When LVMH announced it would be raising prices this year, Bernard Arnault, Chairman and CEO of LVMH Moët Hennessy, explained that this was to protect profit margins, to which the group was seen reaping strong growth in return despite the volatile market. Little surprise that this month, Dior has raised its bag prices by up to 20 percent, at an average increase of 300 (2,000 RMB) — its second price adjustment of the year.
Rival house Chanel has also been sparking rumors of an impending price hike: Its Classic Flap and Classic Mini Square Flap handbags were seen updated with new prices on the brand’s Hong Kong website but then quickly revised as a technical glitch. This comes after the French luxury label drastically raised its price tags by 60 percent over the past year.
Beauty and fragrances have not been spared either. International brands such as Estée Lauder and La Mer increased their prices by 5 percent this month despite stagnant growth in cosmetics and COVID-19 restrictions in Shanghai.
Like with all industries, rising labor costs, production issues, and supply chain bottlenecks have seen luxury brands pass the increased costs of goods to customers. However, with the looming economic downturn and rising inflation, consumers are tightening their purse strings with crumbling consumer confidence. Despite this, the luxury scene continues to capture high-net-worth individuals (HNWI). Designer handbags and expensive skincare are still indulged and if anything, are protected against inflation as they are viewed as prized investment pieces.
But when brands push their prices too high, are the middle class eliminated from the world of luxury?
A few years ago, luxury handbags were abundant and attaining one was a realistic dream for the middle-class worker. Now, luxury brands are taking back the reins by running the scarcity strategy, inevitably elevating the brand’s exclusivity. But as inflation rages on, brands face a shrinking customer base as products become unattainable for the masses. With fewer cardholders and more crocodile bags in the merchandise, the remaining clientele walking through the door are HNWIs leaving with big-ticket items.
Still, the cyclical pattern of luxury brands raising their prices multiple times a year is trying, even repelling these high-income earners. Although HNWIs can still afford these more expensive products, loyal customers perceive the price hikes as unjustifiable, causing some to abandon the brand. Highlighting how price does not match up to value, one Chinese netizen on Weibo commented on Dior’s recent increase: “Isn’t it a bit forceful for Dior to raise its prices? RMB 38,000 for a mini Lady Dior — is it really worth it? The brand doesn’t have Chanel’s status, only the Chanel syndrome.”
As new items become unreachable for the working class, the secondhand market has started to boom in China. Where once Asians perceived secondhand goods as hand-me-downs, iResearch has identified that more consumers have been trading in their bags, with the expected total value of used high-end goods in the domestic market to reach 578.5 billion (3.9 trillion RMB) by 2025. This sector is now threatening the dominance of first-hand consumption.
This means that luxury brands cannot just rely on the HNWIs and push out aspirational customers. In recent years, they have expanded their lines to become more accessible by launching entry-level products at lower prices as seen with sneakers, eyewear, and small accessories. Labels have also been partnering with commercial brands, such as Prada launching its Re-Nylon collection with Adidas and Gucci following suit shortly, both tapping the streetwear category.
Labels have also been able to reach the Gen-Z segment through digital versions of bags and apparel for avatars in games and the metaverse. Equally, lines are able to reap high margins from the sale of digital assets (which sometimes cost as much as their physical counterparts) as NFTs become a new form of collectibles for consumers to flex.
Dancing with inflation, brands must back up their price tags with quality and value. As China’s youth contemplate the “lying flat” movement and the desire for materialistic goods dwindles, houses need to create exclusive experiences aside from the standard pop-up stores and art exhibitions. Creating new store formats at exotic destinations with extraordinary experiences is the strategy to reignite consumption. For example, Prada’s Rong Zhai villa invites guests to explore the meticulous architectural restoration of its historical residence in Shanghai and enjoy zen outdoor activities such as gardening, horticulture, camping, coffee, and mixology workshops. Showcasing strong and inspirational visuals of the brand helps to emphasize the quality of Prada's goods and entice consumers to purchase timeless classics for a lifetime of use.
Yet, no matter how often a luxury name raises its prices, realistically there is low resistance being met. In three year's time, China is still expected to become the world’s largest luxury goods market, as reported by Bain & Co. For the Asian shopper, less is more; when stock is scarce, shoppers feel a sense of accomplishment when they are able to purchase an exclusive item based on their status and relationship with the brand — almost like a gamified experience in itself.