Luxury’s Gray Market Is Emerging From the Shadows

Imagine searching online for a pair of square toe loafers from Bottega Veneta, one of the most hyped luxury brands of the moment. A new season pair can cost over $ 550 on the brand’s website, an old-fashioned department store like Neiman Marcus, or a newer e-commerce player like Net-a-Porter.

But what if you choose Cettire, a website that offers discounts of up to 30 percent on the latest fashion styles? You would be a player in the multi-billion dollar “gray” luxury market, a rapidly growing retail sector that in the past has been hidden from most Western consumers. However, with the arrival of companies like Baltini in Italy, Italist in the US and Cettire, listed on the Australian Stock Exchange in late 2020, in recent years, gray sales are landing in millions of digital shopping carts.

In contrast to the illegal counterfeits that can often be found on the black market, the gray market sells real luxury products – albeit with significant discounts, usually between 15 and 35 percent and without contact with the brands. Through a practice sometimes referred to as parallel import, gray market sellers tend to use the different pricing strategies and taxation requirements for luxury products in different regions in order to bring certain hot products to those who want them at a cheaper price.

One of the best-known examples is daigous, or buyers who serve Chinese demand for overseas goods, especially luxury goods. Daigous typically buys products in a region outside of China where an item is cheaper, and then mails the goods or travels with the goods back to China for a profit.

The price differences between markets can be striking. According to a recent study published by Money.co.uk, a customer in Europe will pay just over $ 2,800 for a Yves Saint Laurent Sac de Jour, but the same bag will cost more than $ 3,700 in South Korea. A shopper in continental Europe can purchase a white Fendi linen baguette bag for about $ 2,620. The same item costs around $ 3,350 if purchased in mainland China.

Taking advantage of such differences has become big business. Last year, the gray market was valued at up to 8 percent of the $ 257 billion market for personal luxury goods, said Luca Solca, an analyst at research firm Sanford C. Bernstein.

“Traditionally, many luxury brands have either turned a blind eye or even indulged in gray market sales as it meant easy money and a chance to beautify their wholesale partner-reported numbers, especially when inventory is immobile or excess,” said Mr. Solca. “But in recent years that attitude has had to change as the market turns into something that is increasingly difficult to control.”

A number of Daigous have formed large collectives, and companies like Beyond have sprung up to facilitate cross-border transactions from the US to China. Recently, western companies have emerged using similar gray market tactics on a large scale, including Cettire, which expanded rapidly during the pandemic, and unauthorized watch dealers like Authenticwatches.com and Chrono24.

Founded in 2017 by Dean Mintz, a withdrawn young founder with no experience in technology or fashion, Cettire offers global consumers deep discounts on some of the best luxury brands including Prada, Gucci, Chanel and Saint Laurent. According to the prospectus for the IPO, sales between March and June 2020 increased by 331 percent compared to the previous year. Cettire raised $ 49 million when it went public in December, and the stock price soon surged more than 400 percent.

Then in June, questions raised in a report by the Australian Financial Review about the long-term sustainability of Cettire’s business model caused the share price to plummet 30 percent. Trading in the company’s shares ceased on June 15, the same day that Cettire received a public letter from compliance officers at the Australian Stock Exchange. Cettire did not respond to requests for comment on this article.

Cettire could be viewed as a case study of how a company operates in the gray market. The company claims to sell around 160,000 goods from around 1,300 high-end fashion brands on its “unique proprietary platform” through a process known as dropshipping. Dropshippers are online sellers who have no products in stock. Instead, when they buy an item, they buy the item from abroad and ship it to the customer.

Cettire takes a commission on sales, consisting primarily of products made and valued in Europe, to customers in the United States and Asia. Like Farfetch, a London-based website, Cettire is an intermediary between boutiques and customers. Cettire has no direct relationship with the luxury brands.

“The gray luxury market isn’t new thanks to fashion’s notorious inability to truly control its production volumes,” said Julie Zerbo, attorney and founder of The Fashion Law, a website dedicated to the legal and commercial challenges facing the industry deals . “In southern Europe in particular, real products often found their way through the back door of a factory or from the back of a truck and eventually into the hands of consumers who wanted to pay less than full price.”

Of course, many customers now find bargains through affiliate advertising on Google or through aggregated search sites such as Lyst. When offers are just a few clicks away from the full-price products on the brand’s own website, price differences become clear.

Cettire caught the attention of Tommy Mathew, a veteran of fashion e-commerce with stints at Acne Studios and Helmut Lang. In May, he noticed these Bottega Veneta slides – one of the brand’s hottest current styles – on Cettire for 24 percent less than the suggested retail price. Similar deals were made for the leather “Chain” shoulder bag – $ 3,506.65 at Cettire, $ 300 cheaper than the official Bottega website – and items such as Chanel glasses, Prada skirts and Saint Laurent belts. (These deals went away after Cettire got press attention this summer.)

“Cettire’s business model isn’t illegal – it’s just very good at exploiting loopholes in trade regulations,” said Mathew. He noted that shipments less than $ 800 in value can generally be shipped free of import duties to the United States, where two-thirds of Cettire’s customers are. China, Cettire’s second largest market, has a similar exemption.

But Cettire also has quirks. Despite being sold to other European locations, it has blocked web traffic from France, Italy and Switzerland, where many of the world’s largest luxury groups are based. (In a letter to Australian regulators, Cettire denied that it was a strategy to prevent brands from seeing the site’s products and prices, saying the platform is “currently inaccessible in certain markets as the company operates its global one Prioritized expansion “.)

“The main reason authorized retailers don’t take advantage of these types of loopholes is that they would likely lose access to products by openly undercutting the brands,” said Mathew. “Cettire disguises its suppliers to ensure their access to luxury goods while offering a plausible denial to those who engage in these types of practices.”

Three brands are no longer sold on Cettire: Celine, Vetements and Acne. Other brands such as Chanel, Prada, and Yves Saint Laurent declined to comment on this article.

Luxury brands are now effectively competing against themselves. Exactly how much they will lose is difficult to quantify. But most are aware of the gradual thinning of the exclusivity they have worked hard to achieve and which has already been partially watered down by the heavy discounts on off-season goods in department stores and outlets.

Now, many brands are working with advisors and local governments to develop new ways to combat the gray market after previous attempts to control the practice – such as repurchasing and destroying unsold stocks – caused setbacks on sustainability issues.

“If brands don’t want to fall victim to these platforms, they need to increase their sales and reduce wholesale volumes to protect their image,” said Solca. Brands like Gucci, Prada, and Burberry recently cut wholesale orders to curb the appearance of ubiquity and the risk of heavy discounts. Eyewear manufacturer Luxottica makes chips for its glasses that help it track products better. Others are investigating the use of blockchain technology or improved auditing measures to identify problematic suppliers and retailers.

Nevertheless, there are still incentives for customers to look at the gray market. Brands like Chanel raised prices by up to 15 percent last year due to changes in raw material prices and exchange rates.

In July, weeks after the controversy that had ripped its stock, Cettire suggested expanding it to children’s clothing, saying it “is still looking at new growth opportunities.”

“Eventually this market will shrink, but right now there are a lot of price-sensitive luxury consumers willing to buy authentic goods at a discount through gray channels,” said Solca. “This demand is not going to go away anytime soon.”