The departure of Chanel’s top designer last Thursday has sent shockwaves through the $1.62 trillion luxury goods industry at a time when all major global players find themselves at crossroads.
The playbook of the world’s top fashion brands, such as privately owned Chanel and LVMH-owned Louis Vuitton and Dior, has been to massively market new designs from their high-profile designers, increasing retail prices significantly.
Major luxury companies have increased product prices by an average of 33% since 2019. This accounted for half of the industry’s organic sales growth over the past two years, RBC estimates.
As the cost of living rises around the world, shoppers have become more demanding, challenging companies’ core strategies.
Chanel, the second-largest luxury brand after Louis Vuitton, posted sales growth of 16% last year to nearly $20 billion, double its revenue a decade earlier. The price increase accounted for more than half of the increase.
Chanel designer Virginie Viard, who worked alongside Karl Lagerfeld and succeeded him after his death in 2019, made her mark on Chanel with her light, Eighties-flavored interpretations of the brand’s famous tweed ensembles . Thursday’s news of Viard’s departure sparked speculation about who will replace her.
Like many other luxury companies, Chanel has significantly increased prices since the pandemic, with the classic flap bag costing more than double, over 10,000 euros ($10,800).
Earlier this month, Chanel warned that it was entering a more difficult environment and had to increasingly defend its high prices.
“I think the whole industry has pushed prices too far,” said Erwan Rambourg, an analyst at HSBC.
“Even die-hard Chanel fans criticize the multi-year price hike of the brand’s handbags,” added Monika Arora, founder of fashion website PurseBop.com.
Investors in Chanel’s publicly traded rivals are also wondering whether the industry’s steep price increases are a sign of a lack of fresh ideas.
“Investors fear that price increases may have driven away or alienated consumers and that brands have limited growth levers in the near term,” said Carole Madjo, head of European luxury goods research at Barclays.
Luxury executives have only recently begun to recognize that the crisis has significantly reduced the number of shoppers who can afford high-end designer belts, bags, shoes, wallets and clothes.
LVMH chief financial officer Jean-Jacques Guiony said in April that the “aspirational customer” without large fortunes “must adapt to this new normal; it won’t take 5 minutes.”
“When you raise prices, well, there has to be a reason behind it,” LVMH President and CEO Bernard Arnault told analysts in January. “The product has to justify this.”
Further price increases may be difficult to justify.
In a rare move, Chanel rival Saint Laurent, a brand owned by Kering, lowered prices of the Loulou small bag and Classic Cassandre chain wallet, Barclays analysts said, noting that previous price increases could being too aggressive.
Competitor Gucci, also owned by Kering, is increasing the number of super-expensive products in its collections. However, it also hopes to attract less affluent and aspirational shoppers with utilitarian products like $200 ankle socks with neat stripes.
Bigger brands need to target younger, more aspirational shoppers, as well as the ultra-wealthy and resilient, Rambourg said. “When you sell more than 10 billion euros ($10.80 billion) of products a year, it’s not a forced choice.” (1 dollar = 0.9259 euros) (Reporting by Mimosa Spencer; Editing by Richard Chang)
