What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing. Currently, the third richest man in the world is bernard arnall, the chairman and ceo of luxury fashion, giant lvmh. Interestingly, he is the only non-american in the list of top 10 richest people in the world. His wealth has skyrocketed over the past few years, with the parabolic rise in lvmh's.

Share price luxury sales have increased rapidly throughout the past decade, with global sales, reaching 281 billion euros or 316 billion dollars in 2019.. While sales took a hit in 2020, they have already rebounded to above 2019 levels. The consulting firm bain predicts a further 25 growth by 2025. With most of this growth coming from china, european luxury brands have generated hundreds of billions of dollars in wealth for their shareholders and are some of the most valuable listed companies in europe.

It's not hard to see why they're so profitable. It's easy to make money when you can sell pieces of cloth for five thousand dollars each while luxury brands build the perception of having the highest quality of clothing for all practical purposes, they're, not really any different than the clothes you would buy at target or gap At the end of the day, manufacturing a five thousand dollar louis vuitton bag isn't rocket science pretty much any clothing company has a technical capability to do it at their core building a luxury brand isn't about designing the most innovative products or having the highest quality manufacturing Techniques, above all, these brands are highly sophisticated marketing machines that employ every psychological trick in the book to make you believe, the bag they're selling - you is worth ten thousand dollars, for example, the luxury fashion industry burns billions of dollars worth of unsold inventory every year to Manufacture scarcity, they also use arcane sales tactics to engineer a perception of exclusivity. This creates an aura of prestige that pressures people from around the world to wait hours in line to spend three months, salary on a designer jacket and while they create the perception of luxury, many luxury goods are made in sweat, shops that use highly unethical tactics to Exploit their workers on the right hand, side of the screen is a zara bag which sells for about twenty six dollars. On the left hand, side is a gucci bag that sells for three thousand eight hundred dollars, making it about 150 times more expensive.

The gucci bag is slightly more elaborate with some fancy ridges on the handle, but the difference in quality is probably one or two times greater, not 150 times. At the end of the day, they both have the exact same functionality. Not all luxury products are like this. For example, a porsche cayman has significantly higher driving performance than a toyota camry and sells for a little over double the cost.

The fashion industry is perhaps the only area where you can see a 100 times price differential for products that are functionally equivalent. This is because luxury fashion brands aren't selling clothing, they're selling a lifestyle and social status. You need people to believe that only the upper rungs of society can wear your brand. This way people will be willing to spend thousands of dollars extra to have your brand logo on their clothes.

To build this image, you need to keep the prices of your products unreasonably expensive. This way consumers can show the world that they're rich, so they can afford to squander their money on materialistic indulgences, but there's a problem, it's impossible to predict exactly how much demand there will be for a given design that you make inevitably sometimes you'll make too many Of that jacket or whatever - and there won't be enough - demand to sell them all at the listed retail price and that produces excess inventory at the stores. Most brands solve this problem by heavily discounting the prices until they sell out. If you go on the website of h, m or any fast fashion, brand you'll see tons of discounts and promotions in some cases in excess of 50 off.

But if you go to a luxury brand store, you almost never see any discounts. You always have to pay list price with no room for negotiation. They can never admit that there's not enough demand for their products at the listed prices that would destroy the brand's aura of exclusivity and prestige. So what do you do? You will inevitably have heaps of products that can't sell piling up in your warehouse.

Eventually, you run out of space for them. You take all of your 5 000 bags and jackets and throw them into an incinerator in 2018. The british luxury company burberry let it slip in their annual report that they incinerated or otherwise disposed of 38 million dollars of unsold inventory in the previous year after facing public backlash, burberry vowed to stop burning clothes and instead recycle or donate them, but burberry isn't alone. The practice of destroying inventory is widespread across the industry brands, including, but not limited to louis vuitton and chanel engage in the same practice.

Luxury apparel doesn't cost all that much to manufacture burning. A few tons of cloth and leather is a small price to pay to maintain your brand, which is where 99 of the value is for some luxury brands. Just having high prices isn't enough, they also resort to arcane sales tactics. To engineer the perception of exclusivity hermes flagship product is their leather birken bag.

Their prices range from eleven thousand dollars to almost four hundred thousand dollars if they include exotic animal skins or precious metals, but it's surprisingly difficult to buy a bag. They don't keep them in stock at their stores. If you just walk in and ask a salesperson to order, a bergen, they'll put you on a waitlist, you might be on the waiting list for years and you might never get the privilege of handing over ten thousand dollars for just a leather bag. A few years ago, vox interviewed a few women who purchased birkin bags for one of them when she initially asked the sales associate about buying a birkin.

The associate said that you have to prove that you're deserving of a bag before they consider selling one to you. It's a pretty arrogant thing to tell your customers, so what do you have to do to deserve a bag? You have to go to that store over a long period of time and spend tens of thousands of dollars on their other products, whether you want them or not. Eventually, they may or may not allow you to buy a bag. It's completely at the sales agent's discretion.

This seems like a radically inefficient way to sell products to consumers, but it's actually a genius marketing gimmick. The engineer perception that you have to be high class and respectable to win approval from the sales associates. That turns it into the ultimate form of social prestige, which is the driving motivation for many luxury shoppers. But it's a pretty shallow measure of prestige, because the only real requirement for buying a bag is spending a lot of money at the store given how expensive luxury apparel is.

You'd think that they enforce the highest possible standards of their manufacturing facilities. To maintain the appearance of luxury, most of them manufacture their products in italy, which is renowned as a global leader in high fashion. Consumers think that if a product hasn't made an italy label on it, it is probably handmade by experienced well-paid artisans, who don't compromise on quality. By contrast, if a piece of clothing has a made in china or made in bangladesh logo on it, consumers will assume it's made in a sweatshop under unethical conditions.

However, the difference between a made in china and a made in italy label is much less than you might think. A 2018 investigation by the new yorker found that many luxury italian brands employ undocumented immigrants from china at their italian factories. They generally don't directly employ these workers, but instead hire third-party contract companies who, in turn, source the workers from china that way the luxury fashion brands technically keep their hands clean of the alleged worker exploitation because the workers are undocumented, they can be exploited with long hours. Low pay and lack of medical insurance brands, including, but not limited to gucci and prada, are alleged to indirectly employ immigrants in this fashion.

That's not to say that the chinese immigrants don't do a good job. Most of the products that come out of these underground italian sweatshops are of the highest quality. But the point is: if you bring immigrants from china and recreate a chinese sweatshop in italy, it doesn't really matter if the product was made in china or italy, but regardless these brands can massively inflate their prices by slapping on a made in italy label. Another issue to consider with luxury brands is the demand side who is buying these products.

Many of the buyers are wealthy individuals who have more than enough disposable income to spend 5 000 on a jacket, but a significant portion are also low or middle income. People who save up multiple months worth of their income for a single luxury purchase. We know this because luxury retailers, including neyman, marcus and saks fifth avenue partner with buy now pay later providers, such as a firm for example. If you want to buy this two thousand dollar dolce gabbana bag from neyman marcus, you can finance the purchase with a firm for as low as dollars per month.

If you don't have 2 000 in your bank account, you probably shouldn't be buying such an expensive bag. In the first place, but the fact that they partnered with the firm indicates that there's a lot of demand from cash strapped shoppers on the top is an income inequality, heat map published by business insider. The bottom map shows the relative google searches for louis vuitton by state. It's pretty easy to see a strong correlation states like california, nevada, texas, new york and florida all have very high income inequality in high interest in luxury fashion.

When you live in an area with high income inequality, there's a tremendous social pressure to appear wealthy. If you report, the last thing you want is for other people to know that you're poor for a lot of people, luxury clothes - are nothing more than an extremely expensive. Signaling mechanism, it shows the world that they have enough money to afford these things, even if they had to use a firm to pay for it. Luxury goods sales in china have exploded in recent years.

The country currently makes up more than 30 percent of global luxury sales, and that is expected to exceed 50 by 2025.. That's despite the fact that their per capita income is only 10 000 per year and when people spend the majority of their disposable income on luxury consumption, they're trapped in a cycle of poverty and can never achieve financial freedom, thus luxury fashion houses, both benefit from and Perpetuate income inequality; alright, guys that wraps it up for this video. What do you think about luxury brands? Are they a good thing for society? Let us know in the comments section below, as always. Thank you so much for watching and we'll see in the next one wall, street millennial signing out.