Luxury prices in the spotlight as Chanel enters a new chapter

The departure of Chanel's top designer early Thursday sent reverberations through the $1.62 trillion luxury goods industry at a time when all major global players are at a crossroads.

The playbook for the world's leading fashion brands, such as privately held Chanel and LVMH's Louis Vuitton and Dior, has been to aggressively market new styles from their high-profile designers while significantly increasing retail prices. .

Major luxury companies have raised product prices by 33% on average since 2019. That accounted for half of the industry's organic sales growth over the past two years, RBC estimates show.

As the cost of living soars around the world, shoppers have become more demanding, challenging companies' core strategies.

Chanel, the second-largest luxury brand after Louis Vuitton, reported sales growth of 16% last year to nearly $20 billion, double revenue from a decade earlier. Price increases 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 at Chanel with playful, '80s-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 increased prices considerably since the pandemic: the classic flap bag costs more than double, to more than 10,000 euros ($10,800).

Earlier this month, Chanel warned that it was entering a more challenging environment and had increasingly had to defend its high prices.

“I think the whole industry took prices too far,” said HSBC analyst Erwan Rambourg.

“Even the most die-hard Chanel fans criticize the rising prices of the brand's bags for several years,” added Monika Arora, founder of the fashion website PurseBop.com.

Investors in Chanel's publicly traded rivals also wonder whether the sector's sharp price increases indicate a lack of new ideas.

“Investors are concerned that price increases may have discounted 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 just begun to acknowledge that the crisis has significantly reduced the number of shoppers who can afford expensive designer belts, bags, shoes, wallets and clothing.

LVMH CFO Jean-Jacques Guiony said in April that the “aspirational customer” without large fortunes “has to adapt to this new normal; it won't take five minutes.”

“When there are price increases, well, there should be a reason behind it,” LVMH Chairman and CEO Bernard Arnault told analysts in January. “The product must justify it.”

It could be difficult to justify further price increases.

In an unusual move, Chanel rival Saint Laurent, a brand owned by Kering, lowered prices on the small Loulou bag and the Classic Cassandre chain wallet, analysts at Barclays said, noting that previous price increases could have been too aggressive.

Its competitor Gucci, also owned by Kering, is increasing the number of very expensive products in its collections. However, it also hopes to attract less wealthy aspirational shoppers with utilitarian products such as $200 ankle socks with stylish stripes.

Bigger brands must cater to younger, more aspirational shoppers, as well as the resilient ultra-wealthy, Rambourg said. “When you sell more than €10 billion ($10.8 billion) worth of products a year, it's not a question of either/or.”