A Casual Analysis of Price Increases in Lux Market - Would Love to Hear Others’ Thoughts!

[opensesame]

Deflation means you need less money to purchase something. With inflation you need more money to buy the same thing.

We are not really in a deflation situation in Europe, but if inflation is below 2%, it is considered a risk of deflation exists, and you would have deflation in certain products/services. When the inflation is 1%, it means prices of products in average are increasing 1% during the year. If a company, like Chanel, are increasing prices say 15%, it means they are increasing prices 14% above the average.

In a perfect close market, if the inflation is 1% (meaning also people salaries are only going up 1%), it would be very difficult to increase your prices by 15% because your buyers would no longer be able to afford the product in the same conditions. Also, you would not need to, because you are paying your suppliers and your labor at the low inflation rate. So if your costs have only increased 1%, you only need to increase your prices 1% to maintain the same profit. But Chanel can afford to increase the prices well above the inflation rate they are living with (that in France and Italy) and still find more than enough buyers. So why not.
Also pricing in the luxury business does not follow typical market principles. What you are selling is exclusivity, and high prices are a part of that.

Thank you so much for the informative post! I misunderstood the term deflation. I suppose the rich is always above meager inflation. It’s frustrating because I feel everything inflates faster than my salary. Housing, tuition, luxury items etc. I wonder if it’s ever going to stop. Chanel is getting so pricy, but like you said, it’s part of exclusivity.

 

[880]

RIP Macallan though. But Laphroiag forever

DH and I like Laphroiag or Talisker, but have also been drinking Amorik (which is french single malt) recently.

 

[Gabs007]

DH and I like Laphroiag or Talisker, but have also been drinking Amorik (which is french single malt) recently.

I am particular to peaty single malts, but a nice speyside is also great, if you are in the US and have a Trader Joe's nearby, they have a Islay single malt, I swear it is a Laphroiag, was around $25 or so, we did blind tests and could not tell the difference. Hubby got a bottle of 60 year old Port Ellen ages ago from a friend, he is dying to try it, and usually cuddles the bottle, however he occasionally googles in and then sees the prices, it has been in the cupboard for 15 years or so, he said the way the price shot up through the years, he can't justify drinking a mortgage on a house...

 

[880]

I am particular to peaty single malts, but a nice speyside is also great, if you are in the US and have a Trader Joe's nearby, they have a Islay single malt, I swear it is a Laphroiag, was around $25 or so, we did blind tests and could not tell the difference. Hubby got a bottle of 60 year old Port Ellen ages ago from a friend, he is dying to try it, and usually cuddles the bottle, however he occasionally googles in and then sees the prices, it has been in the cupboard for 15 years or so, he said the way the price shot up through the years, he can't justify drinking a mortgage on a house...

Good t know! re the port, you cannot take it with you! Drink it and enjoy!

 

[Gabs007]

Good t know! re the port, you cannot take it with you! Drink it and enjoy!

LOL, Port Ellen is a distillery that doesn't exist anymore, I think he plans to sell it at one point in time and buy himself a new guitar for it. I doubt I could enjoy something where I know the bottle is over 8K (GPB) that just seems frivolous.

 

[cheremushki]

DH and I like Laphroiag or Talisker, but have also been drinking Amorik (which is french single malt) recently.

Right?! Laphoiag! Also my partner really loves Talisker. If you like peaty/smokey try Ledaig. Very under rated. I also love Ichiro's malt but the price increase and demand for Japanese brand has gone insane!

 

[Jktgal]

True, we don't have quite such generous offers, but it is also the "buy now, pay later" thing that lets people fall into debt, in the end you pay for it, you have racked up a massive debt... I always prefer to buy items when I can afford them, heaven knows what might happen in a year, I might get sick, have an accident...

There's always cc insurance.

Actually, good reviews in an open forum like TPF drive up demand.

 

[Gabs007]

There's always cc insurance.

Actually, good reviews in an open forum like TPF drive up demand.

Well, I guess people have different opinions, I always lived with the motto "If I can't afford the item now, I won't be able to afford it tomorrow" - personally I reserve debt for real investments, like buying a house or something I need, not a luxury item I want. As my disposable income has grown, my credit rating has, I can't say I have a shortage of bags and most of the ones I want, I can afford. Up to everybody what they do, but personally I sleep better when the only debt I have is a mortgage. Living in a house is simply more comfortable than living in a handbag.

 

[Jktgal]

a boycott worldwide is happening. let's see if it will work making luxury more 'affordable' (not holding my breath)

High-end fashion the victim as Indonesian Muslims' anger toward France swells | Coconuts

A number of Islamic groups held a protest in front of the French embassy in Sarinah, Central Jakarta yesterday. In the event dubbed as “Aksi 211”, demonstrators called for a boycott of French products and directed their anger at high-end fashion items in response to what they perceived as...

coconuts.co

 

[880]

a boycott worldwide is happening. let's see if it will work making luxury more 'affordable' (not holding my breath)

High-end fashion the victim as Indonesian Muslims' anger toward France swells | Coconuts

A number of Islamic groups held a protest in front of the French embassy in Sarinah, Central Jakarta yesterday. In the event dubbed as “Aksi 211”, demonstrators called for a boycott of French products and directed their anger at high-end fashion items in response to what they perceived as...

coconuts.co

The boycott is based on anger re islamophobic comments of leaders, so it’s unlikely it will have any impact on worldwide prices. If luxury was more affordable, it would cease to be aspirational.

 

[corgi204]

Good analysis. It reminds me of a Business of Fashion article I just read about China.

Op-Ed | The Future of Luxury in 4 Trends

The post-virus luxury sector will be shaped by the acceleration of four existing trends, writes Erwan Rambourg.

www.businessoffashion.com

Bringing this convo back to life because I find this topic pretty interesting- we thought the price increases in 2020 were nuts, look where we are now haha.

Seems the tone on China's growth seems to be changing now after a year - I do wonder how much luxury brands can continue to rely on China for their growth. Not sure how many of you are following economics in China, but it'll be interesting to see what will happen if Evergrande (China's main real estate company) collapses, which according to many international sources, is imminent. Because if that collapses, essentially China's real estate sector will also collapse. So many people put their savings and investments into Evergrande properties, and they'd be virtually wiped out. Many say it's similar to the 2008 collapse with Lehman Brothers. Lack of economic growth = less lavish spending.

Luxury brands will want to continue to grow, but they need to start relying less on one dominant country.

 

[LucyMadrid]

Bringing this convo back to life because I find this topic pretty interesting- we thought the price increases in 2020 were nuts, look where we are now haha.

Seems the tone on China's growth seems to be changing now after a year - I do wonder how much luxury brands can continue to rely on China for their growth. Not sure how many of you are following economics in China, but it'll be interesting to see what will happen if Evergrande (China's main real estate company) collapses, which according to many international sources, is imminent. Because if that collapses, essentially China's real estate sector will also collapse. So many people put their savings and investments into Evergrande properties, and they'd be virtually wiped out. Many say it's similar to the 2008 collapse with Lehman Brothers. Lack of economic growth = less lavish spending.

Luxury brands will want to continue to grow, but they need to start relying less on one dominant country.

It all depends upon the spending capacity, in my opinion, taking into account that luxury market is aimed to " luxury people", wealthy people who will not be too affected by the current crisis. And about China, luxury brands will continue relying in China. It is a huge market in expansion.

 

[Bagatha Christie]

I

I tried posting this in a Chanel group on FB that I’m a member of, but sadly it got deleted within 15 minutes and just as soon as comments started getting good. I’m not sure if this post is in violation of any TPF rules, but I certainly hope not as I am hoping to have an intelligent conversation around the price hikes we’ve been seeing across all the fashion houses and multiple industries outside of luxury/fashion in general. Plus all this sheltering in place and being off from work all week due to feeling under the weather gave me some time to actually think about some of this stuff so here goes...


After a bit of research today, here is my take on these price hikes: the pandemic is of course playing a huge role in this but what I wasn’t expecting to discover was how much influence China is having on the price increases. It’s not a secret that Chanel prices are different in various countries but they are typically most expensive in China, sometimes by as much as 30-40%! This is true of all luxury brands’ pricing strategies across the board - not just Chanel’s. Despite these luxury goods being the most expensive in China, the Chinese market makes up one-third of these fashion houses’ revenues each year.



Let me say that again: China accounts for roughly 33-35% of total revenue worldwide for all luxury brands. One country vs. the rest of the world - that’s a lot of buying power for a single country!



In addition to the statement above, also consider the fact that before the pandemic, LOTS of Chinese citizens were traveling to other parts of the world to make luxury purchases at cheaper prices. The volume of revenues from these purchases (Chinese travelers buying outside of their home country) is NOT included in the one-third of global revenues attributed to the Chinese market. That means that China actually contributes more than 1/3 of global revenues, likely significantly more.



As we all know, the pandemic has negatively impacted the global economy, supply chains, COGS (cost of goods sold), and international travel. This has had a domino effect on all businesses, putting most in a position of deciding between only 2 options:

1. Whether they can and will try to survive until things get better
2. Whether they should cut their losses and close now

Due to the disparity in prices that already existed amongst countries/markets pre-COVID, many fashion houses have been able to essentially predict that they can, in fact, “get away” with these price hikes because again - despite their products being the most expensive in China, the Chinese market, geographically, still made up one-third of their total global revenues. So even if they didn’t raise prices in China but raised them everywhere else, the amount of customers they lost due to price increases would likely be a “wash” because they’d still be earning the same amount of revenue, just with less customers. But it’s actually not a “wash” for them if the fashion houses can get away with this because many of them also raise prices to ensure that they maintain a certain level of exclusivity or rarity. Thus, the impact of these price hikes ends up being a net POSITIVE effect on the brands’ perceived value. Keep in mind that value does not equate to price or cost; this is most obvious in the second-hand retail market where certain brands and their products are able to retain or even increase their value irrespective of its age or use.



Conclusion/TLDR:

Closing the gap in prices of luxury products between China and the rest of the world, while in the long-term might not be something that many companies would want to “give up”, in the short-term it does give companies a way to continue operations and production with a certain level of confidence that they’ll still be able to maintain similar revenues for relatively low risk. With the halt of international travel, price increases also forces most everyone to make their purchases in their respective home countries. Where this is the biggest advantage for companies is in none other than China where its residents are already used to buying at the highest prices and can’t travel outside the country to make luxury purchases elsewhere. The bottom line, in my opinion (based on only cursory research), is that these price hikes will continue so long as China’s consumer market continues to buy luxury products despite price hikes. With the Chinese market making up a third of the luxury industry’s revenues, as long as price hikes don’t result in revenue losses overall, losing customers in other countries is counterintuitively desired because luxury brands by design want to prevent their products from becoming overly distributed to avoid diluting the exclusivity of their brand.



What we can do about it:

This may seem like a lost cause, but 2/3 is still greater than 1/3. If the rest of us can (and actually do) band together and boycott Chanel, LVMH, Kering, and other fashion houses, we actually do have enough power to influence price setting. Louis Vuitton and Gucci have lowered prices on evergreen products in certain countries in the past as a result of economic factors, so it’s not outrageous to think that a boycott could actually work. A boycott by the consumers that constitute two-thirds of their revenues absolutely would send a message to the fashion houses that they’d better stop with the price hikes unless they want to start imagining life with only a third of their current revenues. Trust and believe that those prices will start to come back down REAL QUICK. The REAL question is: Can we get everyone who isn’t geographically inside China to boycott luxury products during the pandemic (and honestly beyond because this is getting ridiculous)? I genuinely would love to hear others’ thoughts on this because if we really could get enough traction to do this, we could actually make this a real initiative. An initiative that thanks to the pandemic, gave rise to a protest in its own right in response to the realization and against the revelation of a shamefully unhealthy over-reliance upon a single country, China, in yet another industry where it “hurts” our own economy. Side note: I put quotation marks around the word hurts because I do realize that this is a first world problem during a global pandemic and other natural disasters, but hey, we’re still allowed to have feelings about this one way or the other. PS. This post is not meant to shame China or its people in any way, but rather the decisions made by company executives of all types and from all countries to rely too heavily upon one country for anything at all, whether it be their total revenues, outsourced labor, or cheap raw materials, etc.

I think this is a really interesting analysis of the luxury climate and not negative at all personally.

As others have mentioned, I do think a boycott might not result in a price decrease. I suspect that they might raise the prices further if they felt interest was dying, aka ‘the mulberry manoeuvre’.

What I think would be more likely to cause a price decrease would be significant new competition in their biggest markets. To my knowledge there isn’t a Chinese leather goods company that comes close to the international recognition levels and desirability of the likes of Chanel but there is no reason why there couldn’t be in the near future. I think if the luxury brands felt significantly threatened they’d try and get more visibility and interest and consider the price drop. After all, their current strategy relies on their brands being seen as the apex of style and exclusive luxury on and off the internet.

 

[880]

Bringing this convo back to life because I find this topic pretty interesting- we thought the price increases in 2020 were nuts, look where we are now haha.

Seems the tone on China's growth seems to be changing now after a year - I do wonder how much luxury brands can continue to rely on China for their growth. Not sure how many of you are following economics in China, but it'll be interesting to see what will happen if Evergrande (China's main real estate company) collapses, which according to many international sources, is imminent. Because if that collapses, essentially China's real estate sector will also collapse. So many people put their savings and investments into Evergrande properties, and they'd be virtually wiped out. Many say it's similar to the 2008 collapse with Lehman Brothers. Lack of economic growth = less lavish spending.

Luxury brands will want to continue to grow, but they need to start relying less on one dominant country.

I was told by various retail management higher ups that during covid the focus necessarily shifted from China back to US consumers and those from other countries, as during covid, the wealthy made even more money.

 

[Bagatha Christie]

I was told by various retail management higher ups that during covid the focus necessarily shifted from China back to US consumers and those from other countries, as during covid, the wealthy made even more money.

Forbes still projects China to overtake the Americas and Europe though and it looks like they are anticipating that the demand is going to come from new generation buyers.

China Is Headed To Be The World’s Largest Luxury Market By 2025, But American Brands May Miss Out

American brands are losing traction in China, soon to be the world's largest market for luxury.

www.forbes.com

(This article also backs up my theory that there will probably be a Chinese leather goods line getting into the top ranks soon.)