Luxury goods: A poor investment

Rare, extravagant goods from certain luxury brands have long been the envy of the masses; this encompasses limited edition items, such as the stainless-steel, precious metal Rolex Submariner, the Hermes Birkin bag and the Lamborghini Sesto Elemento. Yet, the process to obtain these goods is long, arduous and very expensive. With this said, most justify these purchases by deeming it a good investment, as the value of these select goods appreciates over time. However, this judgement fails to reconcile the total monetary cost of the process to purchase said goods, with those intending to profit from buying luxury goods at best breaking-even, or at worst making a steep loss.

Types of Goods

Most goods in the market are classified as ‘normal goods.’ These goods have a positive income elasticity of demand meaning that as income increases, the quantity demand of these goods will also increase. Conversely, as income decreases, the quantity demanded of normal goods will also decrease. Income elasticity of demand is calculated by taking the percentage change in quantity demanded, dividing it by the percentage change in income. As a result, normal goods have an income elasticity of demand between zero and one.

However, some goods are deemed ‘inferior goods.’ Contrary to normal goods, as income increases, the quantity demanded for the good will decline. These goods are typically deemed as inferior as consumers will move to a more costly alternative as income rises. As a result, the income elasticity of demand for inferior goods is less than zero. One such example would be public transport; as income rises, the quantity demanded of public transport decreases. This is unsurprising, as consumers prefer travelling by car when given the choice.

On the other hand, luxury goods have an income elasticity of demand greater than one. This means that as income rises by 10%, the quantity demanded of a luxury good will increase by more than 10%. Individuals tend to spend a large portion of their income on these goods. Examples include holidays and gym memberships. Goods that are deemed more valuable than luxury goods are classified as ‘Veblen goods.’ These contradict the law of demand, given that the demand for these Veblen goods increases as price increases. This is due to the exclusive nature of these goods, deeming them as a status symbol for those who purchase them. Additionally, as these goods are difficult to purchase, this appears to warrant their high asking price. At the same time, many see Veblen goods as a good investment, as they tend to appreciate in over extended periods.

The scam of Veblen Goods

With this said, there is no doubt that these luxury, Veblen goods are far from a good investment. Take the elusive stainless-steel, precious metal Rolex Submariner; Rolex sold it to a limited number of customers. These customers were chosen based on their loyalty, determined by the number of watches they had purchased. Let’s say that to have the chance of purchasing one of the limited-edition Rolex watches, customers needed to have purchased between three to ten of their watches. Considering that Rolex watches average at around $10,000, this would’ve required a steep initial investment to even be put into contention of purchasing one of these watches.

Say an individual is lucky, managing to purchase three Rolex watches for the average price of $10,000 ($30,000 total), thereby managing to secure the exclusive stainless-steel Rolex Submariner for a retail price of $36,000. Even in this lucky scenario, this person is likely to break even, given that the market price for one of these precious metal, stainless steel Rolex Submariner’s is around $70,000. In this scenario, the individual has spent just under $65,000 to achieve a small 8% profit, provided they can sell the watch at $70,000. This is even with an extremely lucky scenario; the chance of being able to purchase one of these limited edition watches isn’t guaranteed, even after purchasing a large number of watches. It is more likely that at least five watches would’ve have be required in this scenario, to be able to purchase one of these limited edition watches, thereby leading to a loss. Even if the exclusive watch appreciates over time, it is unlikely that this will be able to cover the initial loss made by purchasing all the other facilitating watches that enabled you to make the purchase in the first place.

The same holds for both limited edition cars and designer bags. Just as is the case with Rolex, Hermes only allow customers who have purchased many of their non-leather goods (e.g. fine jewellery) to be in contention of buying their rare, elusive bags.

Ultimately, the limited edition products sold by designer and luxury brands alike represents a poor investment by those looking to make an easy profit. The process to obtain these rare, luxury goods is expensive, rendering it nearly impossible to make an overall profit from selling the exclusive good, even on the third-party market. Only those who truly value these rare goods should be in the market for them, with those looking to make a quick profit advised to avoid these Veblen goods.