We spend a fair amount of our time as financial planners meeting with portfolio managers, analysts, and company representatives to make sure that we are consistently monitoring the products we use. The one thing we continually hear is critical to their stock selection is clean balance sheets, but if that’s the case how can some of the world’s most reputable brands waste thousands if not millions of dollars every year.
Earlier this week I came across an article stating that fashion designer Louis Vuitton would burn their unsold bags every year. I was flabbergasted! How could any company get away with burning profit? Well, what I can say I found is more interesting and deeper than I thought it was. So, while the original piece focused solely on Louis Vuitton, I could not find any evidence directly linking them to this process. I did find though that companies like Burberry and Cartier have a history of destroying or dismantling their unsold products. In 2017 alone Burberry destroyed more than £36 million in unsold product (or roughly 20,000 of their trench coats), why? Exclusivity. Many times, luxury brands are purchased as a status symbol, so maintaining that exclusivity is vital to keeping their clientele happy. This means not offering discounted pricing, standardizing pricing across the globe, or in this case destroying their product.
Where this all takes an interesting turn is that these companies might receive rebates on taxes or fees for doing so! For example:
According to thefashionlaw.com, “In accordance with U.S. Customs and Border Protection program (and 19 USC § 1313, the section of U.S. Code, which centers on “drawback and refunds”), “If imported merchandise is unused and exported or destroyed under Customs supervision, 99 percent of the duties, taxes or fees paid on the merchandise by reason of importation may be recovered as drawback.”
The website The Fashion Law dives a bit deeper into this noting that the average duty paid for a leather handbag is 16% but can reach 60%, and luxury watches average 11% but can be as high as 50%. Meaning that these companies can potentially recoup a sizable amount of money by these rebates. This of course makes sense for watch makers who can reuse those parts, but what about bags and coats? Well, that £36 million of product that Burberry destroyed, they burned it, stating they “harnessed the energy” by doing so.
While what these companies are doing isn’t as egregious as it first seems, I don’t know about you, tax rebates/ credits and potential exclusivity doesn’t seem like much when you just paid ~£36 million to heat building.