Why luxury brands burn their own goods

EVERY winter the Tuscan workshops of Stefano Ricci, a high-end menswear label, box up the year’s unsold products—from cashmere suits and silk ties to finely woven cotton shirts—and send them off on trucks to be burned.

Then Stefano Ricci’s accountants get to work claiming a tax credit for the operation.

“It’s a very sad day,” says Chief Executive Niccolò Ricci, whose father, Stefano, founded the company. “But we understand it’s for the good of the company.”

Destroying unsold inventory is a widely used but rarely discussed technique that luxury companies perform to maintain the scarcity of their goods and the exclusivity of their brands. In Italy and many other countries, they can also claim a tax credit for destroying the inventory.

On Thursday, British fashion label Burberry Group PLC thrust the technique into the spotlight by announcing it would immediately stop destroying unsold stock, bowing to pressure from environmental groups who say it is wasteful. The amount of stock Burberry destroys had risen sharply in recent years, from £5.5 million in fiscal year 2013 to £28.6 million in the last fiscal year.

“Modern luxury means being socially and environmentally responsible,” said Burberry Chief Executive Marco Gobbetti.

Other high-end brands, however, say destroying inventory is a necessary evil. Goods that end up in outlet stores or in the gray market, priced at a steep discount, contradict the industry’s main sales pitch: that luxury goods command higher prices because they are inherently more valuable.

Compagnie Financière Richemont , the Swiss luxury conglomerate that owns Cartier, spent hundreds of millions of euros in recent years buying back unsold watches, which were piling up at retailers because of a drop in demand from Chinese consumers. The company pried off the jewels and melted them down, but is reusing the materials.

Burberry’s announcement was aimed at younger shoppers who are environmentally conscious and, increasingly, a core demographic for the luxury-goods business. Brands across the industry are abandoning fur; imposing animal-welfare standards on their suppliers; and touting their policies for recycling and reducing waste. On Thursday, Burberry said it too was ditching the use of fur.

The burning of pricey merchandise, however, is a habit that many in the luxury industry find hard to kick.

Francois-Henri Pinault, the chief executive and controlling shareholder of Gucci parent company Kering SA, said the firm tries to minimize wasteful inventory destruction by reusing cloth and leather.

“The part that is truly, truly destroyed is relatively small,” Mr. Pinault said in an interview last year. “It’s shocking to destroy products of that quality,” he adds.

After Burberry’s announcement, Kering said it unloads unsold clothes through discounts for friends and family and through outlet stores. “Thanks to the efforts we provide on the supply-chain side, only a very limited fraction of goods needs to be destroyed,” Kering said.

At Stefano Ricci, executives see the destruction of inventory as a service to the customer. Clients don’t want to spend thousands of dollars on a suit, only to see the same item a few months later selling at an outlet store for half the price, they say.

“We do not like to sell our goods in discounted stores,” Niccolò Ricci said. “It’s giving respect to the clients and the workers.”

At the end of the year, employees gather unsold clothes into dozens of boxes bound for a special facility, where they are incinerated, Mr. Ricci said.The companies hired to incinerate the clothing film the destruction so that brands can prove to the Italian tax authorities that their inventory has truly gone up in smoke. Mr. Ricci says the brand also destroys unsold product in the U.S. and China.

Mr. Ricci said the brand would like to give some of the unsold goods to charity, but the tax credit ties the company’s hands.

“The law says if you want to write them off your book you must destroy,” he said.

His father, founder of the label, can’t bear to come to work when it’s time to destroy the clothes, Mr. Ricci said, adding: “He suffers the most when we destroy cotton and silk. Those are his babies.”

After Burberry’s announcement on Thursday, Mr. Ricci said in a statement, “We destroy a tiny amount of inventory in line with Italian law, and we do this very responsibly with respect to the environment, our stakeholders and the ethics behind our brand.” - WSJ

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