Struggling demand amid rising prices in luxury sector

The departure of Chanel's creative director has deeply shaken the luxury industry, underscoring its current situation between exorbitant prices and slowing demand. Major fashion houses such as Chanel, Louis Vuitton and Dior (LVMH) rely heavily on the prestige of their creative directors to market new designs and substantially increase their retail prices.

Since 2019, major luxury brands have increased the prices of their products by an average of 33%. According to RBC analysts, this represented half of the sector's organic sales growth over the past two years.

However, as the global cost of living has skyrocketed, consumers have become more demanding and have challenged these pricing strategies.

Chanel, which now sells its iconic quilted bag for more than €10,000, recognizes that the market environment is increasingly challenging and requires a stronger justification for high prices.

“I think the whole sector has pushed prices too far,” said HSBC analyst Erwan Rambourg.

“Even the most die-hard Chanel fans have been critical of the brand's handbag price increases for several years,” agrees Monika Arora, founder of the fashion website PurseBop.com.

Lack of new ideas?

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

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

Industry leaders have only just begun to recognize that the cost of living crisis has significantly reduced customers' purchasing power.

The “aspirational luxury customer,” who is less wealthy, “must adapt to this new normal, and it won't happen overnight,” LVMH Chief Financial Officer Jean-Jacques Guiony said in April.

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

In an unusual move, Chanel rival Saint Laurent, owned by Kering, has lowered prices on the small Loulou bag and the Cassandre Classic chain wallet, according to analysts at Barclays, who suggest previous price rises may have been too aggressive.

Gucci, another Kering house, is increasing the number of high-priced items in its collections while offering basic products, such as designer socks for $200, to attract less affluent shoppers.

Luxury brands must cater to younger consumers as well as ultra-wealthy and resilient customers, said HSBC's Erwan Rambourg. “When you sell more than 10 billion euros in products a year, it is not optional.”