The luxury industry’s many contradictions
Exclusivity is not just a matter of selling some items that almost no one can afford
When the world is worried about fuelling up the car or losing a job to AI, sympathy for the troubles of the luxury industry is going to be in short supply. Fair enough. But even those who consider its products trivial should recognise that the industry is not. Luxury is an area where Europe, which badly needs industrial champions, is champion. The biggest four players alone — LVMH, Richemont, Hermès and Kering — generated more than $130bn in sales last year and employ some 320,000 people. So it matters that industry growth, well north of 20 per cent three or four years ago, is now roughly zero.
The easy explanation is cyclical. Post-pandemic, pent-up savings and demand were released, leading to unprecedented growth that was never going to last for ever. For the past few years, we have had the (champagne) hangover — but hangovers end. And things are not so bad. The very strongest brands (Hermès, say) and most resilient categories (jewellery) are still growing in real terms.
Easy, but wrong. The pandemic bubble and its aftermath revealed an industry marked by internal contradiction — strategic tensions that ensured an identity crisis would come sooner or later. Unresolved, they will prevent a return to sustained growth.
The first tension is the notion that luxury’s key growth market could be a communist country. China’s combination of state control and free enterprise has brought wealth to a slice of the country’s population. But it was never designed to support consumption, especially elite consumption — that was an unwanted side-effect. And the politics of a small class of people splurging on foreign-made baubles, in a country whose real ideology is nationalism, is always going to be a problem, as Chinese luxury buyers turn to local brands. Luxury sales in China are not as bad as they were a year ago, but the industry is going to need a new growth story.
Next contradiction: the idea that price both is, and is not, the same as value. There was a point, in 2021 and 2022, where someone, somewhere, would pay almost any price for certain luxury items. Most of the industry responded by charging prices that maximised quarterly revenue. This is the right strategy in a commodity industry, where the market determines value. In luxury, with its 70 per cent gross margins and unique Veblen goods, price is part of the narrative, not the point where demand meets supply. Price establishes value and maintains it over the long run.
Stability and fairness are part of that story, so luxury companies cannot afford to confuse value with the price someone will pay. They face a multi-year process of slowly, delicately rebuilding their price architecture (outright cuts being even more destructive than excessive increases).
Many in the industry frame this widely recognised problem in terms of losing the “aspirational” — rich but not super-rich — customer. To an extent, this is true. Bain, the consultancy, estimates that the industry lost an eighth of its customers — 50mn of them — from 2022 to 2024 as the industry focused on the very wealthiest. At the same time, however, it’s a mistake to think the demand elasticity at the top of the pyramid is infinite. The elite dislike being duped as much as anyone else, and those relationships need repairing too.
This leads us to the final and most important tension: the very idea of aspirational luxury. Call it “mass exclusivity” and the contradiction becomes obvious. Many of the big groups want to live on both sides of the line, without managing the balance with sufficient care. Exclusivity is not just a matter of selling some items almost no one can afford. It is taking care of when and how those objects are seen, and what they are sold next to. Nor does aspiration mean paying an exorbitant price for a trivial item from a great brand. That is the way of the $850 T-shirt, which is neither successfully aspirational nor convincingly exclusive.
Resolving these contradictions will require hard thinking about the structure of the industry. Are big, publicly traded conglomerates the right home for the haute brands? The recent resurgence of privately held Chanel suggests that they might not be. How many stores is too many? Recent closures suggest many companies have decided the number is a lot lower than the number we have. Is there such a thing as too much social media exposure? A product an “influencer” can rent or borrow and pose next to on Instagram is leaking magic, fast. Most importantly, perhaps, the industry needs to think of the aspirational customer not as a lucrative side hustle but a valuable segment with its own needs. Companies such as Tapestry and Ralph Lauren are showing the way.
The luxury industry is ancient, it will survive; to thrive, it will have to make hard choices.