The Luxury Goods Resale Market: Influence on Brand Profit and Consumer Behaviour

The decision to purchase luxury goods can come down to a couple of factors. In previous years, people would purchase these items for their quality, trust in the brand, and perhaps some form of personal status. It was rare for people with enough disposable income to purchase luxury items to attempt to make a profit. In those times, the demand was not nearly as high as in recent years, and the proliferation of hedonistic purchases^[1] was not as common as it is now. 

The massive demand for the luxury goods has introduced a resale (i.e. secondary) market with large profit margins to be made. Privé Porter offers a rotating range of nearly 80 bags at any time and has sold over $60 million in Birkins.^[2] In addition, The RealReal owns more than 300 bags, and its sales value was $437 million in 2021.^[3] StockX owns 235 and its sales value was $1.8 billion in 2021. ^[4] The product that was once so rare now has approximately over a million items on the market.

The prices of watches and handbags globally increased respectively by 16% and 7% in 2021 when compared to the previous year, according to the Knight Frank luxury investment index. Also, in the last 10 years, the index has increased by 123%, with 108% for watches and 78% for handbags. For this reason, our study aims to investigate the price evolution of luxury goods in the resale market and its impact on companies profit and consumer beahviour.   

It is common to see in the field of economics, conventional subjects being tackled. However, it is not very often that people think about the luxury industry and how it drives our economy. More importantly, consumers primarily focus on meeting their needs, but neglect how their day-to-day actions worry a business, or how business decisions use and influence their behaviour.^[5]

We found interest in the luxury industry because it is part of our daily lives. Even though people do not buy from luxury brands every day, the smaller brands that offer customers more affordable fashion are heavily influenced by luxury brands and their designs. Moreover, some of the items discussed in this study are highly sought after and a sudden increase in demand and investment has been seen over the past 10 years.

Luxury goods serve three functions: performance, quality and sustainable investment; hedonism and self-reward; and as a form of status signal. Indeed, the prices of luxury items increase in the resale market because demand is high, and supply is very limited. Thus, these products follow the theory of the economist Veblen: if the price increases, the demand will also increase.^[6] Another determining factor that influences the price increase is the condition and accessibility of the product because two identical products will not have the same price if one has been used or can be found in the store, normally at a lower price.

The strategy of underpricing consists in offering a lower initial price on a product launch. The idea of this strategy is that if the firm offers a low initial price and the secondary market validates the item by increasing the price, then the firm gets a better long-term reputation. So, a company can benefit from the secondary market. The consumer also benefits from it because he has the possibility of finding products online that he is not able to find in stores. 

Indeed, in an online store in 2018, a consumer paid $19,000 for the same bag that he was unable to find in the Hermès store at $12,000. With similar behaviour among consumers, the firm was not negatively impacted as it experienced a 10.4% increase in the consolidated revenue the same year. For the Rolex Daytona, history repeats itself: in 2019 a consumer paid a price of $25,000 in an online platform for the watch which cost $12,400 in store^[7].

Different factors can be taken into account before making an investment. Over the last ten years, there has been a great increase in the purchases of luxury goods.^[8] Objects like watches, bags, shoes and ready-to-wear are some examples of the objects that people have commonly chosen to spend their income on. 

Contrary to savings accounts, stocks, certificates of deposits, bonds, mutual funds, real estate, commodities and annuities, luxury items are extremely tangible. Consequently, this may make these items more attractive to the investor as they can be kept with oneself at all times. These items are always prepared to be traded in a secondary market with a guarantee of a return of investment. 

Certain luxury houses, such as Chanel and Hermès, keep their supply low in order to maintain their demand high at all times. This clever tactic allows them to have a highly competitive control of the market and guarantee that their customers are under the ‘illusion’ that since the demand is so high, the value of the good must be reciprocal to it. It can be said that luxury goods that are more difficult to purchase have a much higher investment return than others, as they are scarce in the market.  

When luxury items, in particular the Birkin bag were compared to gold and the S&P 500, these two markets were relatively volatile, and with some inconsistencies. For example, between 1980 and 2015, the S&P 500 returned a nominal average of 11.66%, peaking at 37.20% in 1995 and lowest of -36.5% in 2008. Additionally, during this same time period, it was reported that gold provided an average annual return of 1.9% equating to a real return average of -1.5%.^[9] 

Our objective is to design an empirical model capable of predicting the resale value of a luxury item by analyzing the following conditions: the initial price of the good, the condition of the item at the time of its resale and availability in the primary market, which implies that the item is ready to buy either online or in store. In order to collect the data of the initial prices of the goods, we checked the company websites and physical stores to obtain the most accurate prices in AED (currency of the United Arab Emirates). To test the accuracy of our model, we randomly selected 73 items from our data set to predict our estimators, and the remaining 19 observations were used for the prediction.

Our hypothesis states that the resale price of luxury items will generally increase from the initial sale price provided that the condition of the product is new and that the item is no longer available in stores. The initial price must be analyzed in order to make the assumption of a good which appreciates or devaluates since its first purchase in store. Additionally, as the availability of the item decreases, we would like to check if this would cause the price to increase in the secondary market due to limited demand. The condition of the item was also considered crucial information as it would provide insight into the willingness of economic agents to spend on a certain good in the secondary market, whether it was used or new.

The empirical results of our study highlight that the resale market of luxury goods is growing and both companies and consumers benefit from it. We have observed an interesting trend of items price increasing in secondary market if they were new or in good condition and they were limited in store.

Regarding the forecast results, our findings show that the absolute precision of our empirical model is far from perfect. However, it manages in most cases to predict in the right direction with a significant confident level. This means that our model is in many cases effective in determining the future trajectory of the items’ resale market price, but not necessarily the actual resale market price. We could use this empirical model to buy goods for which we suspect a price increase in the future. For instance, if we had bought the remaining 20% of products from the store that went up in price and sold them on the resale market, we would have made a total profit of AED 47112.

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^[1] Godey, Bruno, et al. “Social Media Marketing Efforts of Luxury Brands : Influence on Brand Equity and Consumer Behaviour.” Journal of Business Research, vol. 69, no. 12, 2016, pp. 5833–5841., https://doi.org/10.1016/j.jbusres.2016.04.181

^[2] Zerbo, Julie. “Can the Birkin Bag Survive the Resale Market ?” The New York Times, The New York Times, 9 Apr. 2019, https://www.nytimes.com/2019/04/09/fashion/hermes-birkin-resale-secondary-market.html

^[3] “The RealReal Announces Fourth Quarter and Full Year 2021 Results.” The RealReal, https://investor.therealreal.com/news-releases/news-release-details/realreal-announces-fourth-quarter-and-full-year-2021-result

^[4] Rose, Tristan. “How StockX Makes Money ($400 Million in Revenue) : Business Model.” Entrepreneur 360, 14 Oct. 2021, https://entrepreneur-360.com/how-does-stockx-make-money-21767

^[5] Godey, Bruno, et al. “Social Media Marketing Efforts of Luxury Brands : Influence on Brand Equity and Consumer Behaviour.” Journal of Business Research, vol. 69, no. 12, 2016, pp. 5833–5841., https://doi.org/10.1016/j.jbusres.2016.04.181

^[6] Hobson, J. A., and Thorstein Veblen. Veblen : The Theory of the Leisure Class. Routledge/Thoemmes Press, 1994

^[7] Zerbo, Julie. “Can the Birkin Bag Survive the Resale Market ?” The New York Times, The New York Times, 9 Apr. 2019, https://www.nytimes.com/2019/04/09/fashion/hermes-birkin-resale-secondary-market.html.

^[8] “Cut through the noise, Wealth Report.” The Wealth Report 2022 | Knight Frank, p. 87, https://www.knightfrank.com/wealthreport/.

^[9] “Updated Hermès Birkin Values Research Study .” Baghunter, July 2017, https ://baghunter.com/pages/hermes-birkin-values-research-study-june-2017-update. 

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