Luxury blingflation creates opportunity for cheaper challengers
Second-tier brands and retailers are starting to stretch their tendrils upwards
The best things in life may be priceless. But over the past few years some of them have become extortionate. As the luxury industry has created its own kind of high-end inflation, price rises have left some customers behind. That has created an opportunity for upwardly mobile brands, even mass-market challengers.
After a series of sharp price increases, luxury’s unaffordability has turned from a feature to a bug. Sales declined 1 per cent in the last quarter, according to Bernstein, with those at industry bellwether LVMH falling by 4 per cent, and at troubled Gucci-parent Kering by 15 per cent.
But second-tier brands seem to be stepping in. Burberry, for instance, is retrenching after a failed attempt to go even more upmarket — and investors have rewarded it with a share price bounce of more than 90 per cent in a year. Those reluctant to spend more than £6,000 to bag themselves a Louis Vuitton Capucines can opt for niche leather goods producers such as Polène and DeMellier.
It is not just new luxury brands that are stepping in. Retailers such as Zara owner Inditex, with a broader customer base, can also stretch their tendrils upwards.
Zara has been investing in larger, glitzier stores, offering some higher-priced products, including a £700 leopard print jacket from last year’s collaboration with model Kate Moss. Its average selling price per item is already higher than its usual competitors — $34 compared with $26 at fast-fashion retailer H&M and $14 at Shein, according to McKinsey analysis.
Unusually for a mass-market retailer, Zara also manages to project an aura of scarcity. Since it makes a large proportion of its own goods, it can rapidly revise its offering. A Bernstein analysis found that over four weeks it changed about 40 per cent of its online collection, twice as much as H&M. In practice, if consumers see a product they like, there’s extra reason to snap it up sharpish, which gives Zara extra pricing power.
None of this suggests that Zara is going to go all-out luxe. But it does add an extra layer to its equity story. Already, Inditex grows faster than rival H&M, and has over twice the ebitda margin. That comes with a market capitalisation equivalent to 22 times forward earnings, a discount of less than 10 per cent to LVMH. Upward mobility provides a fetching trim.