Estée Lauder Companies (ELC), which ranks at #3 on our Top Global Beauty Companies Report, is facing a securities fraud lawsuit over its alleged failure to disclose its reliance on gray market sales in China.

ELC, which is based in New York, tried to dismiss the lawsuit—but The Fashion Law reports that the case is advancing. A federal court has denied ELC’s bid, saying the company’s statements amounted to “half-truths.”

The Moodie Davitt Report obtained the ruling by District Judge Arun Subramanian. ELC and the group’s former CEO Fabrizio Freda and CFO Tracey Travis are to face the lawsuit. (ELC’s new CEO is Stéphane de La Faverie, who recently announced a restructuring plan.)

Who filed the lawsuit? ELC shareholder Bridgett McAlice filed suit the suit against the company and its executives, on behalf of all the investors who purchased stock between February 2022 and October 2023.

The plaintiffs claim the company misled investors by issuing overly optimistic projections—and covered up the impact of government crackdowns on daigou.

Plaintiffs say ELC concealed the truth until November 2023 about how the crackdown on daigou was hurting sales, which caused its shares to plunge 19%, dropping market value by $8.7 billion, Reuters reports.

What is Daigou?

Daigou refers to the sale of gray market goods purchased outside of Mainland China for customers in China, as a way to avoid import duties and taxes. 

Related: L’Oréal China Reports Growth in the Chinese Market 

On “the gray market,” products are sold through unofficial distribution channels or unauthorized retailers—like when you find beauty brands at Costco. (And beauty consumers shopping at unauthorized resellers risk buying counterfeit products.)

Beauty Sales & the Daigou Market—a Complex Relationship

Someone who is outside China who buys products for someone who lives in China is the official translation, or definition, of “daigou,” and it’s a huge business. “The term also stands for the industry created by these personal shoppers,” JingDaily explains. “They are seen as the main player fueling the grey market for China’s online luxury goods,” the publication writes. 

The Daigou market is so popular in China for luxury brands from the U.S. or Europe, because they are either more expensive or hard to find. Over the years, the Chinese government responded with tighter border controls and tariffs, but “daigou” as only grown to become more legit, in a way.

Jing Daily explains, “…daigou have become more creative. Some will attend fashion shows to prove their value…Their role has evolved from being an illegal personal shopper to a buyer, providing their high-spending consumers with the latest trends.” 

The daigou market was valued at $57 billion in 2020, reported Luxury Tribune. Bernard Arnault, Chairman and CEO of LVMH, said in an online conference announcing the company’s 2022 results, that this form of “informal trade” is fraudulent. It lowers sales for China’s retailers, while raising the risk of consumers unknowingly purchasing lower-quality counterfeits, which can damage a brand’s reputation.

It’s not as black and white as it seems, however, because many brands rely on daigou sales as a retail strategy.

“Trade by daigou was a key sales driver for many global brands including Estee Lauder, until pandemic-related travel restrictions ground the industry to a halt,” Reuters reported in a December 2023 article. The article states that restrictions did the opposite of what was intended by boosting grey market sales, which moved from individual resellers to online platforms, such as the immensely popular Dewu.

The Bottom Line: What the Lawsuit Means for Estée Lauder Companies

US District Judge Arun Subramanian ruled that Estée Lauder Companies didn’t disclose all the facts related to its sales, with regard to the impact of the January 2022 government crackdown on the ‘daigou’ grey market—and concealed the truth until November 1, 2023, which caused shares to plunge.

Investors want to know if they were misled—and now ELC executives must face a judge in court to determine the outcome.

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