After years of price hikes, luxury goods firms are now facing new pressure on their profitability.
A FT article stated that industry data showed up to 40% of luxury items were discounted last year. This impacted margins in the entire sector.
Bain, a consultancy, and Altagamma (the Italian association of the luxury goods industry) estimate that 35-40% of luxury items will be sold for knockdown prices by 2025. This is an increase in percentage terms compared to a decade ago.
The industry’s growing dependence on discounting has driven the margins down to their lowest levels in 15 years. This is excluding Covid-19, and comes amid a general slowdown of demand for designer products, from handbags to shoes.
Outlet stores are becoming more popular than boutiques for full-priced purchases, a sign of a change in consumer behaviour.
Luxury brands that traditionally sought to control their pricing and positioning are less likely to discount in-store.
When consumers stop paying full price for luxury goods, this is not a sign that they are being frugal, but rather a message to the industry about how its price-to value equation has become out of balance.
Post-pandemic price hikes test consumer tolerance
Luxury brands raised their prices dramatically during the sales boom that followed the pandemic, increasing profits in the short-term.
Bain estimates that luxury goods are priced between 1,5 and 1,7 times more than in 2019.
The industry has a smaller pipeline of hit products, which makes it more difficult for brands to justify their higher price points.
Discounts are becoming more important to an industry which has been trying for years to limit its exposure to discounted and wholesale sales channels in order to maintain control of how their products are presented and priced.
Buyers in the industry have already adjusted their strategies to respond.
My customers prefer contemporary brands and emerging designers because they have a high fashion value but a lower price than big luxury names. In the report, a buyer from a large European department store said that he was spending more money on emerging designers and contemporary brands.
Some believe that the recent introduction of a new creative director at luxury brands such as Gucci, Chanel and Dior could bring a fresh perspective to collections.
This buyer also said that these changes would bring “new life” to the high-end houses of design, though he cautioned the designers about the challenges they still faced.
The buyer stated that “early signs of creativity were promising, but we will have to determine if they are enough to justify cost.” He added that new arrivals needed to be given time to adjust before they could build up momentum around so-called hero items.
Margin shrinks as spending and costs increase
Heavy discounting has taken its toll. Bain estimates personal luxury products have returned to margins last seen in 2009.
The average operating margin peaked in 2012 at 23% and reached 21% by 2021. However, it is expected that the margins will decline to 15-16% around 2025.
Cost increases and the need to continue investing in marketing has added stress.
In response, several major luxury groups cut costs and revised their global footprints.
Kering is the parent company of Gucci and Saint Laurent and has had a poor performance in the last few years. The new CEO, Luca de Meo, will be conducting a review of its portfolio.
The company is trying to reduce costs by reducing its retail network.
LVMH, the market leader, has taken measures to reduce spending. These include reducing advertising campaigns, cutting travel expenses, and closing stores that are underperforming, especially in China.
It has also continued to invest heavily in projects of high profile, such as the large Shanghai flagship shaped like cruise ships, opened last year.
The FT reports that Chanel will reduce marketing expenditures and slow hiring in China by 2025.
LVMH stated that it “controlled costs not related to brand value and invested in projects which surprised people, like The Louis in Shanghai.”
After two years of hardship, there are signs that China is stabilising.
The sales of luxury goods and experiences such as travel, dining and jewellery have been relatively stable.
D’Arpizio stated that “experiences and emotions are now the real engine for luxury growth after the shopping spree period.”
The post Luxury brands facing profit squeeze while discounting soars, shoppers doubt value can be updated as new information unfolds.
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