Over the course of the last decade luxury brand bags have gained a lot of relevance as investments. What makes them so special? They tend to be safe investments which can almost be taken to be risk free as they face a stable demand which isn’t influenced by any macroeconomic event or indicator. These luxury bags continue to fetch high prices even during turbulent times and economic crises. One reason that this could be so is that majority consumers are elite and financially very well to do, who aren’t really that affected tremendously due to a recession per se. Such bags make a great investment in countries that suffer from political and economic unrest owing to their recession proof features.
The top 2 brands: Hermès and Chanel
As per the Knight Frank Handbags have been the top luxury investments with a “modest” price increase of 17%. Birkin and Kelly bags have been graded as the best investment by Knight Frank for 2 consecutive years owing to their strong bullish trends. Many studies carried out by Bad Hunter have revealed that the value of a Hermès Birkin has risen by 500% in 35 years. The rise of the same is also partly credited to social media and fancy lifestyles of many influencers out there, they definitely help in promoting and making them a fancy status symbol to have with added benefits of appreciation in value as the same will pay off when such products are resold. As per a study carried out by Bag hunter, on an average the Birkin and Kelly bags appreciate by 14.2% outperforming the S&P 500 and gold markets over the last 35 years, despite its risk being technically lesser than S&P 500 making these bags a safe, good and “low volatility high return” investment. There isn’t much volatility either, making it secure. The trends for the top brand “Hermès” are purely positive with close to zero fluctuation in terms of ups and downs and no decline in value. Chanel has a great resale value but comparatively lesser than those exotic Hermès bags in the market.
To keep in mind before investing:
An important aspect is availability, the fewer the pieces available the higher the price your bag will fetch. This is clearly well understood as it’s based on basic high school demand and supply. As anticipated, limited editions, quirky colours and larger sizes fetch a higher rate than their counterparts. Goods with high craftsmanship, skill, detail and history attached have additional brownie points. Only about 12,000 Hermès bags are made every year in order to keep the brand elite, limit customers to the priority ultra-rich class and maintain huge demand. Beware of fake copies of these so called “prized possessions” as the market is flooded with fake replicas due to their large popularity. The lack of the ability to distinguish the 2 will certainly undermine the value of
the product, this economic phenomenon is well explained by George Akerlof’s paper “Markets of Lemons” based on Adverse Selection.
Other Luxury investment alternatives:
Owning shares in luxury brand companies is also a great idea, this is so due to the oligopolistic tendencies and the brand reputation which has been created by existing players. The ever growing demand for these also makes them a priority sector to invest in. Such investments could be a great hedge to our financial portfolio during times of stress as well. A study found that the luxury fund performed better than S&P 500 having delivered an annual return of 57.56% as of 23rd July, 2021. Paintings are also an excellent investment, but these investments come with large sunk costs incurred to find the right “investment” based painting, verify the originality, the history associated with it and the level of detailing in the painting. Jewellery is a great alternative as well, and it was found that in 2014 the Jewellery market in London performed exceedingly better than London real estate and equities sector.
Fallouts of such investments:
They are fairly costly and hence aren’t affordable by most retail investors. On average a small classic Chanel bag can cost one $5,800 which is certainly a huge amount to invest for smaller investors who face constraints with regards to funds. Not all goods quadruple with time, some even lose value and depreciate if not well kept, hence an investment in such commodities comes with its cost of maintenance and care for the same. Bags that undergo wear and tear and depreciate are less valued in case they are damaged. There are many luxury bags out there, but not all are great investments. Being able to separate those investment pieces requires knowledge, knack and ability. Some of these investments come with huge labels of societal costs such as slavery done to extract the inputs and even animal cruelty. The most popular piece of luxury bag investment is the Hermès Birkin made from exotic leathers of alligators and crocodiles, this definitely doesn’t align well with the animal welfare goals one must ideally have. Animals are ruthlessly treated, denied basic healthcare and food, shot ruthlessly to source so-called exotic leather for these big brand names. Owing to the awareness regarding the same many brands including Armani, Gucci, Versace and others have gone fur free. Another disadvantage is that the resale industry isn’t formally regulated, and as a consequence at times owners of costly bags fall prey to frauds and become victims of the same.
Are they better than equity?
A comparison of such costly items to equity sheds light on striking differences. To earn a higher return in Financial Markets one definitely needs to add on more risk to the portfolio, but these luxury bag prices show exponential growth, trending all the way up year after year. The price of a vintage bag on average can grow 2 fold in just a few years and the same may take years put together in other financial instruments, keeping in mind that the above two investments share the same amount of risk. The S&P global luxury index did dip in March, 2020 owing to the COVID 19 Pandemic and Lockdown, but it showed a very quick recovery in spite of rising covid cases globally and has also reached all-time highs in 2021. As of 23rd July, 2021 the Index delivered a whopping high return of 57.56%.
Author: Kushboo Luniya
B.Sc. Economics & Finance, University Of London