What Exactly are Luxury Goods?

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I spent quite some time puzzling over this question after a couple of recent encounters and I thought it might be worthwhile to write this out. These encounters prompted me to think deeply about the above - What exactly are luxury goods?

Here’s what happened:

• I was roaming the streets of Myeongdong, Seoul, South Korea where street vendors sell “branded” T-shirts with Chanel, Gucci, Moncler, Stüssy and logos of other big brands for $10. A tiny fraction of what real goods are sold for. These are different from what we get in Thailand and other ASEAN countries in the old days. The quality is the same as the real ones. The only difference is that you, yourself know you did not buy it from the actual branded shops.

• While travelling to Indonesia, I noticed the Polo brand being sold at their duty free shops, which means they cannot be fake shops (or else Europe will go after Indonesia). Then I realized there is some history between Indonesia’s Polo and actual Polo Ralph Lauren which we are familiar with. Long story short, the Indonesian Polo is real, just different, with the same logo and all and it sells for $50, which is again a fraction (a bigger fraction though) for what the other Polo Ralph Lauren sells for.

  

  Indonesia’s Polo

• In China, you can buy luxury watches that are indistinguishable from the real ones. If you bring it to the official shops for repair, they may not figure it out. That is how good fake technology has improved. In another encounter, my friend bought a fake Apple Ultra, the highest end Apple Watch, from China for $30. It is also indistinguishable from the real one from the outside, except that it only works on Android.

• In Japan, over the last two years, we can buy these luxury goods from the real shops at 10-20% discount because of crazy movements of global exchange rates, inventory quota differences between countries which led to more selections in Japan because traditionally, Japanese bought a lot of these stuff. These discounts can amount to thousands of dollars.

So here’s the question, why we are paying a few different prices essentially for the same stuff? The Apple Ultra would be the best example. In China, it costs $30 and in Japan, it’s $900+ which is c.15% cheaper than the retail price in Singapore.

The Indonesia situation makes things even more mind-blogging. In a hypothetical situation, say someone cuts a deal with Apple and says, I will sell Apple Watch only in my country, but I want to sell it at $250. Arbitrarily, for some inexplicable reason, Apple says yes, then as tourists, we can go there and buy it for $250. This is exactly what happened with Polo in Indonesia.

When we extrapolate the above to all luxury goods, the question of what are we actually paying for is being brought to the front and we cannot avoid it. The cost to make the stuff is not much. Again, in the case of the Apple Watch, it’s probably less than $30. Yet it sells for >$1,000 in Singapore. That’s why Apple is the biggest company in the world.

I guess to start answering the question in the title, when we break it all down, we are paying luxury products for:

1. The cost of actually making the product

2. The logistics of bringing to the store front

3. The salesperson’s salary

4. Implicit warranty (insurance)

5. Our own satisfaction

To risk stating the obvious, when it’s completely fake and pirated, what is happening is that the same factory making these real luxury goods can easily make another one without the real consigner knowing, slap the brand and ship it out to South Korea, to China or anywhere else in the world willing to sell fake goods.

This is the real cost: cost of #1 - production cost and #2 - logistics cost above. Based on my experience as an analyst looking across luxury businesses, it’s usually 20-30% of the selling price. We can infer by looking at gross margins which is usually at 70-80% of sales.

The rest, #3-5, making up the majority of what we actually pay for, is all fluff. With the final point #5 being the most pertinent. In essence, we are paying a lot for happiness. When we buy that bag or that watch from Ginza, at retail price, which is at 20% discount due to world circumstances, we get both the satisfaction of buying some luxury good and the happiness it’s at a 20% discount.

So what exactly are luxury goods?

In my mind, it is a product of a fantastic business model to ask people to pay and buy something overly expensive, to satisfy their own ego, thereby making them happy. The buyers are happy, because they can show everyone the can afford it, the salesperson is happy because of the commission, the brands are happy and everyone else up and down the supply chain are also happy to get a cut.

But what about the design, the fashion style, the fit?

Here’s what I think, when people say they buy because they like the brand, the style and what not. It’s all bullshit. If the same T-shirt can be bought from Myeongdong at fraction or Indonesia at half price, or Ginza at a discount or Singapore at full price, what exactly is the point of paying up?