It was base, it was rough and it wasn’t something that proper businesses would even consider as they forged a path into the country, tempted by the immeasurable promise of its enormous market.
Instead, daigou was a homegrown concept, born of a diaspora with strong networks at home to whom expat opportunists would sell masses of consumer products, especially nutritionals, after raiding stores in their new homelands.
Visitors, even, would return back to Beijing, Shanghai and Guangzhou laden with tins and jars and containers of another country’s products, which were deemed far safer and worthy of premium prices in China.
The practice left stores bereft in these places, leading to headlines like “Baby formula shortage: 'Shelves are always empty’” in Australia, and government restrictions placed on sales to foreigners in Hong Kong, just across the Chinese border. It was unorganized, disapproved-of trade at its best that led authorities to look for ways to counter it.
They were destined to struggle in the face of demand from consumers and daigou—the term for both the practice and its exponents—willing to be paid handsomely to do their shopping.
“Daigou used to be called the grey channel, and was only ever said with a hushed voice,” said Matthew McDougall, founder of Australian startup DaigouSales.com.
“But now it has come out of the shadows and is being seen as a legitimate way to market, at a much lower risk for businesses than moving into China heavy with cash and ambition.”
McDougall, who founded the Australian China Daigou Association earlier this year, has presided over this shift in the trade’s notoriety, along with other startups that have brought it into the mainstream.
Until recently, the daigou would take orders from friends, family and associates at home for pristine products in countries like Australia, buy them in bulk and either post them home or bring them back in heaving suitcases. Now all they need to do is browse China’s ubiquitous WeChat social app, place an order with facilitators like McDougall’s and count their margins.
The channel is being seen as an economic enabler for many retailers. For a brand, it’s “a bit of a saviour,” according to McDougall, at a time when the domestic market for many products is soft. Though there are no official figures, it is estimated that daigou accounts for some 80% of Australian nutraceuticals giant Blackmores’ business, and around 60% of A2’s total infant formula sales.
“So daigou is a legitimate channel that brands recognize to be part of their export solution,” McDougall added.
Some 70,000 daigou are thought to reside in Australia and do roaring business there. Amazingly, most know each other or are in similar networks. DaigouSales.com claims to service around 25,000 daigou, making it one of the biggest such communities in the country.
Though McDougall’s company has been operating for a just year, it already represents 400 brands and markets 30,000 SKUs from its warehouse in Sydney.
“What we did was create a marketplace where a daigou can buy the brands we represent and sell them at home,” he explained.
“All he does is market to his customers back in China the various offers he can find here that the Chinese buyers can’t see. When an order comes in, he just inputs it into our site. There’s no manual intervention any more. He can even put up a storefront if he wants to, and have buyers purchase through that.”
As long as the item is bought by someone in China for personal use, then there’s a tax-free threshold under RMB166, where duty is not paid. It is then sent directly to the customer in China the day it is ordered.
A new breed of Australian company is looking at Diagou as its primary export channel, at least while volumes are still low. One of these, Clinical Advantage, which is preparing to release a probiotic drink with novel packaging through bricks-and-mortar stores, is already selling its products through DaigouSales.com.
“Daigou has evolved in Australia in recent years and is a very powerful marketing arm for companies that have the opportunity to develop a business by using daigou networks in China to sell in the health and wellness area,” said general manager Matthew Harris.
“What started off as friends and family has become a business for a lot of them,” he told DairyReporter.
“Cross-border e-commerce through bonded warehouses that was opened up a few years ago also allows some of the trading platforms in China to make products available. But we aren’t going down that path. We are really focusing on the daigou and smaller delivery into China at this time.”
Waiting for agreement
Harris has high hopes for Biotik, his scientifically tested probiotic. The nutritional comes in patented dry-cap packaging that keeps the proprietary Lactobacillus paracasei cultures separate from the liquid until it is consumed. Clinical Advantage has been given full exclusivity to market the product in Australian by its Italian patent holder, Sofar, which sells 2m-3m 12-bottle packs a year on home turf.
While he waits for confirmation of an agreement reached with Australian pharmacy major Chemist Warehouse, which he says operates around 400 pharmacies and controls approximately 60% of the market, his product is being sold by DaigouSales.com. He also hopes other pharmacies and health food stores will come online shortly.
“We’ve set ourselves a year 1 goal of exporting around 100,000 units into China on top of what we want to sell domestically,” he said.
Assessing Biotik’s early performance, McDougall says it has been doing well. “It’s been positive. We’re seeing some sales right off the bat.
“I tell brands it would take a good 6-12 months to build awareness among the Chinese-Australian community, and to be patient. But within month 1 we’ve started to see some interest.”
So where could this interest take the product?
“We could be selling thousands of parcels per month through personal shoppers,” McDougall replied.
“Right now we are fulfilling modest orders, but we are in early days. I’m very positive that this could be a very popular brand in China. And if that’s the case it could be a hell of a ride.”
Though Biotik is being released primarily for the Australian market, in which probiotics account for 10% of supplements sales, China would be the prize. Before it can market directly in the country, however, it must first prove success on the home front, so daigou’s low-volume, high-response approach to trading with the country appears a perfect solution while it tests the waters.
This approach also provides an insight into the way the Chinese market might respond to a new product, according to McDougall.
“These guys have come up with a novel application, and that’s what we’re interested in. We think the Chinese are quite interested in probiotics, and we pick and choose which brands we think the Chinese market will care about,” he said.
“To get it moving we did education programs for the local Chinese community, as they are a proxy for what mainland Chinese would be interested in. it’s just a matter of teaching them about what the product’s about and showing them what the margin would be like, if they want to make some money.”
The network was also called on to look at pricing and sound out how it should be branded in China.
"It’s all about trying to sell to the daigou here before they can sell it to their guys back in China. If that works well, it’s generally a first step to a more export-bound business.”