In 2022, Prada saw an 11% increase in sales and was not the only brand that increased its profits. Gucci, Veneta, Fendi, and Bottega all went up by 10%. The reason might have something to do with the pandemic. 

More people are buying online, which makes now the perfect time to invest in luxury goods.

Before you start pouring money into the market, it’s important to understand the ins and outs of luxury goods economics. You can’t invest in these items if you don’t know what they are. 

Check out this guide to learn if dipping your toes in the luxury market is right for you or if you should seek out alternative investments. 

What Are Luxury Goods? 

A luxury item is a good that isn’t necessary for life. These items won’t feed you or put clothes on your back, but they’re deemed desirable by society’s standards. 

As a person’s wealth increases, so does their demand for these luxury goods. That means the target market for investment handbags and yachts is the rich and upper middle class. Those without disposable income are more likely to hold on to their cash to cover more important expenses. 

Since the main target audience of luxury goods is those who wish to show off their wealth, the market doesn’t go down by much during times of economic recession. 

What Makes Something a Luxury Item? 

The most popular luxury goods are luggage, sports cars, wine, yachts, designer handbags, estates, high-end watches, and expensive clothing. Services such as live-in chefs and housekeepers are also considered to be a luxury. 

As you can see, the main thing that makes a regular item into a luxury one is the expense. There aren’t many people who can afford them. 

Another thing that defines a luxury item is how rare it is. If a good is advertised as being the only of its kind, people are going to want to get their hands on it.  

Why Are They So Popular? 

Despite limited availability, designer goods continue to be popular. There are a few reasons why this is, but most of them boil down to psychology. 

Some consumers don’t act with their best interests at heart. There are many people who buy luxury goods who can’t afford them. That might be because consumers tend to view things with an expensive price tag as higher quality. 

Even though you can buy a durable $50 handbag that serves the same purpose as a $1,200 one, the more expensive option is seen as more desirable because you get what you pay for. 

For some, buying a nice handbag or designer shirt can give them a huge self-esteem boost. Being able to afford it fills them with a sense of accomplishment. 

Luxury vs. Veblen 

When navigating the market, you’re going to see the words luxury and Veblen used interchangeably, but they’re a bit different. 

The demand for luxury items tends to increase as a person’s wealth goes up. Veblen goods work against this traditional sense of supply and demand. 

The demand for Veblen goods goes up as the price for them increases. People want them because they are expensive. 

Are Luxury Items a Good Long-Term Investment? 

Now is the perfect time to invest in luxury goods. Before the pandemic, many designer companies were a bit hesitant to sell items online. This changed when COVID caused a massive spike in online consumers. 

When you buy stocks in Gucci or Rolex, you’re investing in pricing power. These brands are aware that they can raise their prices and people will still buy them. That level of confidence can protect investors during times of inflation. 

Before you invest, there are a few factors that you need to take into account. 

Gemstones Are Tricky 

When people think of luxury jewelry, their mind goes to diamonds. While they might be a girl’s best friend, they can be a hit or miss for investors. 

Diamonds have become a bit of a rarity. To meet demand, many of them are being manufactured in laboratories. 

So before you invest, make sure that your gemstones come with a certificate of authenticity. 

Beware of Fakes 

Even though an off-brand Gucci bag looks identical to the real deal, most consumers are going to reach for the actual designer bag. If you’re going to spend a lot of money to treat yourself, you might as well go all out, right? 

That’s why counterfeit rings are getting a little more creative. They pretend to be legitimate sellers when in reality, they’re peddling fake Apple Watches. You’ll need to watch out for these scammers when you’re investing in luxury goods.  

Consider Your Ethics

Before you invest in a company, do your research. Some brands have their staff working in less than stellar conditions to produce luxury goods. 

You don’t want to be part of that for multiple reasons. The main one is that most of the people in the millennial and Gen Z crowd stay away from these brands.

They prioritize sustainability above all else. That’s why some companies have adopted fur-free practices. 

Understanding Luxury Goods Economics 

If you understand the basics of luxury goods economics, you can make a killing by investing. Due to the target audience of these items, they’re not affected by inflation. 

Although many people can’t afford them, they continue to soar in popularity. The reason for it is all a matter of psychology. Despite the price tag, these items sell because people believe them to be high-quality. 

Before you dip your toes into this growing market, there are some red flags you need to look out for. Above all else, when you’re choosing a company to invest in, don’t forget about your ethics. 

For more tips that will help you diversify your investment portfolio, visit the Business section of our blog.