Luxury’s Pricing Reality Check | BoF

There is a growing consensus that rampant price inflation has weakened luxury’s value proposition, contributing to a collapse in demand. And leaders are starting to take action.

This week, British handbag brand Mulberry — a longtime champion of “accessible luxury” — signalled it was no longer accessible enough. Amid falling sales and widening losses, new CEO Andrea Baldo said the company would retool its merchandising to bring most of its bags below the threshold of £1,100 ($1,375), where its flagship Bayswater style sits. New designs had been more expensive in recent years, following the lead of top luxury names.

“We were asking the customer for a little bit too much,” Baldo told Bloomberg. Going forward, the idea is to focus on providing “value for market in the luxury space.”

Capri Holdings, the ailing owner of American accessible luxury giant Michael Kors, struck a similar tone on an investor call earlier this month. The brand “attempted to elevate price points too quickly over the last two years in accessories, footwear and ready-to-wear,” chairman John Idol said. “Simultaneously, we significantly reduced our signature product offering and inventory levels while injecting too much fashion for our core consumer. As a result, we had to promote deeper to drive sales.” Italian stablemate Versace will lower average prices, too. “Broader assortments with price points targeting aspirational luxury consumers are being introduced this quarter,” Idol added.

The comments follow Burberry’s move this summer to install a CEO with a more accessible, American take on luxury: Joshua Schulman, formerly chief executive of Coach. While continuing to brush off the notion that Burberry would downgrade to the accessible luxury segment, Schulman has said the brand went too far in its effort to reposition as a top luxury name, particularly in leather goods where it is less credible. “In terms of pricing, these past few years we have been very focused at the top of the pyramid, especially in leather goods,” he told investors at a Nov. 14 strategy update.

During the past two years, Burberry’s previous management initially defended price increases as a matter of keeping up with the Joneses — benchmarking against French and Italian luxury brands as part of its elevation strategy — before struggling to recalibrate merchandising fast enough to stem falling sales. Going forward, most bags will be priced under €2,000. “This is where we have had strong success in the past and where we were about 18 to 24 months ago,” Schulman said.

Burberry, Michael Kors and Mulberry’s comments come as no surprise, as the notion that prices are simply too high takes hold across fashion. Industry insiders increasingly agree that the sector’s slowdown is, in part, linked to a price-valuation equation that’s out of sync with reality.

More accessible luxury players like Mulberry, Michael Kors and Burberry have more leeway to address the situation head-on, as their chief executives’ recent comments show.

For pure luxury players currently taking a hit — including Kering, LVMH and Richemont — the way forward is less clear. Luxury products are meant to be expensive; that they should feel like a stretch for all but the wealthiest consumers usually goes without saying.

But even rich people don’t want to be taken for a ride. And data supports the notion that brands have pushed prices too far, too fast. Over the past 50 years, brands have historically raised prices by 5 to 7 percent annually, already more than twice the rate of inflation. Since the pandemic, most brands raised prices even faster, by a double-digit percentage annually, a Nov. 21 report by Bernstein found.

“Like-for-like price inflation has been out of whack in the post Covid-19 pandemic years … Price inflation — especially in soft luxury — has been significantly ahead of its long-term average, and well in the double digits. Brands like Chanel have led this escalation, but most have followed,” analyst Luca Solca said in the report.

“Price increases have cut off middle class aspirational consumers from the core products of top brands,” he added. “This is particularly the case in handbags, where finding regular size products at less than $3,000 from reputed brands has virtually become impossible.”

The dramatic increases were symptomatic of the industry’s complacency — as if the post-pandemic boom would continue forever — as well as the result of overreliance on benchmarking, with executives believing they can sell items at higher prices simply because that’s what others are doing.

The continued outperformance of Hermès, which has raised prices by around 20 percent since the pandemic compared to an industry average of close to 40 percent, is surely linked to a more favourable, stable impression of value-for-money offered by the French brand.

What can top luxury players do next? Lowering prices isn’t an option (at least not publicly), and brands are loath to bring back end-of-season markdowns that took years to phase out. Even talking about the notion of value-for-money feels antithetical for brands with a top-end positioning.

In an October investor call, LVMH brushed off the idea that it should adjust its prices to cope with the current slowdown. “The current situation is more demand driven than offer driven,” Guiony said. “Addressing short-term issues such as aspirational customers being less present than they used to be by, for instance, introducing a new range of very affordable products — I think it would be a mistake.”

Still, analysts expect most luxury brands to make an effort to boost more affordable propositions. In September, Gucci released a new range of monogram canvas bags priced around $2,000, dubbed Emblem, as well as following up its $4,000 Blondie bag with a $1,250 chain wallet declination.

The rapid pace of designer changes in recent months suggests luxury houses are also betting on a creative jolt to keep up demand while waiting out the slowdown — and waiting for customers to get used to higher prices. New creative directors at Fendi and Chanel (yet to be announced) or Givenchy and Tom Ford (both set to debut in February) could introduce novel products (some of which may be more accessibly priced) as well as telling new stories to keep fashion audiences engaged in what brands have to say at a moment where what they have to sell is falling flat.

“What can we do in this context? First of all, emphasise product innovation. I know it’s not the easiest growth driver to model, but it is one of the most impactful,” LVMH’s Guiony said. “We have the skillset to harness the creativity of our talent pool and translate it into commercial success.”

THE NEWS IN BRIEF

FASHION, BUSINESS AND THE ECONOMY

Mytheresa reports profit growth in the latest quarter. The German e-tailer’s sales grew 8 percent to €202 million ($214 million) in the first quarter of its fiscal year that ended in September. The company generated €5 million in adjusted net profits during the quarter, up from a €3 million loss a year earlier.

Mulberry bets on lower handbag prices. Mulberry Group Plc is aiming to sell most of its luxury handbags for less than £1,095 ($1,383) to broaden the struggling brand’s appeal and boost sales. “We were asking the customer for a little bit too much,” CEO Andrea Baldo said.

LVMH’s Antoine Arnault reveals plans for Paris Football Club. The Arnault family is investing through its holding company Agache and will own 52 percent of the club after the upcoming closing of the deal, a stake that will reach 80 percent in three years.

JD Sports shares slump 14 percent after profit warning. Mild weather and discounting by rivals hit sales at JD Sports in October. The gloomy update sparked a sell-off among investors, sending shares down 14 percent.

Temu owner PDD’s sales slow sharply after China market sputters. PDD, which competes with Alibaba Group Holding Ltd., said its team was struggling to catch up with unspecified rivals because of a lack of expertise. Shares plunged after warning that its profitability will trend downward over time because of intensifying competition in China.

Frasers calls for the removal of Boohoo director Mahmud Kamani. The group accused Kamani of presiding over a “multi-year share price collapse and value destruction” in an open letter. Frasers repeated its demand for board seats, pushing for its founder Mike Ashley and restructuring expert Mike Lennon to be installed.

Kiko Kostadinov opens first US store in Los Angeles. The 1,500-square-foot space, the brand’s second permanent store worldwide following one opened in Tokyo’s Harajuku in March, will be in the Melrose Hill gallery district.

UK creative industries’ union rings alarm on fashion sector work. Nearly 80 percent of creatives working in the UK’s fashion sector have felt pressure to work for free. Only 14 percent say they get paid on time for the work that they do, according to a new survey by Bectu and Fashion UK.

THE BUSINESS OF BEAUTY

E.l.f Beauty shares drop following short seller report. CEO of Muddy Walters Capital Carson Block suspects E.l.f Beauty has overstated revenue in recent quarters. Block suggests that a build up in the beauty company’s inventory was due to lacklustre sales.

Novo Nordisk launches Wegovy in China with prices well below US. Initial prescriptions for the drug are expected to be issued in Shanghai this week. Wegovy is also listed as available for pre-orders on several e-commerce platforms where patients can register for clinical visits to assess their eligibility.

Clean Skin Club raises $32 million. The funding round was led by US-based growth equity fund Astō Consumer Partners. The brand known for its disposable face towel, will use the investment to continue its retail expansion, hire top beauty industry talent, and develop new technology.

PEOPLE

Kering names new CEOs at Saint Laurent and Balenciaga. The company is shaking up its executive ranks again amid sliding sales. Balenciaga chief Cédric Charbit will lead Saint Laurent, and Gianfranco Gianangeli take the helm of his vacated post.

Reliance Brands Limited CEO likely to step down. Darshan Mehta is expected to leave his post as the company’s president and chief executive, according to a The Times of India report. Mehta will transition into an advisory role at ultimate parent company Reliance Industries Limited (RIL).

The Ordinary CEO Nicola Kilner to step down. Kilner, the brand’s co-founder and longtime chief executive of Deciem, the parent company of The Ordinary, will step down from her role at the end of the year. Jesper Rassmussen, the company’s general manager will be promoted to global brand president.

MEDIA AND TECHNOLOGY

Harper’s Bazaar debuts new podcast ‘The Good Buy.’ The magazine’s executive editor Leah Chernikoff and executive digital director Lynette Nylander will host the show, inviting a different guest each week. The series will kick off with a premiere episode on Nov. 22 featuring actor and founder of hair care brand Pattern, Tracee Ellis Ross.

Compiled by Yola Mzizi.