AI, outlets, recycling: Can luxury solve its billion-dollar excess inventory problem?

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At an industrial site near the French-Belgian border, high-end shoes, handbags and ready-to-wear clothing are routinely broken down, shredded and granulated in preparation for recycling.

None of these products have ever been used by the customer. Instead, they are a small piece of what has become a billion-dollar challenge for the biggest luxury businesses: What to do with goods that don’t sell each season?

Last year, LVMH had €3.2 billion ($3.5 billion) of stock it wrote down as “obsolete” or lacking sales potential, up from €2.7 billion in 2022. Gucci owner Kering recorded a €1.5 billion allowance for its inventory. , up from €1.3 billion a year earlier. That equates to hundreds of thousands, or millions, if not products, although those numbers include raw materials and prototypes as well as finished goods.

Such excess is a feature of fashion’s dominant business model, designed to maximize production efficiency and sales potential in a trend-driven industry where accurately matching supply and demand is a challenge. has been a perennial challenge. But how companies manage the growing glut is a complex question.

Luxury brands have long used staff sales, private shopping events and outlets to carefully sell off old stock. What they could not offload, they destroyed to avoid undermining their pricing power and carefully promoted the concept of exclusivity.

But luxury’s relationship with discounters has always been an uneasy one — even more so now as cheap sales drive excess inventory levels across the sector. Meanwhile, burning unsold goods has become a reputational and regulatory risk that has already been banned in France and will soon be outlawed across the EU.

Recycling is one solution, but manually dismantling each product so that its components can be reprocessed into new materials is expensive, time-consuming and currently on a limited scale. Low-cost brands, such as Nike, have faced criticism for shredding brand-new products they couldn’t sell at recycling plants.

“This is a big problem for the industry,” said Claudia D’Arpizio, a partner at consultancy Bain & Company. “If you’re a big brand and you have a lot of inventory, it’s very difficult to find a solution at scale. I’d say we’re less than 50 percent there. [there]”

A culture of abuse

Luxury brands lean on the idea that their products are inherently more sustainable than cheaper labels because they make smaller quantities and design for longevity. But the fact remains that they have always overproduced.

Higher volumes mean better economies of scale during manufacturing. And over-ordering is considered cheaper than the risk of missing a sale because stock is unavailable. For luxury apparel, a 50 percent full-price sales rate is considered good, according to analysts.

“Embedded in the system is excess,” said D’Arpizio. “There will never be a zero in fashion; It’s structural.”

As luxury’s biggest players have grown over the past decade, so has the value of their overstock. Between 2014 and 2023, the cost of damaged inventory held by Kering and LVMH more than doubled.

To be sure, the true scale of the problem is hard to gauge. The provisions may be changed or amended from year to year. The companies do not disclose details about the volume of products they expect to lose, or what they do with that stock. Luxury trade groups have pushed back against regulation that could require them to do so.

The wide array of products that can be included in these numbers still makes analysis and comparison of all companies difficult. For example, LVMH’s inventory includes makeup, perfume, fashion, jewelry and leather goods, as well as the raw materials used to make them. (Wine and spirits are largely excluded from inventory provisions, according to the company’s accounts.) In contrast, Kering’s brands are more focused on ready-to-wear, with sales of mostly seasonal products. such as leather goods.

Investors are conditioned to tolerate such waste as long as it does not hurt the bottom line. LVMH’s impaired inventory was worth just 4 percent of revenue in 2023. The company said the products it has written are likely to be sold during this financial year. Analysts said Kering’s excess inventory was more than 8 percent of sales, but reflected its focus on fast-moving fashion products. The company did not comment.

A luxury issue

In the summer of 2018, Burberry published a routine set of financials that included a figure that would prove explosive: the British luxury house had burned nearly $40 million worth of goods in the previous fiscal year.

This practice was common in the luxury sector at the time, although most companies did not talk about it publicly. Burberry had published the figures for years without comment. But something had changed in the zeitgeist this year, with environmental concerns moving up the agenda and investors questioning how such waste reflected the British brand’s slow turnaround efforts. Reaction was swift and within months the company vowed to destroy unsold stock.

This prompted regulators to prompt other brands to follow suit. Kering announced plans to stop destroying any unsold products globally from 2022, after France passed a law banning the practice. Hermès said in its last annual report that the company no longer destroys unsold items in France and will extend this policy to operations worldwide between 2025 and 2030.

Big luxury companies are still trying to figure out what to do instead. Of course, low-cost brands also produce more, but unlike luxury players, mass fashion businesses are less concerned about resorting to heavy discounts, price-cutting retailers and bulk traders.

“It’s only appropriate for luxury,” said Ken Picker, a senior lecturer at Tufts’ Fletcher School and former chief operating officer of Timberland.

AI, outlets and recycling

Starting with luxury design and production planning is trying to adapt.

Kering has turned to artificial intelligence to improve sales forecasting and limit the amount of unsold inventory at the end of each season. He has managed to improve the accuracy of his inventory forecasts by 20 percent and his results are still improving. gave Business of fashion last year. LVMH partnered with Google in 2021 with the same goal of improving demand forecasting and inventory optimization.

“It’s become very important … to adapt production to the level of demand because dealing with leftovers is quite a sensitive topic,” said Charles-Louis Scotti, head of luxury goods research at financial services firm Kepler Chevreux. Big luxury brands “now have highly efficient warehouse centers and can reallocate inventory anywhere in the world, so if demand in Europe goes away they can ship to where demand is still high.”

But accurately matching supply and demand is difficult, so luxury brands are also building relationships with charities and schools to donate and grow leftover products. And they’re still giving discounts, even when they say they’re not. High-end brands like Louis Vuitton, Hermès and Chanel host sales for staff, friends and family that can turn up significant volume. Hermès reportedly earns more than €100 million per year from such events. Prada said the company disposes of all its overstock through private sales and outlets.

The off-price sector is booming, buoyed by a glut of inventory and rising prices that are forcing consumers to look for bargains. According to consultancy McKinsey & Co, or 11 percent of the total fashion market, in Europe, sales of the segment were €40 billion in 2021. It is expected to grow at five times the rate of full-price sales in the five years to 2030. Today, 13 percent of all luxury goods by value are sold through off-price stores.

“Outlets will always play a strategic role because seasonal products are always in demand,” D’Arpizio said. “It’s a strategic channel.”

But with excess inventory at some companies running into the billions, luxury brands are looking for other ways to manage stock without flooding the market. “Finally, the sheer volume of products produced is too much to claim in sales and outlets,” said Francois Suchet, circular economy and sustainability strategist.

Increasingly, companies are looking for ways to remanufacture what they can’t sell. Gucci has worked with a collection of designers, brands and artists on its Continuum project, which incorporates pieces from the past into new products. LVMH showed a collection in December created by artistic director Kevin Germanier using unsold products and surplus fabrics from the group’s house.

Both companies are also exploring opportunities in recycling. LVMH launched a circularity initiative late last year, bringing together the various startups and industry partners the company is working with in the space.

Kering has said all its brands have developed pilot projects with Revalorem, the company that operates the processing site near France’s border with Belgium. According to a December presentation, the luxury group privately invested in the business last year.

But the biggest lever of change is not producing much to begin with. “Eliminating the need to think about unsold products in the first place is an important starting point,” said Alyssa Nemetzo, vice president of consumer sectors at consultancy BSR. “It’s going to take creative and innovative thinking — and perhaps thinking about different models of doing business.”

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