Why Birkins are still hot property despite inflation: as Hermès looks to raise prices by up to 10 per cent, can luxury brands like Gucci, Dior and Chanel do the same and still keep their customers?
Brushing off higher prices, affluent spenders are continuing to splash out on luxuries including US$10,000 handbags, high-end perfumes and premium drinks, according to recent trading updates from Birkin bag maker Hermès, Gucci owner Kering, cosmetics giant L’Oréal and spirits company Pernod Ricard.
Yet with prices set to rise further, analysts are asking how long the boom can last before even the wealthy decide they must tighten their belts.
Hermès and Pernod Ricard both said they would continue to raise prices due to higher costs, after beating expectations in the July-September quarter. Business was boosted by Americans returning to Europe and Asia and taking advantage of the strong dollar.
Mainland China also saw a strong rebound for Hermès and Pernod after Covid-19 restrictions were lifted, although some curbs have since been reimposed.
Disruptions in the key Chinese market caused by repeated Covid-19 lockdowns weighed more heavily on business for Kering and L’Oréal, with sales at Kering’s star brand Gucci in particular declining in the quarter.
Stick to long-standing luxury brands
Analysts were looking closely for signs that the post-pandemic spending boom could ease after months of robust appetite from shoppers drawing on pandemic savings to treat themselves to designer labels and champagne.
Top executives largely brushed those concerns aside.
“It’s an industry that has experience of situations of uncertainty, but we have a lot of ammunition … no matter what factors might weigh in the near- and medium-term, perspectives in the long-term remain solid,” said Kering finance chief Jean-Marc Duplaix.
Duplaix said that while business with high US spenders was strong, some cheaper products liked by so-called “aspirational” consumers were doing less well.
Some analysts expect the industry’s sales growth to begin to slow in the fourth quarter or starting next year, with the strongest labels likely to grab market share as consumers flock to best-known names.
Flavio Cereda, an analyst at Jefferies, predicted stronger labels like Chanel, Hermès, Louis Vuitton and Dior, as well as some smaller brands like Moncler, will accelerate market share gains in the final part of the year.
“All told, this higher end of the market is far more attractive than other consumer discretionary companies in the current climate,” said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, referring in particular to Hermès. “Higher net worth consumers are far less likely to be impacted by difficult economic conditions.”
Jefferies forecasts 13 per cent sales growth for the industry this year and seven per cent next year.
Price hikes everywhere
Pernod Ricard, which raised prices by around seven per cent globally over the quarter, said its confident sales growth would continue through its 2023 financial year, as consumers trade up to its premium spirits.
Hermès, which has waiting lists for its prized US$10,000-plus handbags, plans to raise prices sharply next year, by five to 10 per cent, following in the footsteps of rival luxury giants which increased prices throughout the pandemic.
Both Hermès and Kering flagged that suppliers were under pressure from soaring inflation, including raw materials and energy costs.
Companies catering to less affluent consumers have so far also been able to pass on price increases, trading updates from the world’s two biggest consumer firms, Nestlé and Procter & Gamble showed in October. Shoppers continued to pay more for goods like Nescafé coffee and Gillette razors, despite surging inflation.
- François-Henri Pinault, CEO of the luxury group behind Gucci, recently shook off worries that wealthy consumers would stop spending on ever more expensive items amid inflation
- Hermès still has waiting lists for its prized US$10,000-plus handbags, as higher net worth consumers are far less likely to be impacted by difficult economic conditions