The third-richest person in the world is Bernard Arnault, chairman and chief executive of luxury fashion giant LVMH.
Interestingly, he is the only non-American on the list of the 10 richest people in the world. Over the past few years, his fortune has skyrocketed. With the parabolic rise in LVMH’s share price, luxury goods sales have grown rapidly over the past decade, with global sales reaching 281 billion euros or 316 billion euros in 2019. While sales took a hit in 2020, they have rebounded to levels above 2019 levels. Consulting firm Bain predicts a further 25% growth by 2025, with most of that growth coming from China.
While luxury brands have the idea of having the highest quality clothing, they are not that different from the clothes you buy at H&M.
European luxury brands have created hundreds of billions of dollars in wealth for their shareholders and are among the most valuable listed companies in Europe. It’s not hard to see why they are so profitable. It’s easy to make money when you can sell a piece of cloth for $5,000 a piece. While luxury brands are built to have the highest quality clothing, for all practical purposes they are not that different from the clothes you buy at Target or Gap. At the end of the day, making a $5,000 Louis Viton bag is no fancy science, and just about any clothing company has the technical capabilities to do it.
These brands are highly sophisticated marketing machines that use every trick in the book to convince you that the bag they’re selling you is worth $10,000.
The core of building a luxury brand is not designing the most innovative products or having the highest quality manufacturing techniques. On top of that, these brands are highly sophisticated marketing machines that use every psychological trick in the book to convince you that the bag they’re selling you is worth $10,000. For example, the luxury fashion industry consumes billions of dollars worth of unsold inventory each year to create scarcity. They also use arcane sales tactics to create a sense of exclusivity. This created a prestige that forced people from all over the world to wait in line for hours to spend three months’ wages on designer jackets. While they create the feeling of luxury, many luxury items are produced in sweatshops. They use highly unethical tactics to exploit their workers.
The fashion industry is probably the only area where you can see a price difference of 100 times for a product with the same function.
On the right side of the screen is a Zara bag that sells for about $26. On the left is a $3,800 Gucci bag, about 150 times more expensive. Gucci bags are a little more refined, with some fancy ridges on the handles, but the difference in quality can be doubled or doubled, not 150 times larger. At the end of the day, they all have the exact same functionality. Not all luxury goods are like this. For example, the Porsche Cayman is significantly more drivable than the Toyota Camry, and it costs more than twice as much as the Toyota Camry. The fashion industry is probably the only area where you can see a price difference of 100 times for a product with the same function. This is because luxury fashion brands are not selling clothing, but lifestyle and social status. You need people to lead, and only the upper echelons of society can wear your brand. That way, people will be willing to spend thousands of dollars extra to have your brand logo printed on their clothes.
Luxury fashion brands do not sell clothing, but lifestyle and social status.
To build this image, you need to make your product unreasonably expensive. In this way, consumers can share in their wealthy world so they can afford to waste their money on material indulgences. However, there is a problem. There is no way to accurately predict how much you will need for a given design. Inevitably, sometimes you make too many of that jacket or something, and there isn’t enough demand to sell them at the listed retail price, which creates excess inventory in stores.
Most brands get around this by heavily discounting until they sell out. If you go to the website of H&M or any fast fashion brand, you will see tons of discounts and promotions, even more than 50% off in some cases. But if you go to a luxury brand store, you hardly see any discounts. You always have to pay the non-negotiable list price. They will never admit that the products they buy at the list price are in insufficient demand; this destroys the exclusivity and prestige of the brand. So what would you do? You’ll inevitably be piling up a lot of unsellable product in your warehouse, and you’ll end up running out of space. You throw all your $5,000 bags and jackets in the incinerator.