It’s hard to find a decent-sized Louis Vuitton handbag for under $US1,000.

So why not wait a while for the next sale, and snag one of their bags then?

According to Mark Ellwood, author of “Bargain Fever: How To Shop In A Discounted World,“ there’s one problem with that idea: Louis Vuitton products never go on sale.

According to Ellwood, there’s a method to the brand’s madness.

It’s called vertical integration, and it’s a practice that dates back to the 1970s, when steel magnate Henri Recamier married into the Vuitton family and became the first outsider to take over the business.

Recamier noticed that retailers who sold Vuitton products were marking up the bags by at least 100%, putting all the profits in their pockets and leaving little money for the manufacturers themselves. Recamier came up with a solution.

From “Bargain Fever”:

Nixing that greedy retail middleman — in other words, opening wholly owned stores or controlling concessions — would mean Vuitton could keep that money for itself. So that’s what Recamier did.

His move doubled profit margins overnight: As conventional luxury firms remained at the traditional 15 to 20%, his reinvented company hit 40% or more.

Ellwood writes that vertical integration means Vuitton not only owns its own factories, but the company also leases the space it uses for the LV mini boutiques you see on the selling floor of various department stores.

Therefore, Vuitton can control the actual manufacturing of its products (if a certain handbag isn’t selling it can decrease production of that handbag) and it can staff and operate those mini boutiques directly. So LV never sells its products wholesale to a department store, which means the department store can’t sell LV’s products for a sale price.

Here’s Ellwood’s simple explanation of why vertical integration led to success for LV:

As Recamier had realised forty years before, the equation for success at full price was simple: Controlling the channel meant you controlled the price. Without a middleman, margins are higher, offering a plumper profit cushion during downturns.

This practice also confers exclusivity, since you can buy a given product only from an authorised dealer where price is fixed.

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