Adam Smith’s invisible hand is alive and well in China on one of the largest marketplaces for goods and service in the world, Taobao. However, for brands large and small, Taobao presents a double-edged sword. Having a presence, whether it’s a knock-off or the real thing simply being resold, means that there is a market for the brand. However, the brand has very limited visibility into who its customers actually are and runs the risk of losing control of its image in China.
The good news for brands large and small is that it’s getting easier. Alibaba recently announced a new counterfeiting reporting system to help international brands fight IP infringement. But while knock-offs are still a concern, the middleman reseller or ‘daigou’ shopper has come to represent a larger issue for many brands. With disposable incomes now at levels that allow China’s middle class to have real discretionary spending, they prefer to purchase the genuine article rather than a cheap imitation. However, for the majority of ecommerce shoppers in China, actually purchasing the genuine article on a brand’s flagship website remains a difficult task.
Precisely because of this difficulty, the ‘middleman shopper’ or ‘daigou’ has appeared. These middlemen are not rip-off artists, but rather enterprising individuals who have identified a friction point between brands and their Chinese consumers. These middlemen make products available that are otherwise difficult if not impossible for Chinese ecommerce consumers to purchase on their own. They make purchases abroad, bring them back to China, and list them on Taobao. These resellers charge a premium for their service and, while brands are not irreparably harmed by their efforts, brands are losing out on control of their image and revenue in China.
To put these middlemen out of business, or at least make them move on to another brand, two strategies are available: offense and defense. On the defensive side, a brand can file a report to the marketplace where its goods are available without the brand’s consent, or they can take the plunge into China’s court system to stop the reseller. The other option, an offensive one, is likely to have much better results: simply make your products directly available to Chinese consumers. For this to happen, integrating a payment solution preferred by Chinese consumers is absolutely necessary, and offering a logistics solution to deliver in China efficiently is very nice to have. Much has been made of Burberry’s listing on Tmall and the subsequent dive in middlemen activity for Burberry. While I’m sure Alibaba’s effort to curtail the resale of Burberry branded product had an effect, a more powerful force was also at work: capitalism.
When the same product is available at two price points, the one with the lower price point will be purchased. When Burberry products became available on Tmall at a price point close to what was available on Taobao, shoppers made the switch to Tmall because now they were 100 percent sure they were getting the genuine article – and it was easy to buy. Daigou shoppers could no longer command a markup on Burberry products, so they moved to other brands that are still difficult for Chinese shoppers to buy.
The good news for brands today is that you can make your middlemen shoppers move elsewhere without a large investment. If you make your products easily available for the average Chinese consumer to purchase, they will buy from you directly rather than paying a premium to a reseller on Taobao. This process starts with integrating a China-focused payment method, like UnionPay or AliPay, on your flagship website, UnionPay and/or AliPay. This one step will allow you to access Chinese consumers directly. This one step will allow you to access Chinese consumers directly. Millions of Chinese shoppers have solved the logistics part of the equation – they have friends and relatives abroad, they will be visiting the United States soon, or they have their own freight forwarder. With one simple payment integration, you can serve these millions of shoppers immediately; all you need to do is allow them to pay you. Once you allow for a direct transaction that lowers the consumer’s price, middlemen will look to other brands that still have not solved the payment friction point.