How the luxury industry makes a fortune through deception

Honesty becomes “the new luxury” in a world where the concept of quality is manipulated through spectacle

luxury industry leather bag quality price cost waremakers

If a so-called "luxury" bag is sold for 10, 20 or even a hundred times more than it cost to produce it, is its price tag a true reflection of its quality? Or perhaps of something else entirely?

Magnificence usually comes at a price. Few of us expect access to luxury ­— to the most splendid fruits of human labour — without having to give something in return.

That exquisite new French handbag or the premium British suit can run into the hundreds or even thousands of euros, dollars or pounds — and we want the price tag to be justified: superior materials used throughout, pieced together by skilled craftspeople, reflecting the brand behind the item.

Luxuries like these are perhaps not something we can always afford, but if we do choose to put money on the table, we expect the quality of the item acquired to be truly magnificent. This is, after all, a meaning carried by the Latin word "luxus".

Much of the production of "luxury" goods is now outsourced to low-cost regions in order to boost profit margins.

But if you need to pay 10, 20 or even a hundred times more than it cost to produce it, is the price tag on what we normally refer to as a "luxury" item really a reflection of its quality? Or perhaps of something else entirely?

Better known for vampires

A few global conglomerates today dominate the so-called "luxury industry". These are companies that charge €2,000 for a pair of shoes, or £10,000 for a handbag, without blinking an eye. And that is the mid-range. At the top-end, the price for a women's bag has moved beyond €100,000 (approx. $115,000).

You would expect near-divine quality at these prices. Surely, these goods must be produced by elite craftspeople in regions of the world with an unsurpassed expertise nurtured over decades or centuries?

Yet, as an article in The Guardian from June 2017 exemplified, much of the production of "luxury" goods is now outsourced to low-cost regions in order to boost profit margins.

The investigation carried out by the British newspaper exposed how the world's biggest luxury goods company — based in France — cut costs by outsourcing the production of all but the soles of their footwear to factories in Romania.

luxury designer heels shoes made in France Italy EU law brand name shoes price tag

According to EU law, as long as the soles of a pair of designer heels are "finished" in France or Italy, luxury brands are still able to qualify for sought-after 'made in' tags.

According to EU law, by ensuring that their shoes are "finished" in France or Italy, the company is able to still qualify for those more sought-after 'made in' tags. As journalist Alexandra Lembke explains:

"Many of the shoes and boots [the company] sells for [up to] £1,800 a pair and stamped as 'made in Italy' are mostly made in Transylvania, a region better known for vampires than any tradition of luxury craftsmanship."

The French shoemaker is, perhaps not surprisingly, highly secretive about the true nature of its shoe production. According to The Guardian, the company opened its first Romanian Factory 15 years ago, and has gone to great lengths to conceal them from any Google search result ever since — even explicitly denying their existence in 2014.

The same secrecy is applied to where the industry gets its materials. Every year the Fashion Transparency Index ranks 100 of the biggest global brands based on how much information they provide about their suppliers and social impact. In the 2017 report, all of the "luxury" brands score less than 30 out of a possible 100, and the majority achieve a dismal rating of less than 10.

But what is known for sure is that the French conglomerate in Romania is by no means alone in outsourcing production to cut costs. Another "luxury" company — this one British — was recently caught up in similar controversy when it was found to be outsourcing production to manufacturers in China and Turkey, while simultaneously proclaiming its British heritage in its advertising campaigns.

This caused journalist Carole Cadwalladr to write in the Guardian:

"The hypocrisy of a multinational brand whose global marketing campaign revolves around 'Britishness' and being a 'luxury brand' with a 'distinctive British' appeal which makes a profit of £366m on a turnover of £1.86bn a year, all the while shedding British jobs and closing British factories, has a stomach-churning quality all of its own."

And she adds: "Luxury brands are the biggest confidence trick in the great panoply of modern consumerist cons. Price bears almost no relation to manufacturing costs."

Consumers pay it, crazily enough

The basis of your profits are, of course, made up of the difference between what it cost you to make something and what you can later sell it for. And the luxury conglomerates are nothing if not profitable. The French multinational with the Romanian factories made a profit of just over €7bn in 2016 alone — almost as much as the total cost of the 50km-long Channel Tunnel connecting France and Britain that took six years to build.

With production outsourced to low-cost countries and the resulting bags and shoes carrying price tags in the thousands, this kind of profit is not really surprising. It's the result of very deliberate effort, says Dana Thomas, author of the bestselling book 'Deluxe: How Luxury Lost its Lustre'. She is in no two minds about what drives the industry:

"[Their] sole motivating factor is profits. The designers can dream up beautiful designs, but the number crunchers will cut costs wherever they can to raise the profit margin."

It's perhaps a surprising characterisation of an industry marketing itself as supplying the best of the best — with being as high-end as you can get. But Dana Thomas continues:

"Even if fabric costs $2 a metre, and the dress costs $50 to produce, the number crunchers will price it at $3,000 retail. Because they can! One designer told me a case where this happened and he even protested the high price. And the number crunchers didn't care. Their argument: 'consumers will pay it'. And they did, crazily enough."

If production costs and retail price are so disparate, it leaves us with a perplexing question: How have these companies managed to create such a lucrative business model for themselves? And how can they possibly continue to purport an image of "luxury"?

In short: Why is it that "consumers pay it, crazily enough"?

Dominate the client!

According to marketing professor, and luxury industry specialist, Vincent Bastien, the aim of the "luxury" brands is to create the highest possible brand value. They do this by following a particular set of marketing rules, including:

• Dominate the client
• Keep raising the average price of the product range
• Keep non-enthusiasts out
• Make it difficult for clients to buy
• Luxury sets the price, price does not set luxury

The client should be "dominated" by the marketing constantly reaffirming qualities such as "time, heritage, country of origin, craftsmanship, man-made, small series etc.," says Bastien.

luxury brands madison avenue new york rent fit out costs store money

Luxury brands spend exorbitant amounts renting and fitting out stores in prime locations around the world — such as New York's Madison Avenue.

This, according to the marketing expert, is how the industry can "command their incredible pricing power and margins." And it seemingly doesn't matter if the products are actually made in China or Transylvania. As long as the image of "heritage, country and craftsmanship" is continuously reaffirmed and nurtured, the prices can stay high. As Bastian says:

"The more [the product] is perceived by the client to be a luxury, the higher the price should be."

But dominating people does not come cheap. In 2016 alone, the French luxury conglomerate with the Transylvanian connections spent an estimated €4bn on advertising alone — that's more than the combined GDP of Greenland and Belize.

The exorbitant figure shows no sign of dropping either, with "luxury" brands expected to pay out more than €10bn for marketing in 2017.

Advertising alone, of course, is not enough to create a global image of heritage and prestige. The industry also needs to place its stores in prime locations in the world's metropolises — be that on New York's Madison Avenue or Paris' Avenue Montaigne.

And this, too, comes at great cost. A new record was set in London in 2016 when one flagship store agreed to pay £24,000 per square metre (£2,225 per sq ft) to rent their shop on New Bond Street. That's the equivalent of paying a monthly rent of about €300,000 (£260,000) for a decent sized, 130 square metre flat. And the store is of course much bigger than that. You obviously need very healthy profit margins on your bags and polo shirts to cover a rent of this size.

In Melbourne, Australia, a 'luxury' French jeweller was reported to have spent 6 million euros on their cabinetry and interiors alone. However, few anecdotes can compete with a case from 2013 where the French conglomerate temporarily erected an entire pavilion — shaped liked one of it bags — on Moscow's Red Square, solely for marketing purposes.

The right people and some razzle-dazzle in the right places are also part of the mix.  The "luxury" brands frequently set up one-off runway shows and plush parties in exotic locations all over the world. These extravagant events are designed to be attended by celebrities and other influencers, lured in by 'VIP invitations' and the promise of glamour.

The spectacle of luxury

So the brands have to play their cards carefully to create that key moment when a customer on New Bond Street in London chooses to swipe his or her MasterCard — and leave the shop with a rope-handled, gloss-laminated shopping bag. In it, a new made-in-China handbag or made-in-Transylvania pair of shoes.

The conglomerates have succeeded in creating a spectacle so convincing that enough partake in this 'game of luxury' to make the businesses wildly profitable.

But the conglomerates have succeeded in creating a spectacle so convincing that enough partake in this 'game of luxury' to make the businesses wildly profitable.

Full-spread advertising in glossy magazines. Flying celebrities in to canapé parties in Dubai or the Californian desert. Sky-high rents in stores all over the world. Or even temporarily erecting 'bag buildings'. All of this is, of course, in the end paid for by the customer choosing to swipe that card.

All the while, the actual purchased item labelled "luxury" seems to have lost all connection with the key meaning carried by that word: magnificence.

The industry revolves around cost-cutting and outsourcing while carefully crafted images of heritage and craftsmanship adorn their magazine ads.

What remains is a spectacle of magnificence. Simulated magnificence. The industry today seems more connected with two other meanings carried by the word luxury: excess and waste.

luxury shopping industry customer consumer bags rich buying

Simulated magnificence — rope-handled, gloss-laminated shopping bags, most likely containing a new made-in-China handbag or made-in-Transylvania pair of shoes.

The New Luxury

While the industry's various secrets are sometimes exposed in the media, it has somehow managed to dodge most bullets — and even thrive. But the exposure and ensuing criticism has, over the last few years, contributed to the coining of a new term: the new luxury.

British magazine Campaign defines the emerging shift this way: "The new luxury involves people looking for the story behind a brand […]. There is a need for authenticity. Better-educated and smarter consumers no longer need the authority of designer brands in quite the same way, ushering in a more subtle sophistication to luxury."

In Paris, France, an organised movement has even formed around the concept, calling itself 'The New Luxury'. VP Terry Johnson explains:

"The New Luxury is […] a return to a time where products could be trusted to give maximum value to those using the products they buy. This is the true meaning of luxury: timeless products with the highest standards of quality, value, and respect."

Perhaps aided by conspicuous consumption increasingly being frowned upon following the financial crisis, this emerging shift suggests that qualities such as transparency and honesty are becoming more sought-after by people looking for quality goods.

While smaller, high-end producers more occupied with their actual output than with throwing champagne parties in The Louvre cannot compete with the "luxury" conglomerates in terms of marketing, it seems they can quite easily do so in terms of quality of product.

In essence, the aim of the booming number of smaller, premium-quality producers around the world appears to be to reattach luxury to magnificence. When we "allow ourselves a luxury" it should not be a simulated event, but an experience of something inherently premium. Of the best available.

And while premium quality has higher-than-average production costs, these pale in comparison with the money spent on creating mere perceptions of quality. This is why a 400€ bag can be of much higher quality than the 4,000€ one next to it.

In the world of 'the best', perceptions can be deceiving.