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It may be news to many that luxury goods have some kind of value proposition. When the prices of supermarket staples rise faster than the prices of raw materials, consumers are quick to decry greedflation. But for people who already pay ridiculous amounts of money for handbags and watches, it’s hard to understand when it’s too much. But nevertheless, there are convincing signs that post-pandemic price increases in the luxury goods sector are reducing its attractiveness.
Bernstein analysts estimate that between 2020 and 2023, global like-for-like prices for select “evergreen” products at LVMH-owned Dior rose 66%, with Chanel following suit. There is. At the other end of the spectrum, industry leader Hermès limited the increase to 20%.
This trend has been largely responsible for the sector’s margin expansion over the past few years. According to HSBC statistics, operating profit increased from 21% of sales in 2019 to 26% in 2022. The problem is that it is now being solved. Pricing has turned from a tailwind to a headwind as consumers tighten their grip.
Many brands have already stopped raising prices. Some people have gone the other way. And brands don’t necessarily have to discount to reduce profit margins. They just need to introduce more entry-level products that are cheaper. Overall, average selling prices for luxury goods fell 3% in the second quarter, and handbag prices fell 6%, according to Bernstein analysis of Lyst data.
Not all brands are affected equally. According to HSBC, Hermès managed to achieve an 8-9% price increase in the first two months of this year through a combination of restraint and popularity. Moncler and Prada, which were among the companies that raised prices most sharply after the pandemic, did so from a lower base. Recent performance suggests they have not (yet) succeeded in pricing their customers. Conversely, Burberry has been relatively conservative with its traditional product lines. However, prices for the new collection were significantly higher, and sales volumes were down 21% in the second quarter of this year.
Overall, the decline in pricing power suggests that the long-awaited return of luxury goods will take a long time. Investors have rallied more than 10% into the sector on hopes that China’s stimulus measures will help the economy recover. It’s not that simple.
camilla.palladino@ft.com
