When It Comes to Luxury Price Hikes, the Party May Soon Be Over
For years, luxury brands have been raising their prices, simply because they could. But as raw materials get more expensive, and real inflation continues to rise, sophisticated shoppers may begin to look elsewhere.
It’s no longer shocking when a global luxury brand raises prices on its most coveted bags, shoes and dresses, as Louis Vuitton did earlier this week. For years, luxury brands have been upping the numbers at a steady clip, even as more-affordable clothes and accessories have gotten cheaper.
Often, these increases are attributed to higher materials costs or clogged supply chains that can’t keep up with soaring demand. That’s not entirely spin. Labels such as Gucci, Louis Vuitton and others have bought up alligator farms and opened sprawling workshops in recent years to ensure they can create enough shoes and bags and shoes to satisfy customer demand.
But another reason a Chanel 2.55 bag costs nearly double what it did five years ago is that a healthy share of the brand’s customers are willing to pay those higher prices without blinking an eye. A soaring stock market, spiking real estate prices and new middle and upper-class consumers in developing countries created seemingly endless demand. The industry’s biggest brands have taken full advantage.
There are a growing number of signs the party could soon be over, however, even as record sales and profits give luxury brands the confidence to step up the pace of price hikes.
In China, economic growth has slowed, and a troubled property market — plus last year’s crackdown on conspicuous consumption — has worried luxury brands, if not meaningfully dented sales. The S&P 500 index is down about 7 percent this year, and tech stocks that fuelled much of the gains of the last decade hit especially hard. The crypto market, which has created a new pool of luxury super-consumers, is going through one of its period busts.
But the real immediate threat is inflation. What started as a seemingly temporary, pandemic-induced spike in the cost of manufacturing and shipping goods threatens to turn into something more lasting. In the US, overall prices rose 7.5 percent in 2021, the most in 40 years. Consumer prices rose 5.5 percent in the UK, a nearly 30-year high. The US Federal Reserve plans to raise interest rates to contain rising prices, but that will cause economic pain too.
Where Chanel was an outlier with its regular price increases before, it’s now common to see consumer brands from Crocs to Nestle pass along escalating costs to consumers.
A luxury executive might brush this off — if their customers didn’t care about rising prices in 2021 or 2019, why should they now? This would be a mistake.
As we reach the end of the pandemic, consumers will once again spend a larger portion of their discretionary income on experiences, especially travel and restaurants. They’ll also feel the impact of inflation on everything, not just fashion.
In other words, consumers’ radar is up in a way it wasn’t before. The pool of shoppers willing to spend more and more to get their hands on a Louis Vuitton Neverfull bag will get smaller.
What’s more, there’s a movement among a certain set of consumers — in the US and Europe especially, but also China — to reject the highly commoditised, easy-to-access look of masstige luxury.
At some point, the market will simply no longer be able to absorb further price increases. The brands that benefit from the shift in behaviour will offer products that consumers deem of high value for the prices they pay. Hermès is one such label that exemplifies this concept, and may escape lasting damage should there be a backlash to sky-high prices. But those that rely on trend-driven items to drive growth will feel the squeeze.