Friday, 20 July 2018

Why Burberry Destroyed £30m of its Products - An Introduction to Artificial Scarcity


How companies artificially rig markets to work in their favour- and how it gets a lot darker than just burning handbags...

Burberry has recently caused quite a stir after a controversial business practice was recently revealed. News broke that the British high-end luxury fashion brand has incinerated as much as £28m of its own cosmetics and fashion products over the past year, to protect the brand and eradicate counterfeiting.

While these latest revelations have drawn attention to Burberry, this practice of destroying one's own stock is not by any means new in the fashion industry. H&M has a deal in Sweden to burn its own unwanted stock to produce energy. Slashed shoes were found disposed outside a Nike store in NYC. And Richemont, the group whose portfolio includes luxury watchmaker Cartier, has reportedly destroyed more than £400m of luxury watches over the past 2 years.

The most significant threat of these surplus products to a company like Burberry is not the aiding of counterfeiting, rather the potential effect the sale of such items on the grey market could have on the brand. The grey market, unlike the black market, is not necessarily illegal- rather it is a market which sells goods obtained unofficially. Some argue that popular retailers such as TK Maxx are examples of the grey market- obtaining genuine branded items, some of which are from unofficial channels, and selling them for less than the brand itself.

Burberry's concern is this: if their goods found their way to a shop like TK Maxx, and were sold for a fraction of their actual price, what would be the perceived value of the bags which it sells for full price? The appeal of a luxury brand is exclusivity; the grey market offers anything but this. What's more, it is highly unlikely that the original brand gets any of the grey market revenue at all.

Considering all this, Burberry's incineration of its own goods is an investment in the company's brand, protecting its goods from reaching the grey market and helping to maintain high prices. This is artificial scarcity.

Why is this scarcity artificial?

Well, the fact that the surplus goods existed shows that Burberry can produce than it is putting onto the market. Through artificially reducing supply (burning it), Burberry can keep demand, and thus prices, high.

To provide contrast, an example of genuine scarcity could be the recent CO2 shortage confronting many beverage manufacturers. The shortage of carbon dioxide has restricted the production of fizzy beverages, which, if prolonged, may force producers to raise prices.

The spread of Burberry's brash act in the news has brought practices that ensure artificial scarcity to light, but in reality, pretty much every business enforces some type of artificial scarcity. Few companies (perhaps, except Tesla) genuinely produce at their maximum capacity, whether to protect their brand as Burberry does, or to protect costs.

Disregarding the contemptible waste of material involved in some methods of creating it (think of how much leather Burberry burned), one could argue artificial scarcity is too substantial an issue. When it comes to luxury brands, for example, few people suffer from not being able to afford a £1000 handbag.

Where artificial scarcity does come into issue is in industries whose products we depend heavily upon. The pharmaceutical sector is an example; producers with monopoly power over certain drugs can in effect hold its users at ransom by restricting production and sending prices rocketing. Investigations have found this to be happening with medical products as widely used as stents, where some US firms were found to be exporting an increasing number of stents to India, but distributing fewer, despite demand increasing.

The Organisation of Petroleum Exporting Countries (known as OPEC) also leverage artificial scarcity to their benefit. Its members, which include Saudi Arabia, Venezuela and the UAE, are able to control global oil prices through co-ordinating their output. If it is decided that a rise in oil prices would benefit members, all members reduce their output of oil, and if an oil price cut is desired, they increase output. Such organisations are known as 'cartels'- illegal in most instances due to their lack of competition, but uncontrollable in the case of an organisation as influential as OPEC.

Artificial scarcity is always working in favour of businesses, rarely (if ever) working in favour of consumers. In the consumer world, it can cause massive waste, but little other genuine threat to consumers themselves.

However, when artificial scarcity is a tactic leveraged in potentially life-changing industries, such as pharmaceuticals and natural resources, it exposes capitalism at its most vicious- wealthy producers holding consumers depending on their product at ransom, and benefiting from their desperation.

Mohammad Lone Editor