Luxury brands raise prices aggressively to stay luxury

Industry

Published: 16 Mar. 2022, 19:18

Luxury brands raise prices aggressively to stay luxury

Chanel raised the prices of its luxury handbags and wallets by five percent on average on March 3.[YONHAP]

Chanel is jacking up prices once again even though some customers could be priced out of the company's products.

And losing some customers may actually be the point.

On March 3, the French company raised the prices of its handbags and wallets by five percent on average, following the previous increase of 17 percent in January. It marked the company's sixth price hike in about a year.

The Classic Flap, a handbag measuring 23 centimeters (9 inches) in length and 14.5 centimeters in width, now costs over 10 million won ($8,050), up 36 percent from November 2020 and nearly double the price from a decade ago.

Chanel isn't the only high-end brand going even higher — Rolex, Hermes, Dior, Burberry and Tiffany & Co. announced price hikes in January, and Prada, Louis Vuitton and Gucci in February.

Though what initially drove the price jump was the pandemic-driven market slowdown, luxury brands are continuing to up prices at a fast pace even after the market rebounded.

In 2019, 70 percent of the total luxury purchases by Chinese shoppers were made in the United States and Europe. Sales plunged in 2020 due to the travel ban and global supply shortage.

Chanel reported an 18 percent on-year drop in revenue to $10.1 billion and a 41 percent on-year decline in operating profit to $2.0 billion in 2020. LVMH, which owns some 70 brands including Louis Vuitton and Christian Dior, and France's Kering, which owns Gucci and Saint Laurent, both posted a 16 percent decrease in sales.

Jean-Marc Duplaix, the chief financial officer of Kering, which owns Gucci, said that Gucci is not ruling out more price hikes this year on February 17. [REUTERS]

The companies quickly recouped the losses in 2021 by increasing the prices as the luxury market recovered from the pandemic and the demand began to rise in the United States, China and Korea.

According to research firm Bain & Company, global luxury sales last year surpassed the pre-pandemic level of 2019, reaching some 283 billion euros ($311 billion), up 29 percent on year.

The post-pandemic increase in demand is the major driver of luxury prices, but there is another factor: the law of scarcity.

Chanel is one example.

As the company gained in popularity last year due to the "revenge spending" trend — impulsive spending driven by the frustration of missing opportunities due to Covid-19 — and the growing local luxury reselling market, some rich consumers have been turning away from the brand.

"I decided not to visit Chanel boutique anymore after watching a bunch of people waiting outside the store," said a 43-year-old who has been using Chanel products for over twenty years.

"Now when someone mentions Chanel, things that come to my mind are words like reselling and open runs," said the consumer.

"Open run" is a Korean term for pulling an all-nighter in front of department stores to buy a luxury product as soon as the stores open in the morning.

People line up to enter a Chanel boutique at a department store in Seoul. [JOONGANG ILBO]

To make the products more desirable, companies are making them less accessible.

Analysts found Chanel's pricing strategy similar to that of Hermes, another high-end luxury company targeting wealthy consumers.

The price of a medium-sized Chanel Classic Flap bag increased 93 percent over the past decade, from 6.1 million won to the current 11.8 million won, a pace much steeper than the rise of the consumer price index.

The consumer price index rose 13.5 points, or 14.7 percent, during the same period.

Brands that are considered high-end but sell at a lower price compared to Rolex, Hermes or Chanel don't increase prices as often. For them, whether their customers can afford the price increase is a key question. On the other hand, customers for Hermes and Chanel remain largely unaffected by price fluctuations. Rather, they tend to prefer luxuries that are not commonly accessible for average consumers.

That is why high-end brands are eyeing the wealthy younger generation in the Chinese market.

While the number of the super-rich with assets worth more than $30 million was the highest in the United States, China has seen the fastest growth, according to consulting firm Knight Frank.

Customers select products in a duty-free shop in Hainan Province, China. [YONHAP]

The super-rich in China is estimated to exceed 100,000 by 2025.

Bain & Company also found that China will take up half of the total luxury consumption worldwide in 2025.

Some experts are skeptical whether luxury brands can continue to up prices.

"Can you put prices up 50 percent in the next two years? I don't know," said Flavio Cereda-Parini, an analyst at Jefferies & Company, in a March 4 Financial Times report.

Though there is little doubt that the global luxury market will keep expanding, the luxury price increases may face resistance if governments start to lift the travel bans and China continues to report a slower-than-expected economic growth.

Goldman Sachs forecast China's luxury market to grow 9 percent on year. It lowered its projection from the previous 13.5 percent, citing the country's low growth target and the property market crisis.

Luxury companies might have to go through "painful corrections" if prices continue to soar at a sharp pace, said Bernstein analyst Luca Solca on The Fashion Law report in 2020.

BY LEE SO-AH [shin.hanee@joongang.co.kr]