image: Cartier

image: Cartier

Richemont, the parent company to watchmakers Cartier, Piaget, Baume & Mercier, and Vacheron Constantin, among others, is making headlines for “allegedly destroying its expensive, unsold watches.” According to Quartz, the Swiss luxury group’s 2018 earnings report sheds light on its practices, including “inventory buy-backs” and its dismantling of its pricey timepieces, in an effort to “save their brand value,” at least in part from the tarnishment that comes from the grey market.

For years, there has been an active parallel market in operation across the globe, where authentic designer wares, among other things, are sold for a fraction of their traditional retail price. Referred to as the grey market, this unofficial trade is dominated by genuine branded goods obtained from one market that are subsequently imported into another and sold there without the consent of the owner of the trademark.

Unsurprisingly, the oft-perfectly legal trade in “grey market goods” is one that brands commonly cite as highly problematic facet of maintaining the exclusivity that is central to luxury brands.  

As a  result, no shortage of luxury and high fashion companies have worked hard to cut down on such unauthorized distribution of their wares. Chanel, for instance, announced in May 2016 that its efforts to curb the grey market – which saw the brand harmonize prices across the world to disincentivize price arbitrage – have been successful. As noted by Reuters, “The company narrowed its price gaps between the United States, Europe and Asia last year to prevent smugglers buying goods in one region to re-sell to another in the grey market.”

Louis Vuitton, on the other hand, has been shrouded in theories that it handles the issue by destroying unsold bags. The internet is rife with articles asserting that in order to avoid selling its well-known bags at a discount and risk tarnishing its image as a luxury leader, the Paris-based brand burns its excess leather goods.

But more than a measure to save face in a market that depends largely on appearances, the potential destruction of products by luxury brands – whether it be Louis Vuitton or Richemont’s watchmakers, assuming the industry reports are correct – could have another facet to it.

By destroying unused products, brands that import goods into the U.S. stand to benefit from the “drawback” or the return of certain duties, internal and revenue taxes and certain fees collected upon the importation of products into the U.S., for instance, from France.

In accordance with U.S. Customs and Border Protection program (and 19 USC § 1313, the section of U.S. Code, which centers on “drawback and refunds”), “If imported merchandise is unused and exported or destroyed under Customs supervision, 99 percent of the duties, taxes or fees paid on the merchandise by reason of importation may be recovered as drawback.”

While a spokesman for Richemont declined to comment and LVMH did not respond to a request for comment as to whether their brands utilize drawback practices, LinkedIn profiles for a number of Louis Vuitton employees, including “logistics supervisors” – whose duties include, “Perform[ing] reporting and follow-up activities related to duty drawback for both product destruction and product export” – give some potential credence to the theory that luxury goods brands are destroying some of their most esteemed goods. 

Moreover, in its most recent annual report, LVMH seems to suggest that the rumors do, in fact, have some basis in truth: “Provisions for impairment of inventories are … generally required because of product obsolescence or lack of sales prospects.”

Given that the average duty rate for the import of a leather handbag is 16 percent, but can reach a maximum of 60 percent depending on the types of textiles at play, and the average rate for luxury watches is 11 percent but could be as great as 50 percent, brands that can provide U.S. Customs with evidence that imported products have been exported or destroyed in accordance with the set timetable may be able to claim sizable refunds for unsold products. 

Something similar is true in Italy (and many other countries), where brands that destroy unsold products can claim tax credits as a result. As the WSJ revealed in connection with Italian menswear brand Stefano Ricci, “At the end of the year, employees gather unsold clothes into dozens of boxes bound for a special facility, where they are incinerated.”

“The companies hired to incinerate the clothing film the destruction so that brands can prove to the Italian tax authorities that their inventory has truly gone up in smoke,” according to Ricci. “Mr. Ricci says the brand also destroys unsold product in the U.S. and China.” The designer says that while the brand “would like to give some of the unsold goods to charity, the tax credit ties the company’s hands.”

In short: There is more to the alleged destruction of pricey accessories than brands attempting to uphold the air of luxury. There is also a very real monetary component at stake if brands play their cards right.