Luxury hits a wall. What is happening and what will happen next?

Recent earnings reports from the world’s top luxury goods companies brought mostly bad news. Additionally, considerable uncertainty and confusion has been in the air throughout the year, as loss-making online-only players like Farfetch and YNAP have fallen into the hands of new corporate owners. Saks Fifth Avenue and Neiman Marcus, along with Tapestry and Capri Holdings, are considering a merger as sales and profits lag. Given all this, some may be wondering how long this situation will last and what will happen next.

Air coming out of a luxurious balloon

A few weeks ago, industry leader LVMH started things off with an alarming drop in sales. Rival luxury conglomerate Kering Group (Gucci’s owner) also announced a 16% drop in sales and a profit warning a week later. Estée Lauder also disappointed investors with a 4% drop in sales and also withdrew its profit forecast.

Tapestry yesterday managed to beat quarterly profit estimates, but sales were flat overall, with the Kate Spade division down 7%. Accessible luxury rival Capri Holdings Inc. fared much worse, with sales plummeting more than 16%.

It’s not all bad news

In the midst of this luxury recession, Hermès bucked the trend, increasing sales by 11% in the quarter. The Prada Group also achieved great results, with the Miu Miu brand’s revenue doubling. Although these are not small businesses, both companies benefit from a more tightly defined and affluent target consumer set, a more focused go-to-market strategy, and generally better execution of their value proposition. I am getting.

China syndrome?

Much of the blame for this slowdown has been placed on China (and broader Asia), a market that has become extremely important to most iconic luxury brands. Indeed, due to China’s economic stagnation and declining consumer confidence, many companies have seen their sales in China relatively weak throughout the year. More than a decade of disproportionate investment in China has created an overreliance on the region, and the resulting strong headwinds for these brands will make recovery difficult.

A little secret of luxury

In every region of the world, the problem of luxury is even worse than weakness. Often overlooked is the degree to which both brands and retailers serving high-end customers are overly reliant on price increases to drive same-store sales.

According to HSBC, the average price of luxury goods has increased by 60% since 2019. As just one example, Hermès reported an 11% sales increase that included a 9% price increase. Through my own advisory work, I know brands that have experienced for years almost all of their organic sales growth due to average retail unit price increases.

This strategy is very prudent when most of the customers have near-infinite spending capacity and the products are highly differentiated and extremely rare (see Hermes).

But the more your customer base consists of the merely wealthy rather than the super-rich, and sells less coveted goods (see almost any accessible luxury brand or luxury department store), the more vulnerable you become. It will be. Explain the basic dynamics of price elasticity.

Additionally, the increased cost of entry for a brand makes it harder to attract new customers. The results revealed long-term problems with existing brands’ ability to attract, grow and retain younger customers in established regions. But in recent years, this reality has been obscured as consumers from all walks of life have increased their discretionary purchasing power due to the stimulus of COVID-19. That tailwind has already passed.

Do you have time to reset?

It is clear that there are macroeconomic factors that are beyond the control of a particular company. Whether the current trend is just a pause or a major change remains a matter of debate. But given that stocks and many luxury real estate markets are at or near record highs (factors that correlate with historically strong demand for luxury goods), one has to wonder if something more fundamental is at work. be.

Luxury brands that have invested heavily in their own stores across Asia cannot easily press the reset button. Luxury department stores that have lost market share may need to completely rethink their operating models as vendors aggressively expand their direct-to-customer efforts both in their own stores and online. Coveted young consumers are unlikely to follow the same strategy as their parents and become highly spendable, highly loyal luxury customers.

Regardless of what the immediate future holds, it’s hard to imagine that what worked well in the past is likely to continue to serve the industry very well. In fact, some bold action will almost certainly be required.

As they say in Alcoholics Anonymous, “half measures never get you anywhere.”