As growth in the luxury sector normalizes, prices are likely to moderate after years of steep increases before, and during, the pandemic.
Erwan Rambourg, global head of consumer and retail research at HSBC, predicts prices on personal luxury goods could climb 2 to 3 percent in 2024 — below the high-single-digit to low-double-digit hikes seen the last three years.
“For some, excess pricing has already translated into a volume hit,” he explained. “For most, who have been reasonable, it will just not support sales growth as much. Moncler and Hermès stand out as having been the most subtle and likely can increase more in 2024 than peers.”
Johann Rupert, chairman of Compagnie Financière Richemont, also believes pricing won’t be a workable lever for the next two years.
“We are very glad that we did not use pricing like one or two of our competitors because, today, the customers remember. And there is reluctance,” he said on the Swiss group’s first-half earnings call last November, suggesting some brands may regret having passed on exorbitant increases to customers.
In its recent report, “Goodbye Stellar Growth,” HSBC analysts checked prices on 19 iconic luxury products in France, and found that some doubled since October 2019, including Prada’s Galleria leather bag and Louis Vuitton’s Speedy model in a Damier check.
In addition, the price of Chanel‘s classic 2.55 flap bag rose by 81 percent; Prada’s Double bag by 90 percent; Canada Goose’s Shelburne parka by 84 percent; Gucci’s Marmont bag by 75 percent, and Cartier‘s Trinity Ring by 64 percent. On average, prices jumped 50 percent, according to the HSBC report.
Generally speaking, prices have risen for a variety of reasons, including inflation, which ran rampant in Europe in 2022 and the first half of 2023 following the lifting of lockdown, and Russia’s war in Ukraine.
Brands also took advantage of post-pandemic revenge spending and looked to tap into the pent-up savings that customers had amassed during lockdown.
Jonathan Siboni, founder of the data intelligence company Luxurynsight, believes another big reason behind the steep increase in pricing is the big brands’ push for uniform, international rates.
“If you want to keep prices at a uniform level internationally, you cannot decrease them. You can only level up,” said Siboni, adding that some brands don’t want consumers gambling on exchange rates, taking advantage of pricing discrepancies in various markets, or scouring the globe for deals.
Those discrepancies — and the prospect of customers searching internationally for bargains — can create a lot of problems for luxury companies which are vigilant about protecting brand equity, desirability, and the perception of scarcity for their most iconic products.
Siboni said Chanel has been at the forefront of uniform pricing and believes the strategy has been working.
“It hasn’t been easy, but they stick to it and it has played a strong role in the desirability of the brand. And it’s the only way to ensure that there is a coherent approach,” he said.
Rambourg, however, argued that Chanel, Saint Laurent and Burberry “have seemingly gone too high too quickly.”
He noted that a Chanel 2.55 bag, now retailing for around 10,500 euros in France, puts it in the price zone of a piece of jewelry at Cartier or a Rolex watch.
While consumers are “likely hoping Chanel is the Patek [Philippe] of handbags and they can pass it on to the next generation, we think consumers are likely on average to think otherwise.”
Rambourg said that “we don’t know for a fact if Chanel’s big price increases have affected volumes, as the company is private.”
He lauded Burberry under new creative director Daniel Lee as more joyful and colorful than during the Riccardo Tisci era, “but it’s priced a lot higher and core Burberry consumers may also have been priced out.”
“If, like Burberry, a chunky part of your profits is generated in outlets, your pricing power in full-price stores will be somewhat capped,” he explained. “If, like Balenciaga, you have been driven by youth, sneakers, street, it’s likely to take some time to motivate higher-end consumers.”
He described Saint Laurent’s brand equity as “rock solid, so we are not concerned long-term, but the next few quarters are likely going to suffer from pricing out aspirational consumers,” he said.
While the price increases may have driven away that aspirational customer, they did nothing to deter the high-end one.
HSBC’s recent trip to China revealed that “the higher end of all brand pyramids was outperforming the base,” said Rambourg, making “ubiquity issues” slightly less problematic.
Rambourg added that Dior and Cartier “very intelligently accompanied the shift toward higher end VICs via services — for example, Dior’s VIC restaurant in Pudong — and event spaces like Cartier’s ‘La Residence’ concept that enable them to be front-of-mind for a higher-end consumer,” he said.
According to HSBC, the price increases explain why margins in the sector have grown 500 basis points in the past four years to an average of 26 percent from 21 percent.
Given the expectation of more “reasonable” price increases going forward; rising marketing costs and capex budgets, those margins are likely to expand at a slower pace in the years to come, from 25.6 percent in 2023 to 26.2 percent in 2025, the bank has forecast.
Siboni believes that growth will return if the brands broaden their entry-level offers to lure back the aspirational consumer.
Brands, he said, “will need to bring in new products that are much more affordable. Customers will still dream of owning the icons, but in the meantime” they’ll buy what they can afford — a silk tie, a bottle of fragrance or a keychain.
“Prices cannot continue to increase,” as they have for the past few years, Siboni said. “Going forward, there will be a more diverse pricing strategy. Some brands have been doing this forever — selling products that range from 100 euros to 100,000 euros.”
By contrast, other brands have only focused on making expensive things — and charged handsomely for their products. “Those brands now have to learn how to have a better product mix to accommodate all of their customers,” Siboni said.
