Shoppers don’t imagine it. Luxury products cost much more these days, and there is no increase in quality to make up for it. Poor sales appear to be a deeper problem than some brands would like to admit.
A basic cotton T-shirt with the Christian Dior logo will retail for $1,000. Gucci’s simplest black horsebit loafers cost $990. How about this $8,995 Brunello Cucinelli cardigan? Shoppers pay for luxury goods precisely because they differentiate them as people who can spend a lot of money on luxury goods. But there’s only so much a brand can do before cracks start to appear.
Psychologists who study consumer behavior say that people buy branded products for emotional reasons. The main thing is to separate yourself from the crowd and signal where you are in the social hierarchy. Luxury brands spend billions of dollars a year on advertising so that their products become totems of wealth and success in the minds of consumers.
Some luxury shoppers prefer to telegraph their wealth more than others. People who want to make a statement are drawn to labels with larger logos to send a clear signal.
The ultra-rich, on the other hand, tend not to shout about their wealth much. They buy the most expensive but modest luxury brands such as Hermes. One study found that for every $5,000 increase in the price of a luxury product, brand logos shrink by one centimeter. In other words, men who wear logos from head to toe are likely not the biggest spenders of luxury goods.
Consumers value luxury goods as status symbols and are willing to pay high premiums for them. Bernstein estimates that luxury brands typically charge a markup of eight to 12 times the cost of producing their products. This makes the business of selling luxury goods very profitable. Top luxury brands have operating margins of 30% or more, while mass-market fashion brands like Gap and H&M have operating margins of about 7%.
Luxury brands are so-called Veblen products, a category of consumer products that reverses normal economic laws. If shoppers interpret price increases as a sign that a product is valuable and rare, higher prices may increase the popularity of luxury goods rather than reduce demand.
Except that’s not what’s happening today. The average luxury item is now 60% more expensive than it was in 2019, according to HSBC analysis. However, the industry is experiencing one of its most difficult times in recent years.
Sales for the eight luxury brands that have announced their third-quarter results so far have declined by an average of 4% compared to the same period last year. There is a huge gap between brands, and brands known for quality and creativity, such as Hermès and Miu Miu, still sell well. Most others are suffering. Gucci was the worst performer in the sector, with sales dropping 25% in the quarter.
The slowdown may be temporary. Chinese consumers, who have generated more than half of the luxury goods industry’s growth in recent years, are sitting on the sidelines as home values decline. But consumers are also questioning whether luxury brands are worth the prices they charge today.
Since the end of 2019, gross margins have increased across the luxury sector. This was a period when brands were raising prices at the fastest pace in decades. Louis Vuitton owner LVMH increased its gross profit by more than 2 percent during that time. Cartier owner Richemont rose 7 percentage points.
This can be partially explained by increased spending by Chinese consumers during the pandemic in mainland China, where luxury goods are more expensive. But rising gross profit margins also indicate that luxury goods companies are raising prices faster than they are investing in raw material quality.
“Prices were used as a way to address the avalanche of demand for luxury brands during the pandemic,” said Luca Sorca, a luxury goods analyst at Bernstein. “But if customers have to pay a higher price, you have to offer something new and surprising.”
One way to tell if rising prices are hurting your brand’s appeal is to look at how your brand is being discussed online. Negative comments about luxury brands increased on online platforms late this summer, coinciding with controversy over the industry’s supply chain, according to an analysis by social media data firm Brandwatch.
A Christian Dior handbag that costs about $2,800 to buy can be assembled for just $58, an Italian study found. However, consumers quickly changed their behavior and the negative chatter subsided.
However, the online conversation, especially regarding price, remains very negative. According to Brand Watch, based on an analysis of the prevailing mood of social media posts in luxury brand price discussions from January to October this year, the main emotions in over 60% of posts were anger, disgust, sadness. It was.
Indeed, luxury brands may be charging higher prices to cope with rising business strains. For the past 20 years, they have grown sales by “democratizing” access to luxury goods. By expanding into cheaper categories such as cosmetics, sunglasses and small handbags, the company has purposefully drawn in millions of new middle-class consumers.
By targeting this broad group of shoppers, the industry’s global sales have more than tripled since 2000, creating some of the greatest wealth in Europe. Bernard Arnault, the founder of LVMH, is currently the third richest person in the world. At one time his company was Europe’s most valuable stock, but it was dethroned last year by Ozempic drugmaker Novo Nordisk.
But social media has made it difficult for luxury brands to maintain exclusivity. “Social media makes it easy to see what other people are wearing, but it can be difficult if some of what you’re selling is rare,” says University of Pennsylvania says Jonah Berger, marketing professor at . “It can feel like things are becoming less scarce, and smart companies are trying to think of ways to manage this.” One way to lower the risk of overexposure is to buy products at much higher prices. The goal is to reduce the number of items sold.
The problem is that the shift to brand democratization has made brands heavily reliant on comfortable, if not wealthy, consumers for huge revenues. More than half of the luxury goods industry’s sales come from shoppers who spend less than $3,000 a year on designer products. If you alienate them by raising prices, sales will inevitably decline.
If the true art of selling luxury goods is making shoppers feel privileged to pay thousands of dollars for items that cost far more than their functional value, some brands are losing that feeling.
Email Carol Ryan at carol.ryan@wsj.com.
