In recent years, as the global economic downturn has intensified, consumer spending habits have also undergone significant changes, leading to a noticeable slowdown in the luxury goods market. Recently, several global luxury conglomerates have released their financial reports, which unfortunately show a decline in performance.

The world's largest luxury giant, LVMH (Moët Hennessy Louis Vuitton), recently released a report indicating that its revenue for the third quarter of this year fell by 4.4% year-on-year to €19.07 billion, below market expectations of €20.01 billion, marking the worst performance in nearly three years. Kering (Kering Group), a leading French luxury company, reported a revenue of €9.018 billion in the first half of the year, a decrease of 11% year-on-year; its recurring operating profit was €1.582 billion, a decrease of 42% year-on-year; and its net profit was €877 million, a decrease of 51% year-on-year. Its core brand, Gucci, saw a revenue of €4.085 billion in the first half of the year, a decrease of 20% year-on-year. British luxury brand Burberry's performance has also been less than satisfactory. In the three months ending June 29th, the company's retail sales fell by 22% year-on-year to £458 million, and same-store sales also declined by 21%. Burberry warned that if the business continues to slump, it expects to incur operating losses in the first half of the fiscal year 2025.

Inventory has always been a headache for luxury brands. Due to the unique nature of their industry and sales logic, if new products do not sell well during the popular season and become inventory, they turn into a "hot potato" that cannot be easily disposed of, neither sold further nor restocked in the next season. As Emanuel Chirico, CEO of fashion group PVH, once said, "Clothes do not improve with age like wine; the more and older the inventory, the worse the situation becomes."

In fact, as early as 2018, the fashion industry sparked a discussion on how to handle luxury goods inventory. The incident was triggered in 2017 when Burberry burned products worth approximately £28.6 million to clear inventory, including not only clothing and handbags but also perfumes and cosmetics. Once reported, this practice immediately drew strong criticism from environmentalists and societal condemnation. Under intense public pressure and the threat of potential fines, Burberry announced that it would stop this practice from the following year and stated that it would increase investment in sustainable development.

Advertisement

In reality, burning inventory is not new in the luxury industry. The characteristics of luxury goods determine that their brand value is inevitably linked to "scarcity." On one hand, due to high pricing, many consumers are excluded due to limited purchasing power; on the other hand, because luxury goods are only sold to specific groups during certain periods, their scarcity is artificially enhanced. Therefore, for these brands, discount promotions can almost be considered self-sabotaging, causing long-term negative impacts on the brand without any other benefits. This is also why many brands prefer to destroy inventory rather than offer discounts.

However, starting from 2020, destroying inventory was no longer an option. In March of that year, France issued a ban on the burning of products by various brands, urging companies to "handle inventory in a more environmentally sustainable manner." Under these circumstances, what should be done with inventory?

Indeed, some luxury brands have "bravely" challenged the industry logic of "no discount sales." For example, Gucci would, after several sales seasons, put unsold items that even failed to sell at friends and family sales into discount stores; Burberry is also a "regular guest" at outlets like the "discount village," where long queues can often be seen in front of Burberry stores. As expected, although the total sales performance of both brands did not decline more than other luxury brands, the consumer structure has undergone a significant change, with a severe loss of high-spending customers and mid-low priced products becoming the mainstay of sales. In other words, although both brands survived, their positioning has undergone an irreversible change, gradually moving from luxury goods to fast-moving consumer goods.

So, how do brands that are unwilling to change their positioning handle inventory?

The most common method is internal sales, with LVMH being a representative example that often holds events to sell unsold items to employees. However, it is clear that the employee customer base is too small, and even with a high conversion rate, the amount of inventory that can be absorbed is extremely limited.Another approach that can both digest inventory and maintain the brand tone of luxury brands is philanthropy. Burberry announced in 2020 that it would donate some of its inventory to charities or recycle it. LVMH has also established a partnership with the large-scale public welfare organization Cravate Solidaire, which collects some clothing with more distinctive professional characteristics and provides them to specific groups. The high-end clothing brand Moncler has chosen to cooperate with non-governmental organizations, mainly to assist people living in cold or impoverished areas.

Some brands have chosen to collaborate with the creative industry. For example, several luxury brands have announced their entry into the fabric resale platform Nona Source, allowing up-and-coming designers to purchase unused fabric and leather inventory from luxury brands at relatively low prices. Nona Source, representing the brands, stated that this move not only allows these fabrics to release "creativity" again but also provides professionals with low-cost, high-quality raw materials, injecting new vitality into the sustainable development of the industry.

However, some experts have expressed that focusing all attention on dealing with inventory is somewhat misplaced. The current fashion industry needs to pay more attention to the source of production, that is, by predicting consumer demand through big data, managing consumer expectations, and producing on demand from the start, rather than creating inventory first and then finding ways to digest it. Currently, Kering has chosen to invest in artificial intelligence to manage inventory, and Louis Vuitton has also introduced an inventory management data system. However, looking at the overall development status of the industry, the construction of data management capabilities in luxury brands is generally lagging.

"Data management is not a new technology or concept a few years ago, but some brands are still unaware of it, which is a shocking backwardness," said an expert who has been deeply involved in the fast-moving consumer goods industry for many years. If this continues, "a large part of luxury brands will be replaced by fast-moving consumer goods."

It should be said that the de-stocking of luxury brands is not only a strategic issue but also a strategic one. The key is not only how to respond to market changes but also to rethink their own brand value and core competitiveness, and find a symbiotic way with the target customer group based on this. In the face of the global market shift and the surging waves, it is time to seriously think about the future path.