With the price of luxury goods still higher in China than abroad, the CEO of Chinese luxury e-commerce site Xiu.com was arrested on allegations of smuggling items into China to dodge tariffs. Prior to this scandal, L2 found that the site offered a significantly wider range of brands than major competitors.

According to a Chinese media report last week, the CEO and co-founder of Xiu.com Ji Wenhong was recently arrested in Indonesia and sent back to China, where he will go on trial for leading a smuggling operation of over $65 million worth of luxury goods. The items were allegedly purchased in Europe and the US before being disguised as personal items, a means of avoiding China’s high import tariffs.

L2’s Digital IQ Index: Luxury China finds that Xiu.com sells 98% of all Index fashion brands and 60% of Index brands in the watches & jewelry category, rates higher than those of any foreign luxury e-tailer. Farfetch is the closest non-Chinese competitor, with 85% of Index fashion brands and 20% of brands in the watches & jewelry category available in China. Meanwhile, Net-a-Porter sells only 57% of all fashion brands in China, and Yoox offers 78%. The differences in brand presence rates come not only from sites’ curation, but also from brands’ selectivity in choosing e-tailers for official distribution.

Xiu.com has been able to demonstrate some success with official brand partnerships. Salvatore Ferragamo and Hugo Boss both have official flagships on the site, but Ferragamo removed its link to Xiu.com from its homepage when it launched DTC e-commerce.

The site has focused on remaining competitive with costs, and the conditions are still ripe for smuggling luxury goods into China as a luxury price gap persists. Despite some pure luxury brands’ price harmonization policies to combat the country’s rampant gray market, 57% of accessible luxury brands have a gap of 46% or higher between their China and US prices. Currency fluctuations exacerbate existing gaps: 79% of pure luxury brands were 26% or more expensive in China than in the UK after the pound’s value fell as a result of the Brexit vote.

The availability of brands on Chinese luxury sites shows that luxury brands can be easily found online in China whether they choose to be or not. Brands are catching on to this reality, as evidenced by the fact that more are taking control over their online sales presence through their own e-commerce shops or e-tailer partnerships. Gucci and Louis Vuitton both launched online shops in China last month, while Saint Laurent announced a China partnership with Farfetch on August 1. Brands that don’t offer any form of official distribution for online sales will continue to have their online presence and brand equity hijacked by third-party and gray-market sellers.

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