Gray Market: how can luxury regain control on its image?

Currently Coveting The RealReal FW18

Acquiring a luxury product has always been a relationship of authenticity, emotion and exclusivity between clients and brands. But with the Internet era, distribution channels are multiplied, products are more accessible, and so are prices.

As devastating on the long run as counterfeit, gray market is yet less renowned and more mistakenly tolerated.

Also known as “parallel import”, the gray market encompasses suppliers or distributors selling genuine branded items but legally distributed outside the official distribution channel without the trademark holder’s permission and making profit through an aggressive markdown strategy.

The resale market will be a market worth $41 billion by 2022, up from $20 billion in 2017, according to a 2017 Thredup Report.

As gray market is more and more going online, the huge amount of daily transactions and the multiplication of marketplaces make it harder to clearly identify clients.

According to a Heuritech’s study, 15% of the posts on Instagram are commercial, i.e. with a sales purpose, and this figure is growing as products are becoming more desirable.

Our visual and textual recognition technology is able to identify posts with a commercial purpose thanks to a serie of criteria such as phone number identification or price.

The promising pre-owned market and the exclusivity challenge

While ownership is nowadays replaced by product function, luxury products benefit from an investment value with a tax rating of secondary market price.

For instance, there are sneakerheads addicted to luxury names, selling one limited edition pair of shoes on the resale market to gain profits. Social media is imposing a new rhythm, to always have novelties. Pre-owned market thus have a bright future for luxury players.

According Claudia D’Arpizio, Partner at Bain, “second-hand luxury respond to a soaring demand, the one of a client willing a good value for money without renouncing to prestige brands.”

Clients, especially millennials, praise a new conception of luxury where exclusivity is replaced by inclusivity as Italian millennials favourite brand Gucci do so and as Balmain recently claimed on Instagram for its campaign.

Is distanciation over the client still effective for luxury brands? Or should luxury brands embrace second-hand ?

The embodiment of Luxury inclusivity through virtual models Margot + Zhi campaign by Balmain

Second-hand luxury can be seen as a new growth driver and another high quality entry-level offer, such as perfumes, bags and shoes.

Resale enthusiasts are convinced that this system permits to save money and unearth unique pieces to compose a singular look.

Badgley Mishka’s pink floral dress @Renttherunway

Pioneers such as Rent the Runway are opening a new market, the one of leasing service with buying option which allows the client to experiment the product in real-time situation. Kering group tested this year its own rental subscription service.

Gucci embroidered floral handbag @therealreal

The resale market is booming: according Julie Wainwright, founder of The RealReal, sales volume on the platform reached $500 million in 2017 after doing $10 million its first year in 2011.

Through its State of luxury resale mid-year 2018 report, the RealReal notifies that Gucci is the most sought-after brand on the consignment platform, ahead of Louis Vuitton, Chanel, Louboutin and Hermès.

On the other side, LVMH partnered with Stadium Goods while Cartier’s parent company Richemont’s carried a takeover of the second-hand watch selling platform Watchfinder.

On the gray market challenge, there is of course a huge difference between a private seller, using marketplaces to acquire a newbie, replacing an unworn piece from his wardrobe and a professional one owning a well-off boutique.

How permissive gray market could be harmful to the luxury business

The 2017 Deloitte Swiss Watch Industry study testifies the alarming ground loose of luxury brands on their distribution network’s control. In fact, if 83% of watch executives thought in 2014 that shop-based authorised dealers were their most important sales channel, they were only 24% to think so in 2017. Products targeted by gray market resellers not only include watches, but also eyewear and handbags.

Screenshot of a Fendi handbag on Taobao’s Chinese marketplace

So far, these Gray market resellers were acting on the sly, looking for 12% VAT tax refund among a Parisian tourist crowd. Because they were buying at least two identical items (same size, same color), numerous brands implemented quota number to avoid a rapid growth of the movement.

Regarding waste reduction and commercial objectives, brands could rapidly succumb to the gray market as a surplus stock sale channel, to the extent to be little cautious on the vendors profiles.

The major drawback of Gray market is the dilution of the product’s value due to an off-price strategy and a product feature in a “rack“ mass-distribution environment.

Gray market watches are very often sold with 25% to 35% cheaper than authorised resellers networks.

The other downside directly concerns the final client as soon as products need servicing. On the contrary, authorised resellers provide peace of mind for the client with an official manufacturer warranty, expertise informations, production provenance and technics.

The grey market feeds on scarcity or unavailability of a product through authorized channels. Some products are simply unavailable in some countries, or highly taxed, making unauthorized transactions attractive.

In fact, the key factor of the thriving Gray market activity is import taxes as luxury products price used to be 51% higher in China than in the US and 72% higher than in France.

To face the endemic scourge, numerous luxury brands have harmonised their prices to curb the trend, like Chanel’s initiative in 2015 to fill the pricing gap between local market and foreign market, To do so, the brand increased its price of 20% in Europe, while dropping it of 20% in Asia.

Printemps Palace campaign 2018 viewed on daigoucat.com / Photographer : Fabien Montique

Among unwanted merchants and luxury business antagonists are the daigous, Chinese, but also South Korean overseas personal shoppers, purchasing abroad, luxury items unavailable or highly taxed in China on behalf of a resident client. Many of them are proliferating on instagram.

According to a 2015 Bain Study, Gray market resulting from daigou sales is worth RMB 55 billion and RMB 75 billion (€8 billion to €11 billion) which represent 15% of the overall luxury Chinese clients purchases on every network.

Artificial Intelligence: the new wondering filter against unauthorised dealer channels

Gray market constitutes a willy-nilly tolerated situation by luxury players accompanied with a lack of authentication feedbacks.

In an attempt to restore their exclusivity, desirability and trust, luxury brands chose to limit the availability of their product or affix RFID microchips into it, such as Salvatore Ferragamo since 2014 or Moncler, since 2017.

But contrary to branded leather goods which can be identified with a serial number, it is more difficult to track apparel items. As so, brands are often submerged to clearly identify their lifespan products actors.

Artificial intelligence can help brands to identify contraveners resellers on mass-market e-commerce platforms such as Ebay, Amazon or Chinese marketplaces Taobao and Tmall.

For example, Cypheme mobile app applies a real-time tracking from product packaging scan to certify the product authenticity and struggle against counterfeit accurately.

When talking about AI, image recognition technology can help brands to spot the unwanted vendors and accounts spamming with their products by spotting irrelevant pictures online.

As one Heuritech’s study found, 70% of relevant posts with products from a brand do not have a mention of the brand — no hashtag, neither tag — on Instagram.

Mastering the distribution of its products is definitely on each luxury brand’s checklist. Visual recognition technology can truly be an eye opener to better monitor products online, and in fine to reinforce the inventory management for each brand, from warehouse to retailers. Better knowing the desirability of a product helps to forecast sales and stock, especially in the case of a product launch.

Heuritech is here to help — we’d be happy to get in touch at info@heuritech.com for a free demo of our solution.

Heuritech empowers fashion teams to monitor in real time both products and trends through cutting-edge image recognition technology applied on millions of social media images every day. If you want to know more, get in touch at info@heuritech.com