No all bags are created equal. Just because you buy an expensive bag does not mean you will make a profit reselling it at a later date. In most cases you won’t make a profit, but not only that, you will probably suffer a significant loss on your initial purchase price.
How does supply and demand affect price?
Simple market economics says that price is determined by supply and demand. That is, the more people want an item and the less of them there are, the higher the value of the item. This is the overarching principle for all asset classes, luxury or not. This is, in essence, how a free market determines price.
For the most part, the price of luxury items is informed by the fact that there are not many of them and everyone wants them. Usually people demand luxury items as a sign of status or for inherent beauty and workmanship. Principally, it is the status and the apparent relative scarcity associated with the item, that drives demand.
So far as supply is concerned, luxury houses hold most of the cards here. Often they reduce supply of items just to inflame demand. The rarer an item is, the more people desire it. It is the human condition – we want what we can’t easily obtain. Take the Louis Vuitton Toiletry 26 – Louis Vuitton have pretty much turned off the tap on production, supply has plummeted, and people are willing to give up their first born to get their hands on one. The Louis Vuitton Pochette Metis is another example of this. And regardless of how often Louis Vuitton increases the prices of these items, the market keeps buying them in droves.
The best shorter-term investments are those items which are highly sought after and for which supply is very tightly controlled. The Hermes Birkin or Rolex Hulk are great examples of this. You can usually buy them one day and flip them the next at a mark up simply because it is so difficult to get your hands on one. And the market is willing to pay a premium for access.
Longer-term and slower capital growth investments need to be considered more closely as there are inevitably more risks involved.
What bags are often in long-term demand?
Ultimately, if you purchase an investment handbag, there needs to be a market to buy the bag when you ultimately decide to sell it. If there is a limited market or no market for your bag, then this will significantly affect the resale price. Accordingly, you need to make some assumptions and some judgment calls about future demand BEFORE you purchase an investment bag.
Here are some things to consider:
- DO buy a classic style bag – the bags which we continue to demand are the bags we see and we remember. The Hermes Birkin, the Chanel classic flap bag and the Louis Vuitton trunks all fall into that category. The marketing machine for these bags continues to operate, celebrities continue to carry them, and the market continues to demand them. These bags have been loved by generations of fashion diehards. In my opinion these items fall into a proven demand market and have enduring appeal despite trend cycles.
- DO buy a classic colour – as with style, the bags we continue to demand are the classic, easy to wear colours and hardware combinations. So far as colour goes you can’t go wrong with black, beige, and red. Some designers have signature colours which will always be sought after – i.e Hermes Orange and Chanel 12A red. Similarly, silver, gold and palladium hardware will always be sought after.
- DO buy something aesthetic – beauty is a tough one because as we know it is often in the eye of the beholder. That being said, some things are beautiful on any measure and some things are just plain ugly. Objectively beautiful things are more valuable as they appeal to a broader market, and the rarer they are the better. The opposite is also true – you may have a Hermes Birkin which is as rare as French fidelity, however if it isn’t objectively pleasing to the eye, you are going to have trouble selling it and this will affect its market value.
- DO understand the market for each type of design – If it is the type of bag which people often buy for themselves for the long term, then it is less likely to be cycled and sold in the short or medium term. The contra is, if it is the type of item that gets purchased often as gifts for casual acquaintances, the likelihood will be that the bag will be cycled and sold in the short to medium term, and in new or excellent condition. These sorts of bags tend to retain less value.
- DON’T buy heavily seasonal bags – while Chanel continues to produce its classic line, it also produces different coloured and styled bags each season. While the classic line tends to hold its value over time, seasonal bags are often sold at heavy discounts within a short period of time. The reason: see my first point. We forget about them. They become a bag we used to know. A trend attached to a particular season. Trends tend to disappear into obscurity rather quickly.
- DON’T buy seasonal colours and materials – try to steer clear of heavily seasonal colours like chocolate brown, aubergine, neon orange and the like. The same rule applies to nylon and suede. The market tends to associate those colours and materials with particular seasons and not for all-year-round. Luxury items which can be used at any time, hold a greater inherent value than those which have a perceived limited use.
- DON’Y buy exotics – for heaven sake, unless you have more money than God and you don’t mind it going up in flames, please don’t buy exotic leather handbags new. You may love ostrich, python and crocodile, but always buy them preloved. The value of these bags plummets as soon as you purchase them. Why? Because there is a very limited market which will purchase and carry an exotic leather, and the resale of exotics can often be inhibited or prohibited by international regulations governing the sale of exotic skins (called SITES). A small market means small demand which means depressed prices. Just please don’t.
- BEWARE of niche function bags – they will either hold value very well or will plummet depending on the item. This is where you need to know your item and know your market very well. A Louis Vuitton golf bag could be an awesome investment or a decision you rue for eternity.
How does price affect demand?
Ah, the contra: how does the RRP of a new bag affect the value of a bag for resale on the second-hand market. Of course, this applies best where there is an apples-for-apples comparison.
Where a style of bag is still in production, it will have a current RRP which can be used as a starting point to determine the value of an existing investment handbag. Why is that? Because a purchaser in the market has a choice between buying a new bag and buying a secondhand bag – it all comes down to value for money.
If there is a bag on the second-hand market that is used and is for sale at only 10% less than the RRP, then a potential purchaser may consider it better value for money a to purchase the same bag new. That way they receive the store experience, have all the accessories, the receipt and the warranty. Depending on when the seller purchased they bag and how much for, they may or may not be making any capital return in selling the bag at 10% under the current retail price.
However, if there is a classic style bag on the second-hand market which is 10 years old, unused and is being sold at 50% less than the current retail price, then a potential purchaser would likely consider that purchasing the second-hand bag is better value for money. They would acquire a new bag for half the current retail price. In this case, the purchaser is clearly winning. The seller may also be winning if the RRP on the bag has increased 100% in the 10 years since they purchased it. Accordingly, the purchaser is saving 50% on the RRP and the seller is making a 50% gross nominal profit on the purchase price of the bag. Note my comments on gross profit v net profit in part one here.
In short, the more the RRP of a bag increases, then the more value that will be retained by a bag on the second-hand market.
For example, if you buy a Speedy now and look after it, you should be able to make your money back on it (at least) in 5 years time. I know this can be done, because I did it last week.
What about inherent value, condition and accessories?
It goes without saying that the better condition a bag is kept in, the more inherent value there is for resale. Bags which are unused and come with all their accessories will hold their value better than bags which are heavily used and missing shoulder straps and authenticity cards etc. If you purchase a bag as an investment, it is best not to use it and ALWAYS keep your proof of purchase. If for no other reason, your insurer will probably want it if you make a claim.
For most people buying a luxury handbag is about finding something to love and use. Buying a luxury handbag as an objective investment decision is not to everyone’s tastes. That being said, it isn’t impossible. It can be done. You just need to be smart about it and not let emotion or trends get in the way of good medium to long term investment decisions.
*Disclaimer: this article is for general information only. You need to obtain your own personal and tailored financial and commercial advice prior to making any investment purchase. This article is not to be relied on as your principal source of information. Further, this article is written with the existing Australian market in mind – the preloved markets in other parts of the world will very likely be different and will accordingly need to be considered in place of the market as it is in Australia.