In the second quarter, the luxury skin care brand reported a decline of 7.5%.
“We recorded negative growth of 7.5% in the second quarter, and the primary reason lies in the significant disruptions of the diagou business in the Asian travel retail markets,” said Beiersdorf CEO Vincent Warnery.
Daigou is a reference to intermediaries that purchase overseas goods to sell to Chinese consumers in the grey market. Daigou shoppers offer their customers tax and price advantages over retailers.
Warnery elaborated that disrupted diagou activities impacted La Prairie’s performance in South Korea and China in particular.
“A substantial part of Korean travel retail has been benefiting during the COVID years from government support to bring goods to China for resale in absence of individual shoppers. The government's support ended last year, and this market has been on a sharp decline since.”
According to Warnery, the restrictions in China and Korea caused diagou business to decline by 87%.
“Excluding diagou business in China and Korea. La Prairie would have achieved 10% growth in the second quarter,” he said.
Warnery added that many beauty brands felt compelled to make up for the lack of daigou business with promotions. However, he said it was more important to protect the allure of La Prairie.
“While some competitors are offsetting the impact by promotions, we focus on striking the right balance between preserving our brand equity while still ensuring targeted customer reach in China,” said Warnery.
“We believe this is the absolutely right decision for the brand. We are aware that these developments impact strongly our last quarter results and we remain visible in the quarters to go.”
Despite the impact on their business, the company expressed support for government measures to reduce daigou activities in China.
“Beiersdorf, therefore, welcomes the recent government measures to reduce daigou business in China, even though this negatively affected the luxury cosmetics business in the second quarter,” it said in its press statement.
Warnery said that the brand’s budding online business would help to offset the diagou dip.
“What’s something we’re really betting on is e-commerce. We are extremely successful with Tmall and JD.com and we are working on launching La Prairie on TikTok. The fact that those three retailers absolutely respect the quality of the brand, and they don't run promotions, they respect the aesthetic and visual codes make us pretty optimistic.”
A persistent issue
Earlier this year, LVMH Chairman and CEO Bernard Arnault spoke strongly against the diagou sellers.
Speaking during its 2022 annual results conference, Arnault slammed the diagou trade as “nothing worse” and “dreadful” for the image of the luxury fashion and beauty house.
“We're refusing and we're fighting against so-called parallel exports. A number of our peers need to generate revenue and don't hesitate to sell through resellers who buy abroad products and then sell them on at discounted prices in China, but we avoid that. Absolutely ditto for cosmetics,” said Arnault
As of January 1, 2019, China has mandated that diagou merchants must obtain licenses and formally register as businesses. They are also required to pay taxes.