LONDON — Walk into any luxury megabrand flagship these days, and you’ll face prices that boggle the mind. According to HSBC, the average price of personal luxury goods in Europe has increased by an eye-watering 52 percent since 2019.
This can be partly explained by the aftershocks of the pandemic, which sent inflation soaring, driving up the cost of raw materials and labour. Leena Nair, chief executive of Chanel, whose classic medium 2.55 flap bag now costs €11,100, up 91 percent since October 2019, told Bloomberg last week: “We use exquisite raw materials and our production is very rigorous, laborious, handmade — so we raise our prices according to the inflation that we see.”
But price hikes have also been used to grow revenue and profit. “Pricing was the main driver of sales growth between 2021-2023, but we think it will be far more subdued in the years to come,” analysts at HSBC wrote in a note in January.
Indeed, higher prices were fine when the market was willing to absorb them. In the years since the pandemic, pent up demand (and Covid-era savings) allowed brands to keep pushing prices up and up. But as the post-pandemic luxury boom recedes and aspirational customers, in particular, pull back and trade-off their spending on luxury products with travel and experiences, even the most rabid luxury fans are now thinking twice before buying.
As for the super wealthy, they may be able to afford higher prices, but there is an inherent price-to-quality consideration that drives their decision-making too, especially when they perceive the quality at some brands is declining. Nobody likes being taken for a ride. More and more, these customers are now asking themselves: ‘is this good value for my money?’
This value equation is further complicated now that there is an active secondary market on resale sites like TheRealReal and Vestiaire Collective which give an indication of which luxury products and brands will hold their value over time. So, if it’s less expensive to buy a higher-quality, second-hand product in very good condition, why fork out the cash for an overpriced, lower-quality new one that will lose its value?
The customer backlash to the aggressive price rises is real. There are entire Reddit threads and Purse Blog forums, where price-conscious customers are complaining about the price increases. But it’s not just grumpy customers complaining without reason.
Earlier this month, 144 people commented on the r/handbags Reddit thread (with 114,000 members) about the price increases for Loewe’s coveted Puzzle bag, which now costs more than $4000.
“This is ridiculous. I bought my small Puzzle in 2021 for $2400 total,” wrote Secure_Olive_154. “These brands have lost their minds. I just don’t even feel like buying these bags anymore. I’ll stick with vintage and getting wear out of what I already own.”
Other customers say they are waiting for discounts before they buy. A user named anakngtipaklongnaman added “Loewe [sales associates] offer discounts when you’re at the boutique. I was offered this adorable Puzzle at 20 percent off retail.”
The worst thing for brands to do is to raise prices and then offer discounts, even if this is done quietly. One luxury executive told me that this has become particularly problematic in China where powerful shopping mall developers like SKP in Beijing, who are paid at least in part based on the revenues generated by their luxury brand tenants, are insisting that brands participate in ‘SKP Days’ when customers can use vouchers to shop at a discount at even the most high-end brands. This trains customers to expect discounts, and further reinforces that the listed retail prices do not offer fair value.
One notable — and very interesting — exception to the enormous price rises and ‘SKP Days’ is Hermès, which deploys a more nuanced pricing strategy than the blunt tool some other brands have used, which is to raise prices across the board, even with entry-level products.
- Chanel has made some of the most aggressive price increases. A classic medium 2.55 flap bag now costs €11,100, up 91 percent since October 2019.
- At Louis Vuitton the price of a Speedy 30 Bag — made of coated canvas, not leather — has doubled to €1600 over the same period.
- Gucci, which is in the midst of executing an elevation strategy, has increased the price of its Marmont small matelassé shoulder bag by 75 percent, now with a price tag of €1490.
Most of the customer frustration about Hermès is focused on their hard-to-get Birkin and Kelly bags which has even attracted a class action lawsuit from two shoppers in California. These bags can cost $100,000 or more for the most exclusive styles in exotic skins, but there are still plenty of entry-level products that seem like much better value when compared to a canvas Louis Vuitton Speedy or Gucci Marmont.
While I was perusing the Hermès website today, I was pleasantly surprised to find that the Evelyne 16 Amazone cross-body bag made of grained Clemence leather perforated with an Hermès H logo, costs only £1660 (about $2100). You can also buy a 90 cm silk scarf for £450 ($565) or elegant Oran leather sandals for £615 ($775). Amid the ever-spiralling prices in luxury land, Hermès entry-level products are great access points for first-time customers.
“One reason Hermès is so resilient is that despite being the most expensive brand in the space, they carry many categories that are accessible in nature,” HSBC’s Erwan Rambourg wrote to me in an email. “Louis Vuitton, Dior, Chanel and Hermès should have all price points — everything for everyone — given their scale. Many brands are likely to rethink their access assortment as you can only sell that many nano or micro bags.”
In the first quarter, Hermès reported organic growth of 17 percent, far outpacing LVMH Fashion and Leather Goods which grew by only 2 percent. Kering suffered a catastrophic revenue contraction of 10 percent in Q1, and now projects that profits will decline by up to 45 percent in the first half of 2024.
Meanwhile, Hermès has said it will continue to increase its prices by 7-8 percent in the coming year. As the old saying goes, slow and steady wins the race.
This Weekend on The BoF Podcast
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Stan Herman may be 95 years old, but the designer, activist and former president of the Council of Fashion Designers of America remains an unstoppable force.
His recent memoir, “Uncross Your Legs: A Life in Fashion,” details his journey through the American fashion industry, including bringing New York Fashion Week to Bryant Park.
This week on The BoF Podcast, I sit down with Stan to reflect on his incredible life and career, and to talk about how the fashion industry has changed.
“With so much money being floated out there, it’s changed the whole nature of the business,” he says. “Once we anointed designers as superstars, once big business and Wall Street put their cashmere gloves on, fashion was not the same.”
Wishing you all a great weekend!
Have a great weekend!
Imran Amed, Founder, CEO and Editor-in-Chief, The Business of Fashion
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