc.
Chanel, for one, has been open about its aim to get rid of the gray market for its goods. “We reduced quite a lot of the parallel market, mainly in Asia, and we have double-digit growth in our boutiques in mainland China,” Bruno Pavlovsky, Chanel’s president of fashion, asserted in 2016, discussing the brand’s crackdown on unauthorized sales, including its move to “narrow price gaps between the U.S., Europe and Asia” beginning in 2015 in an effort to dissuade unauthorized third-parties from buying goods in one region and offering them up in another.
The State of the Law
With this stance in mind, and as brands continue to boost prices in China amid growing indications that the government will take action to the address extreme signs of wealth, as it has done with no insignificant effects in the past, they are likely to give renewed attention to parallel imports in China, even if “there is no clear legal provision that stands in the way of parallel import of goods bearing trademarks,” according to Kangxin attorney Alexandra Chopenko, who is based in Beijing.
“The current trademark law and other national laws do not explicitly prohibit parallel imports,” per Chopenko, noting that “third-party imported goods that are legally circulated in the extraterritorial market and end up being offered to consumers in China do not violate Chinese trademark law and related provisions.” And Chinese consumers are particularly eager to engage with the parallel market, as indicated by the burgeoning $52 billion business of daigou shoppers, who purchase authentic luxury goods outside of China and bring them back into the country, thereby, enabling an avoidance of various import taxes.
“In China, especially when buying a luxury good,” Chopenko says that “consumers are sometimes more willing to buy from parallel importers, such as daigou shoppers, simply because there is more trust that goods coming from overseas are genuine, as counterfeiting within China is particularly rampant.”
While parallel imports are technically permitted in China, assuming that the goods are declared to customs and the appropriate duties are paid on them, courts have sided with brands in certain grey market goods cases, namely, when there is a consumer safety issue at play. In 2009, for instance, a Chinese court sided with Michelin Group, which accused tire dealers Tan Guoqiang and Ou Can of infringing its trademark in furtherance of their sale of grey market tires. At the heart of the court’s decision was the fact that the defendants failed to obtain a specific Michelin certification before offering up the tired, which were intended for the Brazilian market, therefore, posing potential quality and safety issues.
With that in mind, the court held that “the standard of quality denoted by the Michelin trademark and [its] reputation as a leading tire manufacturer would be damaged” by the defendants’ unauthorized use of Michelin’s trademarks in connection with the sales of the grey market goods. The case was characterized as a sign of “progress of trademark infringement trials of parallel imported products into China.” However, for products, such as garments and accessories, that do not pose equivalent health and safety issues, it may be difficult for brands to protect against parallel imports in the same manner.
Brands may not be entirely without recourse, though. Chopenko states that in the event that a distributor inaccurately holds itself out to be an official distributor of a brand, that “may be a cause to build a legal case against them.”