Mon Dieu! Chanel Challenges Hermès in Bag War
Chanel’s most popular handbag is now more expensive than an Hermès Birkin for the first time. Investors should take note.
Chanel has raised eyebrows by hiking the price of its most popular handbag to the same level as an Hermès RMS 0.94%increase; green up pointing triangle Birkin. It’s a fascinating case study of how far wealthy shoppers can be pushed and the results so far look mixed.
The Birkin is the ritziest handbag in the luxury goods industry. A rare one made out of exotic skins like crocodile can sell for more than $100,000 and even a basic leather 25-centimeter Birkin will set American buyers back $10,400 before sales taxes. In addition to sometimes costing more than the average U.S. car, the bags are hard to get hold of as Hermès limits production to around 50,000 each year, according to Bernstein estimates.
Lately, the so-called “Birkin premium” – the price difference between the Hermès bag and other brands, as tracked by luxury handbag forum PurseBop – has shrunk dramatically. Chanel has raised the price of its popular medium-size Classic Flap bag by 75% over three years in the U.S. The bag cost $5,800 in 2019 and is $10,200 today, according to PurseBop’s founder Monika Arora.
The Chanel bag is now more expensive than the comparable-sized Birkin 25 in Europe for the first time. And it is catching up fast in the U.S.: The Chanel model was $4,000 cheaper than the Birkin before the pandemic and is only $200 less today.
Chanel says these sharp moves are due to inflation and exchange rate shifts. Most luxury brands are charging shoppers more as their input costs are higher, but nowhere have prices risen as drastically as at Chanel. The Birkin is only 6% costlier than prepandemic levels, for example.
One theory in the luxury industry about why Chanel is pushing prices so high is that it wants a handbag that is as exclusive as the Birkin. The Classic Flap is now priced out of the reach of all but the wealthiest shoppers. Chanel may also be trying to make them scarce by limiting the number of bags people can buy each year.
A strategy of selling fewer bags at higher prices already appears to be juicing Chanel’s profits. The brand is privately owned but publishes annual results that show group operating margins jumped from 28% in 2019 to 35% in 2021. Chanel’s 2022 earnings are due to be released over the next few weeks and may reveal another rise in profitability.
Despite grumbling about the price increases on online handbag forums, the moves don’t seem to have damaged the brand. “They are raising prices because customers are willing to pay. At the high end, there is no pushback,” says Michelle Berk, CEO of luxury handbag reseller Privé Porter.
Stock analysts who follow Hermès have asked the brand’s executives whether they plan to raise prices more aggressively in response. Being relatively cheaper than Chanel may not be a great look. Luxury brands are a classic example of Veblen goods, demand for which rises as prices go higher. Hermès needs to make sure that shoppers still see its handbags as exclusive since two models, the Kelly and the Birkin, contribute around a quarter of the company’s sales according to some estimates.
Since Hermès is run so conservatively, the Birkin premium isn’t likely to reappear soon. The brand only increases prices enough to offset inflation in its supply chain. Typically, this has been 1% to 2% a year, although Hermès has upped prices 4.4% so far in 2023 in response to higher inflation, UBS data shows.
Trends in the secondhand market suggest Hermès shareholders needn’t worry. Pristine-condition Chanel Classic Flap bags in medium sold for $4,800 on average last year on luxury resale website The RealReal. Data supplied by the U.S.-based reseller shows the bag’s secondhand value is rising in line with the hikes implemented in the brand’s stores.
But even a mint Chanel bag is still only worth roughly 50% of its original cost if the owner decides to resell it. This discount in the secondhand market is a good proxy for whether Chanel’s price maneuvers are making the brand more desirable to luxury shoppers. It hasn’t improved since 2019.
Compare this to Hermès, which is one of the few luxury brands that costs more to buy used than new, along with watchmakers Rolex and Patek Phillippe. Shoppers are willing to pay a premium for these brands secondhand rather than tolerate long waiting lists in stores. Buyers paid nearly double store prices for pristine Birkin bags sold on the RealReal in 2019. In 2022, they shelled out three times what the bags cost in the brand’s boutiques.
This means anyone lucky enough to score a brand-new Birkin can be pretty confident the bag will hold its value. They can even flip it for profit. A shopper who spends $10,400 on a Birkin 25 could walk out of the Hermès store and immediately sell it to a reseller like Privé Porter for $16,000, who in turn will sell it on Instagram for $24,000. These numbers will be higher for unusual colors and hardware combinations.
Chanel can crank its prices as high as wealthy fashionistas will bear, but the resale market makes it easier than ever for savvy buyers to spot which brands are worth splurging on.