Daigou - buying local to sell to China
Small-scale by Chinese standards, daigou traders have the buying power to strip supermarket shelves down under through massive direct purchases – and there lies the opportunity, but also the risk.
- Thousands of daigou entrepreneurs in Australia and New Zealand sell quality products to China.
- Estimates show there are 1,200 to 1,500 daigou businesses in Australia.
- Unregulated daigou shoppers can negatively impact sales, even for market leaders such as Blackmores.
By Leo D’Angelo Fisher
New Zealand honey maker Manuka Health exports to 45 countries including China, whose booming middle class has a seemingly insatiable appetite for food and health products from both sides of the Tasman.
Over the next two years, the Asian giant is forecast to account for 25% of Manuka Health sales and an agreement signed last year with a Beijing distributor will supply 20,000 retailers and leading online shopping sites.
China is a tier one market and the large-scale agreement with Beijing’s Commercial & Trading Chao Pi centralises most of its mainland China export supply chain through a single distributor, says Manuka Health CEO John Kippenberger.
“With Chao Pi, we plan to grow our China business significantly as we increase our brand distribution and continue to build our brand connections with our Chinese consumers.”
Manuka Health is also using an unconventional although increasingly common channel to build all-important connections with Chinese consumers: “daigou” shoppers.
Daigou means “buy on behalf of”. Thousands of Chinese daigou entrepreneurs in Australia and New Zealand who are often students are building online businesses by selling high-quality products such as baby formula, vitamins and skincare products via messaging platforms such as WeChat.
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Daigou shoppers take orders from customers in China who are often family and friends and source products from retailers to be on-sold at huge mark-up. A tin of baby formula that retails locally for A$25 can sell for A$80 in China, a healthy margin that enables products to be shipped to China by post or courier.
Chinese consumers, who favour milk and health products from Australia and New Zealand over inferior local products, prefer to buy through daigous to avoid counterfeit products and fake brands.
Daigou is an important channel for Manuka Health as the business continues to grow, says Manuka Health’s General Manager of Marketing Kate Kember.
“One reason that daigou works is that Chinese consumers are looking for highly-respected and reputable brands and when they buy from a daigou they are buying from someone they trust,” she says.
Partnerships are how the company builds trust in its brand. “Trust is a very important part of doing business in China and the endorsement of daigou opinion leaders ensures positive conversations around our brand.” Chinese consumers have a passionate interest in authentic, NZ-natural health products.
From daigou to direct
Not all companies have been able to seamlessly incorporate daigou shoppers into their China export strategies, however.
Tasmanian infant formula maker Bellamy’s Organic, which first used daigou as its primary channel into China, miscalculated when it tried to go it alone last year. Bellamy’s believed the daigou business model was under threat due to reports of a government crackdown on traders avoiding import taxes by the use of mail and courier. So Bellamy’s tried to sell directly through online retail sites and ran into problems when it resorted to heavy discounting to move an over-supply of stock.
The crackdown proved short-lived and ineffective, but Bellamy’s move made the firm less attractive to daigou shoppers who switched to other premium brands.
Sydney investment analyst Alan Edmunds, publisher of the Crouching Tiger Hidden Gems sharemarket report, says Bellamy’s failed to understand the importance that the premium tag carries. “It is also hard to overstate the importance of brand perception in China, particularly in regard to children’s food and health.”
Resale tricks and traps
Because daigou shoppers are both resellers and consumers, their activity can artificially skew markets in ways that are difficult for manufacturers to anticipate. Take the case of vitamins group Blackmores.
Huge demand in China for Australian vitamins in 2014 and 2015 resulted in daigou shoppers emptying shelves of Blackmores products, which they onsold online for up to three times the retail price. Domestic sales soared for Blackmores, but then the daigou business slowed in 2016, partly due to regulatory uncertainty. The company is still slowly clawing its way back, with lower sales this year.
Blackmore’s group sales of A$496m for the nine months to 31 March 2017 were down 6.7% on last year. But CEO Christine Holgate says sales and profit improved in the second quarter compared to the first quarter.
“Chinese consumers are now purchasing through multiple channels and our China in-country and export sales increased to $92m in the nine months, up 60% from the prior year. China remains an important part of our business.”
A growing concern
Livia Wang, director of Sydney consulting firm Access CN, which specialises in marketing to China, estimates there are 1,200 to 1,500 daigou businesses in Australia. And she expects the number to climb.
Wang cautions that businesses wanting to export to China can’t take for granted that the daigou channel will be available to them. “Australia is very popular with Chinese consumers as a source of high-quality products, but a product needs uniqueness for a daigou to show interest,” she tells Acuity.
A product category might have just two or three brands that are recognised by consumers in China. “The recommendation of a daigou carries a lot influence, so recommendations are not made lightly.”
Wang believes that not only will the number of daigou shoppers grow, but they are likely to become more sophisticated as a conduit for products into China.