Fashion student You Xiaobao was instructed by his sisters to urgently purchase a couple of Louis Vuitton handbags last week in Shanghai. His sisters had learned from contacts on WeChat Moments that the brand would raise prices in September and wanted to finalise their purchases before the spike. You, who says a Louis Vuitton sales person confirmed the price hike to come, ended up spending RMB 34,600 (£3,800) in the store. (A Louis Vuitton spokesperson said the brand doesn’t officially comment on price increases.)
Chinese consumers usually hear of price hikes from luxury daigous, or “surrogate shoppers”, who alert their clients via social media like WeChat and Xiaohongshu. Spurred by price increase rumours, last week consumers were seen lining up outside Louis Vuitton, Chanel, Gucci and Hermès boutiques at Plaza 66, a high-end mall in Shanghai. Queues were reported in other cities too, including Beijing and Nanjing.
A long list of luxury brands have raised prices so far this year, particularly on popular handbag lines, which have among the highest profit margins in the industry. Louis Vuitton did it twice, in March and May, (its Alma BB Bag has jumped from RMB 9,350 in April last year, to 10,400 RMB this April, and is 10,900 RMB today) while Dior increased prices on specific products. Chanel increased prices of some handbags and small leather goods globally in May, followed by Prada in July, who said “contained, single-digit price increases” were due to logistical and manufacturing complexities. Gucci raised prices between May and June in Italy, UK and China according to a Jefferies analysis (Gucci declined to comment) and Salvatore Ferragamo confirmed a price hike in July.
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Drastic sales and footfall declines this year have pushed luxury brands to manipulate prices to recoup some of the spending lost to Covid-19 store closures, weak consumer sentiment and impaired international travel. Hikes have generally been applied globally, but the strategy works best in markets like China, where luxury consumption is recovering, demand is high and consumers are unable to travel to international markets where products may be cheaper. More price increases could come this year, but the strategy is a temporary fix: there are limits to how many times prices can go up, and once international travel resumes, brands will have to readjust, analysts say.
“There is a possibility this year of getting away with it a little bit more,” says Francesca Di Pasquantonio, managing director of equity research at Deutsche Bank. “This year, Chinese consumers don't travel to Japan or to France and therefore they don't benchmark. Next year, they might be able to.”
While a pandemic might seem an unlikely moment to increase prices, the timing is “not surprising” given the price gap between China and Europe has been coming down, says Zuzanna Pusz, head of European luxury equity research at UBS. Luxury brands have been normalising their regional pricing architectures for the past several years, which had floated above 50 per cent. In June that differential was at around 30 per cent according to UBS Evidence Lab data, a level that has allowed brands to resume price increases after a few years break.
“If your brand price differential between Europe and China is around 20 or 25 per cent, raising prices is perfectly acceptable,” says Jefferies luxury goods analyst Flavio Cereda. “If the price differential is already around 40 or 50 per cent then it's more problematic, especially when China, as a geographical region, accounts for one-third of the luxury sector.”
Strong volumes in China, both pre-pandemic and after the lockdown was lifted, with the market up 40 and 65 per cent respectively for Kering and LVMH in the second quarter, also prepared the ground for possible price increases this year. Strong volumes of product allow for it, says Pusz, as brands don’t want product to become overly distributed. But analysts warn of relying too heavily on the tactic.
“Going forward, beyond 2020, I don't see a policy of raising prices in China as sustainable,” says Cereda, adding that raising prices three or four times in a year is “a bit aggressive”. “We might see more price raises, but probably in Europe and in the US to reduce the price gap with China.”
Risks and learnings
Not all brands can afford it. “The ability to raise prices is a manifestation of brand power,” explains Cereda. Having brand heat and momentum is an essential prerequisite for a price lift, as consumers are less sensitive to price adjustments for brands they associate with exclusivity and quality.
Often, however, underperformers find themselves forced to either comply with their peers or be perceived as not having the power to do so. Price hikes, usually initiated by top performers like Louis Vuitton, Chanel and Hermès, often spur a chain reaction across the sector.
“In a situation where you have almost seen zero volume growth, which means the customer is not necessarily interested in buying your products, raising prices by a couple of percentage points is not going to make the consumer buy it more,” says Pusz. Looking at how secondhand prices respond to hikes in the primary market is a good measure of a brand’s pricing power, says Pusz. “If a specific brand has low resale value, that pretty much signals that [the brand] doesn't have pricing power.”
But even brands with strong momentum need to tread carefully, as the risks of overexploiting their good standing with consumers is always around the corner. Di Pasquantonio points at the aggressive pricing policies acted by watch brands during the Chinese boom years, between 2010 and 2014, as an example of the strategy backfiring.
“In watches, the idea was to increase prices and continue to develop rich merchandising, but when the boom ended many companies and brands had to reconsider their price and product architecture,” she says. “Many brands in the category have never recovered.”
George Arnett and Yiling Pan contributed reporting to this story.
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