By Mimosa Spencer
PARIS (Reuters) – The departure of Chanel’s top designer early Thursday sent ripples through the $1.62 trillion luxury goods industry at a time when all major global players are at a crossroads.
The playbook of the world’s top fashion labels, such as privately held Chanel and LVMH-owned Louis Vuitton and Dior, has been to heavily market new styles from their high-profile designers while significantly increasing retail prices.
Major luxury companies have increased their product prices by an average of 33% since 2019. That was responsible for half of the organic sales growth over the past two years, RBC estimates show.
As the cost of living rises around the world, consumers have become more discerning, putting companies’ core strategies to the test.
Chanel, the largest luxury label after Louis Vuitton, reported 16% sales growth last year to nearly $20 billion, doubling sales a decade earlier. Price increases were responsible for more than half of the increase.
Chanel designer Virginie Viard, who had worked alongside Karl Lagerfeld and succeeded him after his death in 2019, made her mark at Chanel with breezy, 1980s-esque renditions of the label’s famous tweed ensembles. News Thursday of Viard’s departure led to speculation about who will replace her.
Like many other luxury companies, Chanel has significantly raised prices since the pandemic, with the classic flap bag costing more than double: more than 10,000 euros ($10,800).
Earlier this month, Chanel warned that the company was entering a more difficult climate and increasingly had to defend its high prices.
“I think the whole sector has pushed prices too far,” said HSBC analyst Erwan Rambourg.
“Even die-hard Chanel fans are criticizing the brand’s multi-year spike in bag prices,” said Monika Arora, founder of fashion website PurseBop.com.
Investors in Chanel’s listed rivals are also wondering whether steep price increases in the sector indicate a lack of fresh ideas.
“Investors are concerned that price increases have priced out or alienated consumers and that brands will have limited growth opportunities in the short term,” said Carole Madjo, head of European luxury research at Barclays.
Luxury executives have only recently begun to realize that the recession has significantly reduced the number of shoppers who can afford expensive belts, bags, shoes, wallets and designer clothes.
LVMH Chief Financial Officer Jean-Jacques Guiony said in April that the “aspiring customer” without vast fortunes “must adapt to the new normal; it won’t take five minutes.’
“If there are price increases, there should be a reason for it,” LVMH Chairman and CEO Bernard Arnault told analysts in January. “The product must justify this.”
Further price increases may be difficult to justify.
In a rare move, Chanel rival Saint Laurent, a Kering-owned label, cut prices on its Loulou bag and Classic Cassandre chain wallet, Barclays analysts said, noting that previous price increases may have been too aggressive been.
Competitor Gucci, also owned by Kering, is expanding the number of super expensive products in its collections. Still, it also hopes to appeal to less affluent, aspirational shoppers with practical products like $200 ankle socks with neat stripes.
Larger brands should target both younger, more aspirational consumers and the resilient, ultra-wealthy consumers, Rambourg said. “When you sell more than 10 billion euros of products per year, it is not an either/or.”
($1 = 0.9259 euros)
