How Chinese gangs trick Louis Vuitton staff and EU taxpayers to get cheaper handbags for the grey market
Dark Luxury exclusively reveals how Chinese gangs exploit the price difference between handbags sold in Europe and China, and cash in extra profit via VAT refunds.
One morning in early 2024, two Chinese tourists entered the Louis Vuitton store on Paseo de Gràcia in Barcelona, planning to buy some handbags. The pair were ready to splash out, contributing to the $40 million that’s spent on average every year at flagship Louis Vuitton stores around the world.
But this was no ordinary shopping spree.
While browsing the store, one of the pair felt he was being watched. Another man had entered the shop shortly after them and was lingering nearby, watching him and his partner. “It’s not illegal what I’m doing”, he might have thought, echoing a conversation with his partner earlier in the day.
Shaking off an onset of nerves, he followed the plan, catching the attention of a member of staff. With their help, he picked three – total price tag, €5,450, including tax. “Nothing too flashy”, he reminded himself. Not too expensive. Mid-market.
His nerves jangled again when approaching the till. “I’d like to pay in cash”, he said, retrieving an envelope with €6,000 in notes. Despite a raised eyebrow from the Louis Vuitton assistant, the transaction proceeded, and he took the bags and almost €500 of change.
As the pair left the store, a woman sat nearby, their landlord for the next two days. She greeted them, took their purchases and stuffed them into her coat. She unceremoniously dumped the yellow paper Louis Vuitton shopping bags on the bench and left.
The tourists may not have known it at the time, but they were acting for gangs at the forefront of a thriving grey market in China estimated to be worth up to $100 billion, which ruthlessly takes advantage of the difference in price between luxury goods sold in China and abroad.
This kind of “handbag arbitrage” has been happening for years, but the Chinese gangs who operate the scheme recently introduced a new feature: Using tourists to secure goods and later cash in on European Union VAT refunds offered by European countries to encourage sales.
That meant that despite leaving the store with thousands of euros of handbags, which could be sold for thousands more in China, the work of the tourists was not done.
“Pocket money”
In all, the tourist couple made three separate transactions over two visits, buying six bags worth €10,600. Each time, they handed over the bags (and the change) to their host within sight of the store. Having completed their work, and both being ready to leave Barcelona, they were driven to the airport, along with a group of two students who had also participated in the scheme.
There, the final part of the plot fell into place.
Chinese shoppers and traders known as “daigou”, or “To buy on behalf of”, have long travelled abroad to buy luxury goods which can be cheaper in Hong Kong, Macau, Tokyo and elsewhere in Europe and the US.
Dark Luxury can reveal for the first time how daigou are also exploiting the EU’s VAT refund schemes, adding an additional 21% of potential profit to the resale of every handbag. Many EU countries have VAT refund schemes that say the products must be taken out of the country by the original buyer.
After their second and final trip to the Louis Vuitton store, they were taken to the Barcelona Airport’s VAT refund stand, where the pair secured a rebate of €2,242, of which they received nearly €700. The remaining profit went to the group of daigou who ran the scheme. The tourists were told that the bags had been sent to China to be sold at a shop there, but it’s impossible to tell where they ended up.
In all, the tourists were recruited to buy €10,600 worth of handbags. Back in China, the gang could have sold the bags for as much as €13,000, securing a profit of around €4,000 after factoring in the VAT refund and the tourists’ cut, presuming they also avoided customs duties in China.
How it works
Tourists recruited to buy €10,600 worth of handbags
Tourist claims VAT refund of €2,242
30% or about €700 is given to the tourists
70% or about €1,570 goes to the Chinese gang
The Chinese gang ships the handbags back to China, evading customs authorities, and resells them for €13,250Estimated profit to the gang, excluding other costs = €4,220
In London, retailers have been lobbying the UK government to reintroduce the VAT refund scheme, despite a report which found that the purchases would mostly have happened anyway. The UK’s National Crime Agency in a 2019 report warned of the “growing prominence of Daigou” and “the increase in the exploitation” of the government’s VAT reclaim scheme.
How the tourists came to be a part of this ‘handbag arbitrage’
The tourists here used “The Little Red Book” or Red Note, a Chinese app similar to Instagram known as Xiaohongshu, to find somewhere to stay in Barcelona. It was their only choice after discovering the city’s hotels were fully booked. Run by a husband and wife team, the flat offered more than just rooms to rent.
Three bags bought by the tourists on their first trip
Ivy Wallet on chain bag- €1,450
Boulogne bag - €2,050
Diane bag noir - €1,950
Having offered the chance to earn some pocket money, the scheme was laid out. The next day they were driven to the Louis Vuitton store before it opened. In the car, each was given €6,000 of cash in paper envelopes, as they revised their instructions in their head. Once inside, they were to pose as customers shopping for their family and praise the sales staff “for being beautiful or nice”.
After gaining the attention of the staff, they would ask to see a selection of €2,000 handbags which they were briefed to request over Chinese instant messaging app WeChat. The couple were told not to select more valuable bags to minimise the risk of raising suspicions of fraud.
“I managed to take a photo of the bags and send it to them on WeChat without the staff noticing”, said the man, who then received a confirmation that this was the item they should buy. All the while, the pair suspected they were being watched. They were aware of a Chinese man who had joined the queue with them, who was now lingering nearby in the store, perhaps to ensure they didn’t dash with the cash.
Daigou and China’s grey market
Daigou are a key part of the thriving “grey market” in China, a $40 billion to $100 billion industry which is thought to have played a significant role in the recent dramatic decline of the share prices of luxury businesses. This grey market trade is well known to the executives who run LVMH, the parent company of Louis Vuitton.
Billionaire LVMH CEO Bernard Arnault has disparaged what he calls “parallel exports” by his peers in the industry, who he says, “need to generate revenue and don’t hesitate to sell through resellers who buy products abroad and then sell them on at discounted prices in China”.
“But we avoid that”, he added, perhaps a reference to the fact that LVMH’s top brands such as Louis Vuitton do not offer their products on the wholesale market, traditionally one of the main channels by which daigou and other grey market traders access cheaper luxury goods.
Dark Luxury has contacted LVMH asking for comment.
Dark Luxury’s story reveals that Louis Vuitton, and perhaps other LVMH brands are not immune to these “parallel” markets.
Shoppers in mainland China are reportedly increasingly turning away from local boutiques and buying new handbags instead from platforms like DeWu, a fashion trading platform with hundreds of millions of users that offers massive discounts on new luxury products. One expert described the DeWu as an “800 pound gorilla” since it is now estimated to make up an estimated 70% of the country’s grey market.
Before they left the country, and knowing that such purchases were something they could never have afforded on their own modest incomes, the tourists took photos of the haul to tease their family.
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The story continues
-Why the Chinese grey market exists
-How big it is and how much it’s expected to grow
-Risks for luxury brands who don’t investigate it
-Suggestions for how to stop it affecting your brand
Expert view: What luxury firms need to know about daigou and China’s grey markets
Why the Chinese grey market exists
Luxury goods can be as much as 35% cheaper outside of China, and that encourages shoppers to travel abroad to snap up a discount.
It’s estimated that about two-thirds of all Chinese purchases of luxury goods occur outside of China. These price differences are in part because of China’s taxes on foreign goods, including import duties, VAT and consumption tax, which are designed to encourage sales of Chinese-made products. This discrepancy drives Chinese shoppers abroad, to everywhere from Japan and a Bicester Village outlet near London. It also creates an opportunity for grey market traders and daigou.
“As long as there is a gap in the prices between Europe and China, daigou will exist”, said Max Peiro, who works at Re-Hub, a consultancy in Shanghai that helps luxury brands grow and develop strategies in China. He says opportunities for this arbitrage trade are hard to eliminate. “This will likely continue and keep growing unless brands take a radical approach and decide to fully [match] the prices between Europe and China, which is nearly impossible”.
Daigou is huge, growing and adaptable
The scale of the grey market in China is so huge that it’s hard to qualify, says Peiro. “For some brands, the grey market share versus their official revenue in the country might be in the low double digits”, he said. But for other brands, the grey market is potentially larger than their official revenue in China.
The biggest risk is to brands like Prada and Valentino, which have wholesale channels for their products. For them, “this is a big risk because you are investing in the Chinese market, spending on marketing, opening stores, operating stores”, he said. If those customers then access the grey market, “these Chinese consumers are paying against your wholesale margin … that is not sustainable for any brand”.
Merchants will use Taobao, the closest Chinese equivalent to eBay, to attract customers, says Peiro, and later try to move the conversation into WeChat. “Taobao may be the tip of the iceberg, because there might be a lot of transactions happening but there is no visibility of that”, he said.
Relatively new platforms such as DeWu, which is said to have over 300 million monthly active users, have also begun selling luxury products. Its closest equivalent in the West is StockX, the sneaker-trading platform. “[DeWu] started to provide authentication service, and they grew and added new categories”, Peiro said, and has become so effective at discounting that it is replacing some official channels.
“Luxury has become a significant category for DeWu. It’s a platform with a very nice user interface. They claim that each product is authenticated, and they deliver it within 24 hours. It gives this reassurance for customers. They have superb customer service”, he said. “I think this adds an additional risk for brands, versus the old version of the grey market, which was this wild west”.
Brands which don’t sell to wholesale channels, such as Hermès or Louis Vuitton, are not immune to the grey market, says Peiro. “My understanding is that brands like LV are trying to implement measures to prevent daigous from buying, but I think the ingenuity of the daigous is becoming better and better”, he said, referring to Dark Luxury’s story about the tourists. “They are even trained to pretend that they don’t know what bag they want, to dress like they are luxury buyers”, he said, citing recent reporting of court cases in China.
Risks of the grey market for luxury brands
Beyond the lost revenue from the Chinese grey market, there are other risks for brands that don’t know or address it. Some of them include “the potential for counterfeits. You cannot verify with 100% confidence the authenticity of products in the grey market”, said Peiro. “You also don’t get this client into the [customer relationship management tool] so you’ll have the ability to directly interact with them moving forward”. With direct relationships with customers becoming critical to the industry, and so much of the revenue going to such a small group of ultra-rich consumers, this may be one of the biggest longer-term risks of failing to address daigou.
How do brands solve this problem?
“The first step to solve this problem is to be fully aware of the problem”, said Peiro. “My feeling is that there are still a lot of luxury brands nowadays that are not aware of the size of the problem for their brand in the Chinese grey market”, he added. “If you are not aware of it, it's very difficult to act upon, right”?
“If brands want to address this problem, they need to implement multiple types of actions, from working towards price [matching between regions] to thinking about how to implement wholesale excellence and having a close monitoring of the different distribution partners to make sure that the products that are being sold to them end up in the right market”.
“From our monitoring of brands’ prices and assortments across grey market channels in China, we have found a strong pipeline of wholesale products finding their way to Chinese e-commerce platforms, often via cross-border transactions, at prices below that which consumers could access at international retail with tax rebates”.
With new EU legislation requiring luxury brands to conduct checks on customers when selling items priced €10,000 or more, it’s also clear where regulators are travelling.
Clearly, a raised eyebrow is not enough when dealing with customers paying in cash, who could be innocent tourists, or the forefront of a vast grey market worth hundreds of billions of dollars.