Luxury Goods Investing
Why do people buy luxury goods? Psychologists say that luxury items boost self-esteem and give a sense of accomplishment. Others say that they are a way to project our social standing. And what makes a luxury good a luxury good? Is it the superior quality, craftsmanship, and design, or merely the high price? All of these questions make investing in luxury goods a confusing proposition unless you simply just enjoy the finer things in life, in which case profit is not your main motivator.
Luxury goods investing is buying high-end products in the hope that their value will go from high to off the charts. But how is a luxury good defined? After all, one man’s meat is another man’s poison.
A luxury good is perhaps best defined when compared to an inferior good. An inferior good is one that an individual would buy less as their income rises. For example, a high-earning individual might buy less low-quality meat like ground turkey or hotdogs and more steak or lobster.
As an individual’s income increases, they have greater demand for luxury items. However, there are grades of luxury, and what is an inferior good for one might not be for another. For example, a billionaire with a jet airplane might not consider a sports car a luxury good.
Regardless of the good’s cost, a luxury good is synonymous with quality—quality in materials, design, and manufacturing. It’s quality that allows a luxury good to sustain its value. Luxury goods are Veblen goods; goods that consumers want because they are status symbols. Veblen goods appeal to consumers and investors because of their perceived value. Counter-intuitively, if the price of a luxury item or Veblen good, goes up, let’s say of a Gucci handbag, the demand for that handbag will also go up because the perception is that its value has increased.
Using possessions as status symbols is a custom as old as humankind itself, whether it be who has the best-bred horse, the grandest estate, the latest fashion from European designers, or the finest wines. But what about using luxury items as investment vehicles? Over the past decade, luxury stock has lost none of its appeal to investors.
According to MoneyWeek, over the past 10 years, the S&P Global Luxury index, which tracks around 80 global companies that make luxury goods— for example, LVMH, which makes champagne, cognac, and leather goods, Kering, which owns Gucci, and Swiss group Richemont with the brands Cartier, Dunhill and Montblanc—has consistently outperformed technology stocks. The luxury sector has returned 13.7% a year, 3% more than the 10.4% from the S&P Global 1200.
Luxury goods also seem to be protected from economic shocks. During the Covid-19 pandemic, for every 1% gain in global stocks, luxury stocks added 2%, giving a total return of 105%. The S&P Technology Select Sector index returned only 67% over the same period.
Modern society has a penchant for brands. Younger generations, particularly, seem to identify with brands marketed by social media and influencers to the extent that the image or perception of the brand is more valuable than the quality and durability.
There is a culture of “must have” that encourages luxury good manufacturers to limit availability of items to increase the demand, the price, and the aura of “exclusivity.” And it works. Luxury goods are not losing any of their allure among the younger generations.
The pursuit of profit differentiates the luxury good investor from the person who just wants to be seen sporting a Hermès Picnic Kelly or a Patek Philippe Nautilus. The former buys for financial gain, while the latter buys for status.
Profit, then, is the ultimate motivator for luxury investors, and democratization through the internet has made it accessible to a wider swath of opportunity seekers.
If you doubt the power of products in revealing status look no further than a book by Detlev Piltz called “England: A Class of Its Own.” The book is reviewed by The Daily Mail, which also mentions the M&S test, coined by Kate Fox, anthropologist, and author of the book “Watching The English.”
According to Fox, whether you buy your intimates, food, or furniture at M&S reveals whether you are lower, middle, upper-middle, or upper class. These cultural status markers ensure that luxury items remain popular, and some increase in value over time.
Another cultural phenomenon has made luxury investing possible for anyone, not just the landed gentry. The internet and ecommerce have made the exchange of goods easier and faster, even across borders. Technology is also making luxury goods more accessible.
During the COVID-19 pandemic, luxury brand companies were forced to adapt in or order to sell their goods. Many are now embracing new technologies like augmented reality (AR), which can create “virtual dressing rooms,” and even the metaverse.
In 2021, Louis Vuitton launched a mobile game embedded with 30 non-fungible tokens (NFTs), Dolce & Gabbana sold at auction a nine-piece collection of digital NFTs alongside some real couture for a total of 1,885.719 Ether (Ethereum cryptocurrency), or the equivalent of nearly $5.7 million.
Although a recession will hamper the amount that people spend on luxury goods. There will always be demand among the wealthy for luxury goods. In that regard, the luxury goods market is relatively recession-proof.
Many consider the luxury market destined for significant growth due to the growing middle class. According to data from the European Commission, the global middle class will grow from 3.75 billion people in 2021 to a projected 5.5 billion by 2030, with most of that growth occurring in Asia.
The luxury goods industry is also sustainable. Younger generations are expected to drive the luxury goods market. Social media is playing a role, and young people are the target of many social marketing campaigns because they tend to spend more on luxury products. According to Bain and Company, “millennials will represent 40% of the global personal luxury goods market by 2025.”
Luxury goods have many advantages over stocks. They are less susceptible to market shocks and inflation. However, there are risks involved for the investor. It is not easy to avoid counterfeit products, and maintaining a luxury yacht or mansion calls for more than a one-time minimum investment on eToro. Here are some pros and cons of luxury investing worth consideration.
The more you know about luxury goods, the better your investing strategy will be. By educating yourself, you reduce your risk.
Quality brands tend not to “shout.” If someone is wearing a brand and looking like a fashion victim, don’t invest. Stay conservative as you develop your eye. Also, find your niche. Some investors have an eye for fashion, some have an eye for luxury watches or jewelry. Some investors have a canny way of predicting where the market is going for certain products.
Brands’ popularity wanes and rebounds. It helps to understand why. For example, Burberry’s iconic check pattern in the early 2000s was eschewed because of it’s undesirable associations with the likes of a bedraggled Pete Doherty and football hooligans.
By 2018, it had been embraced once again by millennials spurred on by influencers and social media. Learning how cultural and political sentiments affect prices can help you develop your investment strategy.
Companies will discuss trends in their annual reports, which can be a harbinger of future profitable investments. Keep your finger on the pulse of luxury products, so that you are less likely to make mistakes and invest where you shouldn’t.
There are many risks of relying on the appreciation of luxury goods for profit. It’s better to invest as a source of enjoyment and as a way to diversify a portfolio. Here are some of the risks of luxury goods investing.
Styles come and go, and brand value fluctuates with consumer sentiment. According to research by Deutsch Bank, younger generations are embracing sustainable values and support companies that follow ESG (environmental, social, and governance) initiatives. Brands that do not could quickly fall out of favor along with their products. It takes an investor with a trained eye and a savvy approach to limit the risk of brand and product fads.
Ever tried to sell a 100-meter luxury yacht? eBay or Etsy are not your friends here. Finding the appropriate channels to sell luxury items can be a challenge. You will likely have to pay a third party significant fees for authentication and transaction services.
Even small items like jewelry and watches can be hard to move without the necessary authentication or going through an experienced dealer. This may mean that if you need cash quickly, you may have to sell an item at a lower price than you would like, and fees will cut into your profits.
It’s not easy to spot fake luxury goods or avoid buying them. According to the OECD, the majority of fake luxury goods seized at borders include watches, clothing, bags, jewelry, and perfume, and it’s a growing problem. Counterfeiting is everywhere but most prevalent in the United States of America, France, Italy, Switzerland, and Germany.
Critics of the luxury goods market typically call out the consumerist mentality that it promotes and ESG concerns.
Luxury goods are not necessary for survival. They are not food, energy, or even basic clothing. Critics of luxury goods see them as serving the ego only. They point to the consumerist mentality that luxury goods encourage and the resulting damage to the environment. Critics may claim that luxury goods widen social divides while lining the pockets of the elites.
Luxury goods are known for their less than ethical supply chains. Think of blood diamonds, ivory, crocodile skin, and fur, none of which align with the current trends toward a cleaner environment, human rights, and human and animal wellness.
Now, however, political and market pressures are forcing luxury companies to change tracts and at least claim to support efforts to reduce global warming, restore biodiversity, protect the oceans, use fewer chemicals, and follow sustainable practices.
Moncler, the Italian fashion house, is going fur-free after their 2023 collection, Dolce & Gabbana have pledged to follow suit. In 2020, Moncler produced a collection made from recycled materials, except for the down filling in a puffer jacket.
Tapestry, the parent company of Coach New York, Kate Spade New York, and Stuart Weitzman, is improving the sustainability of their supply chain through a new partnership to use a “verified regenerative sourcing solution.” Prada has invested in new industrial facilities designed to reduce their carbon footprint.
Here are five tips to help you on your way to luxury and profits.
Collectibles and luxury items can be turned into quick cash but be careful. Jewelry is often sold to gold dealers who melt the items down if they have little resale value. However, if you have a designer brand—Cartier, Tiffany & Co.— or an antique item, the right collector will give you a better price. The same goes for coins.
Some coins are worth more to collectors depending on their issue date, so find an expert who can tell you what is junk and what is not. For fashion, find a resale site with broad reach and where you can sell on consignment.
The young play a large part in luxury trends because they tend to spend more in this area. K-pop culture and its celebrities, for example, have greatly influenced the luxury market. TikTok became extremely popular during the height of the pandemic and had a huge influence on social trends. Follow the trends in lifestyles to hone your intuition and your investment strategy.
It’s not easy to find luxury items like Hermès handbags. They are in great demand. Even the retailers may not have what you want, and there are often waiting lists for items.
Try the resale market. Items will be subject to mark-up, but if you have done your research, it’s possible to find items that you can sell for a profit. Stick to brand classics because they will not go out of style and will retain their value.
For many luxury items, condition is important. If you buy a luxury bag, watch, or piece of jewelry and wear it, it will show signs of wear and tear, which will reduce its value. Consider keeping the items safely in storage, locked away where they cannot be stolen.
Fashion houses and luxury brands raise the prices of classic items each year. So, your item will stay safe as it increases its value over time. If you can, keep the item in the original packaging and keep the receipt, you stand the best chance of a lucrative sale in the future.
Think of luxury investing as a way to diversify your portfolio or, if you plan to show off your asset, as a way of expressing yourself. Do not put all your eggs in one basket, but also invest in safer assets like stocks, bonds, and retirement accounts.
Birkin – The iconic luxury handbag known as “The Birkin Bag,” introduced in 1984 by the French luxury goods maker Hermès and named after the English actress and singer Jane Birkin.
Consignment – Selling or buying through a third party.
Crocodile – One of the most expensive leathers for handbags, but ethically controversial because of the flouting of strict rules for the humane treatment of animals.
Blood diamonds – Diamonds sourced from a war zone where the proceeds finance a conflict.
Conspicuous Consumption – Buying goods to show off wealth.
Elasticity of Demand – A measure of how responsive the demand is for a good to a change in a person’s income. For example, if there is a decline in income, demand for luxury items will decline.
Exclusivity – Products that are expensive and scarce are considered exclusive, which increases their appeal and their value.
Inferior Good – A good that is in less demand as a person’s income increases.
“It” Factor – A fashion item that suddenly skyrockets in demand and value has the It factor, often due to exposure by a celebrity or influencer on social media.
Limited Edition – Short-term collections from fashion houses and luxury good manufacturers. By limiting supply, brands increase demand for the items.
Status Symbol – For many people, an exclusive, luxury good is a statement about their wealth and place in society.
Veblen Goods – Goods that see their demand rise because they’re considered status symbols.
Luxury goods are synonymous with quality and value. Investors in luxury goods rely on these characteristics to ensure longevity in a product’s value. Luxury goods have been used as status symbols, and social media and celebrity influencers on TikTok and other platforms have ensured that Millennials and Gen Zers use luxury brands to express themselves.
The luxury goods sector has outperformed stocks for the past 10 years, and although the world of luxury goods has been greatly democratized thanks to the internet and the digital universe, investing in luxury goods is still the stomping ground of the mega-wealthy. The dangers for novice investors include difficulty in sourcing and selling the right products and the risk of buying fake goods.
For lovers of haute couture and the finer things in life, buying and selling luxury goods can be a source of pleasure and also a sound way to diversify an already well-balanced portfolio. That is, if you can find the right distribution channels and a pile of cash.
Examples of luxury goods are haute couture clothing, jewelry and high-end watches, diamonds, art, wine, cars, luggage, yachts, and real estate.
The COVID-19 pandemic had a strong influence on the luxury market. Consumers turned to alternative travel options because of air travel bans, and there was significant buzz around superyachts. Somino Yacht Liner is the world’s biggest yacht, and it came on the scene in 2021 offering 39 luxury apartments. SuperYachtsMonaco also launched a 442-foot model called Project Sunrise.
Another sector in luxury that reflects the digital times is the metaverse. Some brands are now offering NFTs and digital-only clothing lines. Louis Vuitton launched a mobile game embedded with 30 NFTs, and Dolce & Gabbana sold a nine-piece collection of NFTs and real couture at auction for the equivalent of nearly $5.7 million.
Handbags have consistently been in the top five of the luxury investments index since 2011. Hermès bags in particular are very popular. Exclusive items that are limited editions or models associated with a certain event or person sell the most.
According to Luxe Digital, Gucci is the most searched for brand online in 2022. Dior is second. Next comes Chanel, Louis Vuitton, and Hermès. It’s difficult to find which luxury item is searched for most on Google, but according to Epsilon, consumers have shown the most interest in luxury cars, personal luxury goods (fashion, watches, jewelry, fine wines and spirits, and high-end furniture since the pandemic.
Brands are expected to continue to enter the metaverse and to use technology, avatars, and fiction to convey their brand. Luxury names will offer NFT collections sold with physical goods or as standalone digital collectible assets. According to analysts at Morgan Stanley, the luxury NFT and metaverse market will reach $56 billion by 2030.
Luxury brands will use augmented reality to improve the customer experience online or in-store so that customers can see what a pair of sneakers or outfit will look like. Ready-to-wear products, small leather goods, and shoes are well-positioned to benefit from technology, the metaverse, and wealthy consumers’ demand for digital fashion.
Lastly, brands will broaden social responsibility efforts to sustain growth. Greenwashing will damage brands’ reputations, so there may be more demand for a product’s sustainability credentials (i.e., materials, origins, manufacturing process, etc.). Products made with locally sourced materials, sustainable materials, and fur-free couture are expected to thrive.