Kering: Luxury brands are finding it increasingly difficult to justify soaring prices, and the stock market is worried

(BFM Bourse) – The luxury sector is evolving in a difficult environment, its clientele, previously less concerned about prices, is beginning to rebel against price increases in a context of inflation. Investors are asking questions about the ability of large listed houses to activate other growth levers.

If the departure of Chanel’s artistic director has shaken the luxury industry so much, it is because it now finds itself at a crossroads, between very high prices and slowing demand.

The biggest fashion brands like Chanel or even Louis Vuitton and Dior (LVMH) rely on the reputation of their artistic director to market their new models and considerably increase sales prices.

Since 2019, major luxury players have increased the prices of their products by 33% on average. That accounted for half of the industry’s organic sales growth over the past two years, according to estimates by RBC analysts. But as the cost of living has skyrocketed around the world, consumers have become more demanding, questioning these pricing strategies.

At Chanel, which now sells its classic quilted bag for more than 10,000 euros, we recognize that the environment is becoming more and more difficult, which requires us to further defend high prices.

“I think the whole sector has pushed prices too far,” said Erwan Rambourg, analyst at HSBC. “Even die-hard Chanel fans are criticizing the multi-year surge in prices for the brand’s bags,” says Monika Arora, founder of the fashion website PurseBop.com.

A pricing strategy that gets stuck

Investors in Chanel’s publicly traded rival brands are also wondering whether the sector’s sharp price increases are a sign of a lack of new ideas.

According to Carole Madjo, head of European luxury research at Barclays, “investors fear that price increases have excluded or alienated consumers and that brands have limited growth levers in the short term.” .

Industry executives have only recently begun to recognize that the cost-of-living crisis has significantly reduced customers’ purchasing power. The “customer who aspires to luxury”, not very fortunate, “must adapt to this new normal and it will not take 5 minutes”, remarked in April the financial director of LVMH, Jean-Jacques Guiony.

LVMH Chairman and CEO Bernard Arnault told analysts in January: “When you increase prices, there has to be a reason behind it.” “The product has to justify it.”

In a rare move, Chanel rival Saint Laurent, a Kering-owned brand, lowered the prices of the small Loulou bag and the Cassandre Classic chain wallet, note Barclays analysts, who say previous price hikes have may have been too aggressive.

Gucci, another Kering house, is increasing the number of very expensive products in its collections but at the same time offering basic products, such as designer socks for $200, to attract less fortunate buyers.

Big brands must address younger consumers, as well as ultra-wealthy and resilient customers, analyzes Erwan Rambourg at HSBC. “When you sell more than 10 billion euros of products per year, this is not an option,” explains the specialist.

(With Reuters)

SS – ©2024 BFM Bourse