L’Oréal facing the impact of restrictions on Daigous in China

The latest figures from L'Oréal, published on February 8th, highlighted a record year in 2023 for the French beauty giant, with an operating margin approaching 20%. However, analysts have recently shed light on a worrying issue. Despite a year characterized by excellent performance, the stock market did not show great enthusiasm, and L'Oréal's stocks fell by 7% shortly after the results were announced. This reaction sharply contrasts with the company's financial performance. The sticking point is related to the phenomenon of "daigous." But what exactly is it?

Investor concern is mainly due to a slowdown in sales in the fourth quarter of 2023, a decline attributed to business performance in China. The decline of L'Oréal in North Asia is largely explained by the increased efforts of the Chinese government against the "daigou" phenomenon, a battle that has intensified recently. The principle of daigous is relatively simple: these intermediaries, often "personal shoppers," buy luxury products abroad at advantageous prices to resell them to affluent Chinese consumers. Chinese authorities are trying to limit this practice, which directly impacts foreign luxury brands. As early as the third quarter, Asia was the only region where sales of L'Oréal Luxe were down, with a decrease of 4.8%, while analysts anticipated growth of 15%.

Since 2014, the Chinese government has targeted "daigou" commerce, seeking to reduce the loss of tax revenue caused by this parallel market for beauty and luxury products in general. Customs controls have become stricter, and import-related taxes have decreased. Some major brands like Chanel have also helped limit this phenomenon by harmonizing their prices and reducing price gaps between Europe and China. A Bain & Company report found a 33% drop in luxury product sales following the implementation of new government measures, representing a loss of about $7.6 billion. Trade through "daigou" has been a very important sales channel in Asia for many prestigious brands, such as Estée Lauder, Prada, and Balenciaga. Estée Lauder estimated that up to 40% of its revenue in China came from daigous.

However, the gradual disappearance of daigous and the emergence of e-commerce platforms such as T-Mall Pavilion and the opening of flagship stores of major brands in key Chinese cities, with unified prices, should help overcome this difficulty in the medium term.