When will the consumer cry “uncle!” with regard to luxury prices?
With the richest 1 percent of the world’s population getting wealthier, luxury products still sell out at ever-higher prices. And yet there are signs — increased competition from labels offering a lower entry price point; European consumers no longer being able to afford luxury brands, and Japanese customers turning their back on luxury products — that brands should be cautious.
Is luxury killing the goose that laid the golden egg? Not necessarily.
Roger Vivier’s Rendez Vous special-edition shoes for this fall retailed at $2,000, versus $600 for the simple flats. “They barely made it to the stores because they were sold out to VIP clients,” said Victoria de la Fuente, Holt Renfrew account executive at the buying office Lambert & Associates.
Related Articles
In October, Vertu launched its new Aster mobile phone, which retails at up to 5,900 pounds, or $9,437 at current exchange, for the version that features more-exotic materials, such as ostrich leather. The maker of luxury smartphones wouldn’t put the product on the market if it didn’t think the product would sell. And last season, there was a waiting list for Fendi’s Karlito bag charm that costs $1,685.
“If there is any trend, it is to buy up, buy more special, buy higher quality,” said de la Fuente. For spring, she bought pieces from Givenchy’s pricy ready-to-wear collection; Céline’s summer coats, which retail at around $3,000, and Saint Laurent’s stage jackets, selling at around $5,000. “They usually do very well for us.”
The 1 percent’s global wealth has grown to a new record, rising by 8.3 percent to $263 trillion — or a $20.1 trillion hike — between mid-2013 and mid-2014, according to a Credit Suisse report on global wealth published in October. The richest 1 percent of the world’s population owns more than 48 percent of global wealth, according to the report, which warned that growing inequality could be a trigger for recession.
“The average price for a designer handbag rose from $1,500 at retail in 2007 to over $2,000 now,” observed de la Fuente. She also cited designer sunglasses doubling from an average $200 in 2007 to $450 now. “Carrie Bradshaw’s Manolo Blahnik stilettos were around $500 in 2000. Designer shoes are now more like $1,000.”
“The industry has been very smug about its pricing power. Historical analyses show that luxury products have experienced price inflation above general consumer price index,” according to a report issued on Oct. 31 by Exane BNP Paribas.
The report, prepared by Luca Solca, Paola Bertini and Hui Fan for institutional investors, cautions that, going forward, this could pose a few significant problems. One risk for luxury players is to create a “price umbrella” for entry-price competitors that offers a greater value proposition, according to the report.
“Accessible luxury brands like Michael Kors are creating a more competitive environment for luxury incumbents, including Gucci and Louis Vuitton,” explained Madelaine Ollivier, luxury analyst at Ledbury Research.
Consumers are getting more price-savvy, pointed out Ollivier, noting that the brands that add the best experience in the custom-made area will stand out. She praised Bottega Veneta, which took its artisans from Italy to New York for three days to offer customers an experience of the company’s customized service, with a focus on adding hand-stitched crocodile-skin initials to select bags. Customers were invited to watch the craftsmanship involved.
Consumers from emerging markets buy European luxury brands as a way to capture European flair, and brands that embrace price inflation risk pricing their products out of the reach of their historic European consumer constituencies and altering their identities, the Exane BNP report warns.
“The entry price point of luxury goods is the most important decision that houses need to make nowadays,” said Pierre-François Le Louët, president of French trends agency NellyRodi. “Even if there is a slowdown in China’s growth, the Chinese are buying the European lifestyle, excellence, a vision of France, of creation and tradition. Europeans can no longer afford these products.”
Exane BNP Paribas’ report highlights the fact that leading brands are out of sync with major socio-demographic trends. This holds particularly true for the Japanese market, according to Le Louët. “Cheap is chic in Japan,” he deadpanned, adding that, since the Fukushima nuclear reactor disaster, there is a shift to more necessary spending. “This is disconcerting to the luxury brands.”
Luxury prices haven’t reached their limit yet, he said, with markets such as Indonesia, the Philippines, the Arab world and the U.S. seeing growth. “The other very important decision that brands need to make is where to put their focus, where to expand and where to shut down [doors],” he advised.