Lion of the Blogosphere

Anti-economics: when companies make profit by DESTROYING value

As explained in this article:

  • Burberry destroyed $36.8 million of its own merchandise in 2017.
  • Fast-fashion retailer H&M had burned 60 tons of new and unsold clothes since 2013.
  • Richemont, the owner of the jewelry and watch brands Cartier, Piaget, and Baume & Mercier, destroyed about $563 million worth of watches over the past two years.
  • Many other companies destroy their own merchandise, including Urban Outfitters, Walmart, Eddie Bauer, Michael Kors, Victoria’s Secret, and J.C. Penny.

Hopefully there will be no more dumb posts by libertarians who insist that the only way to make money is by creating value.

Written by Lion of the Blogosphere

September 24, 2018 at 12:42 PM

Posted in Economics

27 Responses

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  1. Well, technically, the argument is that this destruction creates value (Schumpeter famously talks about “creative destruction” in another context). I read an article a few weeks ago (maybe it was from this blog) about a smallish Brooklyn-based company that makes exercise equipment. Consumers, apparently, did not think they could buy a quality bike for $1200, so they raised their prices and demand went up.

    Vince

    September 24, 2018 at 12:52 PM

  2. They don’t make money by destroying their merchandise per se. Otherwise, they’d burn all of their merchandise.

    But a lot clothes end up in dumpsters, thanks to channel stuffing. Last year, the FT wrote about a successful fashion company that took a different tack: producing less merchandise in the first place.

    Dave Pinsen

    September 24, 2018 at 1:01 PM

  3. If that was the only thing those companies did you might have a point. They don’t make money by destroying value they make money by giving value. Their customers value the exclusivity of their products.

    XVO

    September 24, 2018 at 1:12 PM

  4. If nobody wants to buy fashion that is past the season it is probably too much hassle and cost to keep it around.

    Also, what’s 563 million worth of goods? Is that full retail price. The cost of those goods to the store is probably much less than that because of the markup. I rarely buy an item at its full retail price.

    I like being able to return stuff too. I wore a jacket from a dept store and didn’t like it. I returned it with no questions asked. I assume they threw it out.

    People buy more when returns are easy.

    Notice how pants are 70 dollars, but most of the time you can get them for 25-35 dollars with all the sales.

    How much did a dept store pay for those pants? I’m guessing 5 or 10 dollars?

    The original price of a lot of goods is very high so they make people think they are getting a deal with the “sale” price.

    ttgy1

    September 24, 2018 at 1:24 PM

  5. The point at issue is not “value.” You’re just trying to think about it with the wrong word. They clearly create brand valuation by managing scarcity. The issue is environmental negative externalities. Does the pollution and wasted resources from all their activity outweigh shareholder and customer “value,” creating a net drain on society. Some number of people get cancer every year from all the chemicals involved in the supply chain, for example, and those people don’t realistically get compensated by H&M.

    bobbybobbob

    September 24, 2018 at 1:24 PM

  6. They don’t make their money by destroying products. They make their money from the products that they sell. The customers to whom they sell presumably value the products at or above the amount they pay for them, so (while I won’t argue that everyone who makes money does this) in this case they are indeed making money by creating value.

    To protect those sales, they need to maintain their bargaining power, because of course their customers would like to pay less than the value of the items if they can get away with it. If the company makes more of an item than it can sell to people who value it highly enough to pay full price, they could discount it and get some money from other people who value it less highly, increasing profits. But that trick only works if you can figure out who your original customers are and who these other people are. If you can’t figure it out, discounting may just cannibalize your original sales. To maintain your bargaining power, you may need to destroy surplus products, to give your original customers no option but to pay full price.

    In the Great Depression, farmers protected milk prices by destroying milk. This does not prove that the market for milk is based on snob appeal. It’s the same logic as above: if you give out free milk to poor starving children, how do you prevent middle class not starving parents from saving a little money by getting in on the free milk, too? All kinds of farmers keep up prices by destroying excess product to this day.

    Libertarianish Economist

    September 24, 2018 at 2:51 PM

  7. This is just the retail equivalent of the Laffer Curve. The Laffer Curve states that there’s some tax rate between 0 and 100% that maximizes tax revenue. In this case, there’s some sales rate that maximizes sales revenue. They’d have to reduce their prices to sell everything. And that would lead to a reduction in net revenue going forward. Of course, this would only work for sought after brands like Burberry. It wouldn’t work for Hanes or Fruit of the Loon

    I’d also point out there are other examples of keeping prices high by restricting supply such as housing and unions. And you’ve been very inconsistent on this principle in the past. I, however, have been consistent. I don’t object to companies destroying their own property to reduce supply. I do, however, object to people telling someone else they can’t build a house or have a job. Another difference is that I have the option of not paying extra for some designer’s overpriced crap.

    destructure

    September 24, 2018 at 3:21 PM

    • Yes, you see this at sporting events. There are often empty seats but the teams don’t cut prices to fill the stadium because that would cost them money overall.

      James B. Shearer

      September 24, 2018 at 8:29 PM

  8. cause it’s crap. rolex never destroys their watches.

    grey enlightenment

    September 24, 2018 at 3:38 PM

    • Watches don’t go out of style like clothing does; they can be left in a warehouse indefinitely, so there’s little or no penalty for overproduction. Makers of “preppie” or other styles of clothing that never change are in the same situation.

      J1

      September 24, 2018 at 4:24 PM

      • “Watches don’t go out of style like clothing does”

        Disagree with that. Old watches with small dials, totally out of style, they generally aren’t worth any more than their gold content.

        Lion of the Blogosphere

        September 24, 2018 at 4:37 PM

      • Disagree with that. Old watches with small dials, totally out of style, they generally aren’t worth any more than their gold content.

        The small-dial men’s watches can be repurposed as women’s watches.

        Dave Pinsen

        September 24, 2018 at 5:26 PM

      • I prefer a normal sized dial to one that’s too large or too small. It looks normal now, And, in a few years, when they bring back smaller dials it will still look normal.

        The only reason designers/manufacturers/retailers push new styles is so that people have to buy new stuff. If you think it’s wasteful to destroy unsold clothing, is it not at least as wasteful to pressure hundreds of millions of people into tossing still wearable clothes because they’re “out of style”?

        That’s why I only buy clothes that will always be in style like khakis and oxford shirts. Has the professor off Gilligan’s Island ever been out of style? Nope. Add a jacket and tie and one could wear those same clothes to the office today.

        destructure

        September 24, 2018 at 6:55 PM

      • I’ve given up on caring about expensive watches. My semi-expensive (more than $200) Swiss watch stopped working. My $100 Citizen Eco-Drive watch just keeps going and going, never stops. I do need to get a new strap for it though.

        Lion of the Blogosphere

        September 24, 2018 at 11:14 PM

    • I suspect that Rolex does buy old watches off the second-hand market to keep the supply down.

      McFly

      September 24, 2018 at 11:59 PM

    • I’m slightly surprised that it hasn’t yet been said this simply:

      Lowering supply always increases product value in the presence of any demand (or perhaps maintains it, depending on whether there has been over-production and on the availability of competitive products in the market).

      Storage of those items would be costly. Releasing them into the secondary market would drop the value of their products still on offer. They weren’t expensive to produce. I’m sure he accounting more than adds up, even if value is merely maintained.

      Sam

      September 25, 2018 at 12:58 AM

  9. Libertarian, schmibertarian. This is basic economics.

    If no one wants to buy them at at least cost, it makes sense to destroy or at least warehouse for another time. The savings are the value, though there would be a better result with more accurate placement.

    You might have a great value in buggy whips, then here come the cars. Should you convert to making car seats destroying your whips and whip-making facilities, or try and sell buggy whips no one wants ? Which creates value?

    Robert

    September 24, 2018 at 4:53 PM

    • But this does involve products that are completely out of date like buggy whips. I’m assuming that these expensive brands never hold sales. Too low class. On the cheaper end, sales are commonplace.

      Frau Katze

      September 25, 2018 at 1:26 AM

  10. We live in a culture of excess. You see this with with food- the US throws out more than 100 billion tons of food every year, but poor people are still fat. Even homeless people are obese.

    Are the watches really destroyed or just dismantled and recycled somehow?

    toomanymice

    September 24, 2018 at 6:20 PM

    • And the fat epidemic is spreading even to poor countries. Mexico is full of fat people.

      Famine only occurs in wars like Yemen or socialist paradises like Venezuela.

      And for the oil states, obesity is a major health problem. At least here in the West, obesity is kept somewhat in abeyance by education campaigns. People have been trying and talking about diets for decades.

      Frau Katze

      September 25, 2018 at 1:34 AM

  11. Hold onto something long enough, and it’ll come back into style. I keep telling my wife that our avocado green appliances will be stylish again Real Soon Now.

    Sgt. Joe Friday

    September 24, 2018 at 6:27 PM

  12. What this example does show is that it’s not enough to create value, that if you want to make money you also need to be savvy enough to do some very counter intuitive things.

    Libertarianish Economist

    September 24, 2018 at 6:30 PM

  13. The was a great article about 5 years ago about a dumpster diver who targeted strip malls, and said he got tons of brand new unopened merchandise from big box stores like Best Buy.

    I have noticed that Target has about 5x more clearance racks than Wal-Mart even though they have smaller stores. I bet the reason is that Wal-Mart destroys more merchandise. Wal-Mart may have overall lower prices, but it is rare they have things 70% off like Target does. Lowes similarly has a much larger clearance section that Home Depot.

    1122a

    September 24, 2018 at 6:32 PM

  14. Does this show sophisticated supply chain management or not? What percentage of the brand’s total inventory does this represent? I see Burberry has over $3B USD in sales annually. So that’s around 1% of their gross sales reported. Pretty tight control I’d say, and as one would intuit.

    A Dilettante

    September 24, 2018 at 8:22 PM

  15. I heard that back in the day the baseball card companies basically trashed most of the baseball cards they published if they did not sell quickly at the good price. They would literally charter a fishing boat and go out fishing and toss over the side thousands and thousands of cards.

    That was the 60s and earlier 70s, young people from those days have memories of having bought with their paper route money thousands of dollars (in current prices) of still valuable baseball cards.

    Fast forward to the 80s, everybody wanted to get every penny they could from kids and a Hall of Famer card from the childhood of a kid born in 1975 is worth less than a penny on a dollar, those kids can give every card they bought in their entire childhood to their grandchildren and the whole collection will not be worth the storage space in a cheap storage unit.

    Kids born in 1955, though, if they kept their two pack a week collection until today, would be sitting on enough collectible cards to buy a Porsche. A good one, too.

    On the other hand, kids born in 1975 had much better acne treatments than kids born in 1955, so there’s that.

    Stephen Cooper

    September 24, 2018 at 8:39 PM

  16. Hey Lion,

    Potential blog idea:

    Seems up your alley. A book review/criticism of the libertarian/futurist manifesto which (supposedly) has a cult following among Silicon Valley billionaires: The Sovereign Individual: How to Survive and Thrive During the Collapse of the Welfare State.

    https://www.theguardian.com/news/2018/feb/15/why-silicon-valley-billionaires-are-prepping-for-the-apocalypse-in-new-zealand

    I noticed the authors also published:The Great Reckoning: How the World Will Change in the Depression of the 1990’s (1992). (lol)

    My knee jerk take (not having read the book but with 21 years advancement in time since its publishing): technology will lead to stronger, more invasive government (Big Brother) rather than a breakdown in nation states. Big Tech will be supporters of this order– hand-in-glove with the surveillance state. Sure, there could be a breakdown in big governments, but it would be in an apocalyptic scenario and thus accompanied by a breakdown in tech and civilization.

    anon

    September 24, 2018 at 11:15 PM

    • Printed books can be recycled. (I’m assuming the second book has lots of unsold copies.) The first one doesn’t sound much better.

      There are pulp mills in BC (although demand for paper has fallen dramatically) that can recycle paper.

      But the ebook is a most environmentally friendly product. No need for unsold copies.

      Frau Katze

      September 25, 2018 at 1:47 AM


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