Why Luxury Brands Are Raising Prices in a Pandemic
Top-tier brands like Chanel and Louis Vuitton are hiking prices in what looks like a bid to pad margins, cushion the impact of lower sales volumes and capitalise on the China rebound.
The Covid-19 pandemic has savaged the global economy and crushed consumer demand for luxury goods. Now may not seem like the best time to raise prices on expensive handbags. But that’s exactly what top-tier luxury brands Chanel and Louis Vuitton are doing.
Louis Vuitton raised prices by 3 percent in March and another 5 percent in April. This week, Chanel was even bolder, raising prices on its iconic 11.12 and 2.55 handbags, as well as its Boy, Gabrielle and Chanel 19 bags, and certain small leather goods, by between 5 percent and 17 percent. The percentage increases reflect prices in France, but the hikes are being phased in globally.
As the news leaked, thousands of shoppers in Asia flocked to Chanel stores to snap up handbags before the price increases take effect in their markets in what effectively became a sort of reverse sale. Lines formed outside Chanel boutiques in Shanghai, Hangzhou, Guangzhou and Beijing. In Seoul, the queues were so long that the municipal government is considering an order to suspend Chanel from doing business in the city, citing fears over Covid-19 infections.
Luxury prices have been rising for decades, growing at more than twice the rate of inflation. It’s common to see one to two price hikes per year, typically under 10 percent, reflecting everything from the rising costs of raw materials and labour to the customer’s growing willingness to pay. But the amount of Chanel’s latest increase raised eyebrows.
“Like all major luxury brands, we regularly adjust our prices to take changes in our production costs and raw material prices, as well as exchange rate fluctuations, into account,” said a spokesperson for Chanel. “In the current environment, the price of certain raw materials, which were already difficult to procure due to the quality we require, has increased again.”
The pandemic has no doubt disrupted the luxury supply chain and product shortages may even be a factor. But raising prices will also help Chanel and its competitors to pad margins and cushion the bottom-line impact of lower overall sales volumes as they try to make up for revenue lost during weeks of forced store closures. Louis Vuitton declined to comment.
It’s a very difficult time for the luxury business. According to Bain, sales are expected to sink by up to 35 percent this year. Consumer demand remains extremely low in Europe and the United States, where retail is slowly sputtering to life again. But Asian spending is bouncing back, if not to pre-pandemic levels, then at least enough to signal opportunity.
Chinese consumers drove 90 percent of global luxury growth last year and, in its first quarter results, Louis Vuitton owner LVMH, a bellwether for the sector, reported a sharp rise in Mainland China sales, starting in mid-March as stores in the country began re-opening. Raising prices will surely help brands like Chanel and Louis Vuitton make the most of the momentum.
Raising prices will help Chanel and its competitors to pad margins and cushion the bottom-line impact of lower overall sales volumes.
Of course, Chinese consumers historically do only about one-third to half of their luxury spending at home, preferring to buy while travelling outside Mainland China, both to benefit from the symbolic value of buying European luxury goods in the continent’s fashion capitals and capitalise on persistent price differentials. And with overseas sales effectively at zero, Mainland sales would roughly have to double or triple to make up for lost revenue.
Chanel said its price hikes were in line with the “harmonisation” strategy it adopted in 2015 to better equalise prices across markets. “These adjustments are made while ensuring that we avoid excessive price differentials between countries,” said the spokesperson for the brand. “We believe it is essential not to penalise our clients on the basis of geographic considerations.”
Louis Vuitton has also made attempts to minimise price differentials. Last April, when the Chinese government lowered its VAT on luxury goods from 16 percent to 13 percent, the brand responded by lowering prices in China by 3 percent. In a statement at the time, it said it was “fully supportive of the Chinese government’s ongoing efforts to narrow the price gap between China and overseas.”
But the recent price hikes are global and do not seem calculated to drive the repatriation of Chinese spend. Nonetheless, Asian consumers appear likely to stomach the increases, at least when it comes to Chanel and Louis Vuitton, such is the pricing power of top-tier brands.
The strategy is probably not replicable for brands further down the food chain, however. Indeed, it serves to further differentiate the true luxury credentials of brands like Chanel from competitors, who may have a hard time increasing prices in Asian markets where some consumers may be feeling squeezed by the economic contraction and tired of paying more.
According to market reports, Gucci and Prada, which may not be seeing as strong a recovery in China, are playing a more cautious game on pricing, with no plans for hikes. The ailing British label Mulberry is even going in the other direction, lowering its prices by up to 20 percent in some Asian markets in an attempt to entice consumers to buy. Whether anyone else has the guts to put their brand credentials to the test and implement Chanel-style price hikes remains to be seen