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Most big luxury houses like Chanel, Hermès, Dior and Louis Vuitton for decades burnt their unsold stock to preserve their image. After they had offloaded unwanted goods through staff, “friends and family sales,” outlets and third-party organizers of private events, they destroyed whatever was left out of fear that old stock could be sold for cheap and weaken their pricing power and exclusivity.

But today a reckoning is underway. In an age of climate crisis, the world’s top brands are having to face a future when they cannot destroy goods. It’s been banned in France, the crucible of the luxury industry, since last year. Another, more extensive ban is shortly expected to become law throughout the European Union. That change has come amid mounting consumer outrage over the practice of burning unwanted goods.

In 2018, Burberry was at the center of a media firestorm after it revealed in its annual report that it had burnt £28 million worth of stock. The British fashion house was the first major luxury brand to talk about it. Most of its French and Italian rivals did it for years but never mentioned it. Under new EU regulation that could be voted as early as this year, brands will no longer be allowed to burn products and they will have to disclose in their annual report what they do with unsold stock. This is a very unpalatable prospect for luxury brands as they do not like to talk about anything but the high-quality and creativity of their products.

Since that disclosure, Burberry has stopped burning stock. It recycles parts of it, particularly its leather goods, and offers a wide array of repair services, as do many other luxury brands.

ECODESIGN

In France you can no longer destroy non-edible products such as textiles and shoes but you can still burn cars and handbags. This week, the European Commission formalized plans to submit to the European parliament a regulation that will require companies to publicly disclose how many goods they destroy and will put pressure on them to recycle and reuse materials. It will also force companies to provide digital passports for their products to inform consumers about their environmental sustainability.

Brussels’ Ecodesign Sustainable Product Regulation will be debated and reviewed by the European Parliament and the Council over the course of next few months. “The Ecodesign regulation will make sure that products sold in the EU market are fit and ready for the green transition,” said Ebba Busch, Swedish Minister for Energy, Business and Industry and Deputy Prime Minister said in a statement issued on Monday. In January, Sweden took over the rotating presidency of the EU Council for six months with a pledge to push for reforms on green and energy transitions among other issues.

This regulation, together will others in the pipeline in Europe and elsewhere, will force fashion and luxury brands to be transparent about what happens to their unsold wares, how they are made and to what extent they can be recycled or upcycled. The luxury goods industry has been quietly preparing for such major regulatory changes but it’s far from being ready yet, industry sources say.

Adapting to the EU and other countries’ regulation to help preserve the environment and fight climate change is a huge and complex task. It will require not only significant amounts of investment but also a dramatic change in mentality. Fashion and luxury brands will have to talk openly about one the least glamorous aspects of their business: the resources and materials they use and what they do with unsold items - a major taboo until now.

“This is a big spanner in the works for those brands which are not prepared,” said one senior industry executive who follows closely EU regulatory changes. “Of course, Brussels will give them a few years to adapt but such demands will have to be enforced much more quickly than you expect.”

PRODUCE LESS AND BETTER

If middle class consumers have become smarter in recent years, snubbing fast fashion and “buying less and better,” many luxury brands have also been trying to produce less and better. Major luxury players including Hermès, Louis Vuitton and Chanel have invested in software that allows them to track in real time the sale of every item and limit production to volumes they are close to certain they will sell. That way, they create rarity and preserve desirability. It also helps them limit the amount of unsold goods. It is those smaller brands that do not have the means to invest in such technology that end up with excess items they struggle to get rid of. Louis Vuitton was the first luxury brand to put such system in place more than two decades ago.

“Production of the collections is only launched when orders are received from our buyers, which considerably reduces potential unsold stock,” a spokeswoman for Chanel said in response to Miss Tweed’s query. The buyers in this case are mainly the brand’s boutiques not individual buyers themselves. The brand added that once a year, it organizes private sales “exclusively for our employees, who can purchase items from previous collections.”

Louis Vuitton, Hermès, Dior and many other luxury brands also conduct sales for their staff once or twice a year that can be extended to “friends and family.” In recent years, they have taken place online. If you are lucky, you can get Chanel ballerina shoes for €150, a bag for €700 euros and a jacket for €1,200. Today, Chanel ballerinas cost nearly €1,000 at full price and most bags fetch more than €6,000 – catching up with Hermès price tags.

Sales to staff and their family and friends represent a non-negligeable source of revenue. For Hermès, they generate more than €100 million every year, industry insiders estimate. When you employ more than 15,000 staff – that’s a pretty sizeable and loyal customer base.

Since many people working in boutiques and in production plants do not receive big salaries, these private sales help make up for it and allow them to wear luxury goods they could never afford otherwise. It's also a good way to retain staff and attract talents.

“As for the limited stocks remaining, they can be used by the ‘Petit h’ business [which uses mainly excess materials], sold during sales or private sales for staff, or directed towards recycling channels,” a spokeswoman for Hermès said.

Chanel, Dior and Hermès for example hold sales in its stores during certain periods of time and they remain discreet about them. In France, they take place during the period applied to all retailers, this year from June 28 to July 25 and then after the Christmas sales next year. Customers only get details if they ask for them when physically in the store.

OUTLETS

LVMH’s Dior is the only top luxury brand to have outlets: one in the UK and another in the United States. Its rivals Hermès, Louis Vuitton and Chanel have none, but they are increasingly thinking about, industry insiders say. It’s a pretty efficient and profitable way of turning unsold stock into cash. Kering’s Gucci for example has many outlets and produces exclusively for them, like many other high-end brands.

Another secret luxury brands do not want their customers to know is that outlets are hugely profitable. They cost much less to open and operate than a flagship and their sales density is much higher. You often find queues in front of outlets and by contrast, generally only a few customers in a brand’s flagship boutique in a major city.

Many luxury brands including Burberry, Gucci and Ferragamo are reluctant to wean themselves from outlets even though they know that it blemishes their image. Yet, these three fashion houses, and they are not alone, keep telling investors and analysts they are working on “elevating the brand.” However, everyone knows that cannot happen until they stop selling goods, particularly ready-to-wear at 70 percent discounts in outlets.

Outlets provide a good yardstick of a brand’s desirability and sales momentum. The weaker the brand, the more outlets it needs. It also works the other way around. For example, LVMH’s Loewe and Celine have been cutting down on the number of outlets they have around the world because their sales growth has been so strong, industry insiders say. However, Burberry on the other hand, is still very dependent on outlets. The brokerage HSBC estimates that Burberry makes around half of its profits from outlets and dedicates a good part of its production exclusively for them as do many other brands. Ralph Lauren makes more than 70 percent of its profits from outlets. But outlets have harmed the brand’s desirability so much that no-one wants to buy Ralph Lauren even though it has been on the market for many years.

A more discreet way of offloading unwanted items is through third parties such as Arlettie and IK VP that organize private sales in France and in the UK in bricks-and-mortar premises as well as online. There is also Veepee and other online flash sales specialists in France and elsewhere. Even in China, there exists many organizers of private sales online and in physical stores.

And there is another non-visible way of getting rid of unwanted goods: work with companies such as France’s Efficio. It buys unsold goods from brands, usually watches but they can also include handbags, shoes or ready-to-wear. It pays in cash or it exchanges the lot for advertising space it has bought in bulk from big media companies. It’s a peculiar form of barter but one that has become increasingly popular. Usually, analysts estimate that around 2-7 percent of a brand’s stock is unsold. “If you have more than 10 percent, then you really have to reconsider your offer,” explains Maximilien Urso, CEO of Efficio and of second-hand watch specialist Cresus. “If everybody produced only goods which they knew they could sell, there would not be any unsold products or ‘slow movers’ as we call them,” Urso says.

RECYCLING

Chanel, like most of its major rivals, said it was “looking into the best way to recycle items that cannot be sold or offered during our in-store sales periods because they are defective.”

“With this in mind, and for several years now, Chanel Mode has no longer been destroying its unsold items, thanks to its collaboration with Atelier des Matières, whose mission is to recycle unused materials and unsold finished products from the fashion and luxury sectors,” a spokeswoman for the brand said.

Founded in 2019 by Chanel, L'Atelier des Matières collects unsold products and materials that are not used in the production cycle such as textiles, leathers, threads, buttons, etc. These are sorted and disassembled to enable them to be transformed into high-quality recovered materials, before being returned to the supplier or offered to another customer, Chanel said. Some items can be reused for the development of new collections. L’Atelier des Matières works for Chanel and other brands, but Chanel did not wish to disclose them.

It's the same for RE-Valorem which has emerged as a key player. It cannot reveal the identity of its major clients even though everyone in the industry knows that it works for every major luxury group including Richemont, LVMH and Kering as well as several major Italian brands. Launched in 2020 by former Arthur Andersen consultants, the French company dismantles unsold goods and recuperates materials that can be reused. It handles tons of bags, shoes and textiles and is now trialing a way to recycle acetate in eyewear.

“Our business is a bit like extracting ore,” Eric Legent, ReValorem’s co-founder and managing director. “We extract raw materials from a deposit.” Legent and his teams are not comfortable talking to journalists because their activity concerns one of the least glamorous aspects of luxury goods. Also, they are aware that their company exists because of luxury brands’ inability to adjust production to demand. “For our customers, it's important to be prepared for the big wave of recycling that's coming,” Legent says.

On average, ReValorem is able to recuperate around 65-67 percent of a products’ raw materials. The rest is destroyed if it cannot be recycled or reused. A good part serves as fuel for heating furnaces used by public heating infrastructures.

For Legent, the creation of a 100 percent circular economy products is a myth. “In order to be virtuous, the reuse of recycled raw material can only be part of an industrial approach, with its quality, volume and supply constraints,” says Legent. “One-off closed-loop initiatives, or what we call upcycling, are a good way of describing what's possible, but they cannot provide a lasting solution for the reuse of recycled raw materials.”