How The Pandemic Pushed Up Prices On Some Luxury Goods
Rather than offer discounts, high-end brands like Chanel are asking even more for their products. Silvia Ihring, style editor-at-large for German daily Die Welt, explains why.
BERLIN — Now should be the ideal time for bargain hunters. Many clothes shops and online retailers have dropped the prices of designer items by up to 70% in a bid to shift stock that's been clogging up their warehouses throughout the coronavirus pandemic. But a few designer brands are resisting the urge to slash prices, and some are even going so far as to raise them.
Take Chanel as an example. In May, the French fashion house told Reuters that to mitigate the effects of the coronavirus pandemic, it planned to increase the price of selected bags by between 5% and 17%. The news agency also revealed that Louis Vuitton bags were more expensive in May than they had been the previous October. The Neverfull MM Monogram bag, currently sells for around $1,500, up from $1,320 in October.
Analysts from the U.S. financial services firm Jefferies reported price rises of between 5% and 9% on selected Gucci designs in the UK, China and Italy. At the beginning of July, a spokeswoman for Florence-based fashion house Salvatore Ferragamo announced that they intended to increase prices worldwide by between 5% and 7%.
These price hikes are nothing new in the world of luxury goods. "Many brands raise their prices every year, some even twice a year," says Oliver Merkel, an expert in luxury goods and partner at management consultants Bain & Company. "They do that to keep up with inflation, but they also often set prices a little above the inflation rate."
This means that some popular luxury items — Rolex watches, for example, or Hermès's famous Birkin bag — cost significantly more today than they did 10 years ago.
The virus spread and people across the globe stopped spending money on luxury items.
Even in normal times, that's not ideal for eager customers who may have scrimped for months to save up a few thousand euros so that they can own one of these status symbols. But these price hikes seem even more problematic in the context of the coronavirus pandemic, when countries across the world are seeing mass redundancies, salary reductions and companies in dire financial straits. In the middle of an unprecedented global crisis, the price of the largest model in Chanel's Classic Flap bag range, with its chain-link strap and iconic CC logo, has gone up by almost 1,000 euros, from 6,200 to 7,100 euros.
And yet, companies are pointing to the pandemic as the reason why prices are rising. It has caused severe financial difficulties for the industry as a whole, and individual brands are trying to balance out their losses. According to the latest study by Bain & Company, the market for luxury goods is set to shrink by between 20% and 35% this year.
A shopper walks with bags of purchases in New York. — Photo: John Lamparski/SOPA Images/ ZUMA Wire
The first impact was a huge drop in demand from customers in China. Then the virus spread and people across the globe stopped spending money on luxury items. Tourists from Asia, furthermore, represent a significant proportion of sales of designer fashion and accessories in Europe, and the travel restrictions spelled an end for international shopping trips. According to Chanel, the cost of raw materials has also significantly increased during the crisis.
It's difficult to judge whether these factors will justify price hikes for all brands, says Oliver Merkel. He says those companies that can afford to raise prices should be congratulated. "That means the brand's reputation is so strong that this kind of step will work for them," he explains. "Brands think very carefully about price changes."
Customers are still prepared to pay for the status and the emotional attachment associated with certain brands and products — especially those customers for whom a few hundred euros here or there won't make much difference.
"Chanel's customers are likely to be among those who haven't been hit particularly hard by the crisis," says Merkel. "We're seeing an explosion in the stock market, and property prices are rising again. Those are the kinds of industries where luxury consumers tend to work."
Customers are still prepared to pay for the status and the emotional attachment associated with certain brands and products.
While Chanel and Salvatore Ferragamo are using the effects of the crisis to justify their price rises, most brands are choosing not to comment on or explain their decisions. And with good reason, in Merkel's opinion. "Companies don't need to be defensive about this," he says. "On the contrary, they can point to the fact that they haven't made employees redundant, for example, or that they are still paying their staff's full salaries without accepting financial support from the government."
He says that those decisions are more important for a brand's image than the price of its goods. All customers know that the price of a luxury item isn't only determined by the cost of materials and production. "A pair of Gucci trainers costs around 500 euros, but its production costs are not significantly higher than a pair of Adidas trainers," Merkel explains. "People are also paying for the brand, and all the prestige it conveys."
Often the price itself sends an important message: namely, that this an especially exclusive product, desirable precisely because not everyone can own one. If the brand is well established and active in areas that are important to customers today — such as sustainability and tolerance — the price fades into insignificance alongside the larger narrative associated with the brand. That is, until it goes up again.