PARIS – Dior canvas bowling bags were popular in the 1990s and 2000s. You can still find them at vintage stores and resale sites for a few hundred dollars. The brand is currently working on reviving the style, and its September runway featured an updated version of the bag, now called the Groove.
What’s the price? 2,900 euros. Dior handbags are considered easier to come by these days, as the French haute couture brand has increased the prices of its flagship styles. The Lady Dior mid-sized bag currently sells for 5,900 euros ($6,500), 46% more than in 2019.
Rising prices for familiar designs, coupled with macroeconomic headwinds in key regions, have put a huge strain on the luxury goods sector in recent months. LVMH, owner of Dior, is no exception. The French luxury conglomerate’s third-quarter results, to be released after the market on Tuesday, are expected to be tough.
The global luxury goods market is in a full-blown recession after gradually cooling from its post-pandemic highs, but the downturn could be longer and deeper than initially expected. What started as consumer fatigue with logo-heavy products and a slowdown in sales to less affluent and “aspirational” customers has since spread beyond price points and aesthetics. Sector leader LVMH saw sales fall 1% in the first half. Gucci owner Kering reported a 20% decline.
Shares of luxury companies have risen in recent weeks on positive macroeconomic news. China announced a series of fiscal stimulus measures to revive its struggling economy, and the United States announced a series of interest rate cuts.
But analysts warn that this rally is built on shaky foundations. As last September’s Fashion Month collections hit showrooms, retailers continue to order cautiously. Francesca Berrettini, Kering’s deputy CEO, described the current state of the industry as a “crisis” in a recent interview.
At LVMH, chairman Bernard Arnault has shaken up leadership, announcing designer changes at Celine and Fendi, and appointing a new deputy CEO at Dior and new CEOs at Givenchy, Hublot and Tag Heuer. But when and how the luxury conglomerate will regain momentum remains an open question.
A recent note from UBS analyst Zussanna Pusch predicted that LVMH’s fashion and leather goods division, which includes major brands Louis Vuitton and Dior, would see sales decline 1% in the third quarter. The group’s recovery is uncertain. “Louis Vuitton’s estimated gains from July price increases may be offset by the fallout from the recent Dior controversy,” Pusch said, citing an Italian investigation into sweatshop workers in the brand’s supply chain. He said it out loud.
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economic headwinds
Analysts say slowing growth in major economies, persistent inflation and declining consumer confidence are the biggest factors behind the luxury goods slump. These factors are damaging both real purchasing power and the consumer “feel good” that is essential to selling luxury goods.
In China, high youth unemployment and a slump in the real estate and stock markets are severely hampering the post-COVID-19 recovery and weighing on consumer confidence. For many people, it seems unwise to buy luxury goods now. “Over the past six to nine months, consumers have not had the ability to predict a bright future,” said Erwan Lambourg, an analyst at HSBC.
Elsewhere in Asia, South Korea’s economy is doing better than China’s, but the market is at risk of saturation. Koreans already spend more per capita on luxury goods than any other nationality.
Sales in Japan have increased significantly this year as the weaker yen has made shopping much more attractive to overseas buyers. However, foreign exchange influences make these sales less profitable for European brands, forcing prices to rise to offset the risk of currency depreciation, excluding domestic buyers.
Wage, stock and real estate growth in the United States has outpaced most other mature economies since the pandemic. Although the job market remains at an all-time high, many Americans have already used up the savings they accumulated during the COVID-19 lockdown and shifted their priorities to other categories, such as travel, restaurants, and health and wellness. It’s coming back rapidly.
Europe continues to be affected by persistent inflation and geographic proximity to wars in Ukraine and the Middle East. LVMH’s results will show the extent to which the 2024 Olympics deterred luxury shoppers from visiting Paris this summer, further hurting sales.
However, the damage caused by luxury goods is also self-inflicted.
“Greedflation”
The sharpest price hikes since 2019, both in response to rising costs and opportunistically looking to shore up profit margins, have compounded the blow for consumers already on the brink of inflation, leaving many customers with no choice. has moved away from luxury brands. Some companies are now paying more attention to quality declines. Reports of crooked stitching, cheap hardware and poor factory conditions have all spread on social media, damaging brand recognition.
According to HSBC, luxury goods are now on average 54% more expensive than they were before the coronavirus, with key styles even more expensive. The price of Chanel’s 2.55 flap bag increased by 91%. Louis Vuitton’s Speedy is up 100%.
“Consumers are not naive…there is an element of arrogance, what we call ‘greedflation,'” Lambourt said. And once a luxury brand raises the price of an iconic product, it’s hard to back down.
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creativity in crisis
Of course, luxury means expensive. Brands trade on the perception of exclusivity, which is reinforced by high prices. However, there is a growing consensus in the industry that price is too far ahead, not just in terms of quality but also creativity and appeal. Often, the value proposition appears to be out of place for even the most affluent customers.
In recent seasons, safe designs have performed better as customers lean more than ever toward items they consider long-term investment items with attractive cost-per-wear. That’s part of the reason why brands from Gucci (under new designer Sabato de Sarno) to Chanel (under departing Virginie Viard) have adopted ultra-wearable, heritage-focused strategies. That’s the reason.
Emphasizing iconic carryover and wearable products is smart business as brands seek to protect record sales and profits achieved during the pandemic. However, there is a worrying lack of emphasis on bold creative concepts that keep customers excited about fashion.
“This is a troubling time for our industry as we move from fashion to luxury. Almost everything today is designed to please and target consumers rather than for better creativity (and) innovation. It looks stripped down,” writes art director Ezra Petronio in a recent foreword to his magazine Self-Service.
A heritage-first strategy has the advantage of emphasizing the brand’s enduring value to customers. But they have the downside that people have less reason to get excited about your brand, talk about it online, or go to your store now instead of next season.
“Luxury customers remain enthusiastic and motivated to buy luxury goods, but now more than ever they need a compelling reason to invest. Richard Johnson, chief commercial officer at Mytheresa, said:
Looking to the future
Emerging from the current slump will undoubtedly be a difficult task. As brands adapt to a new demand environment, marketing budgets are decreasing almost across the board, putting pressure on managers and creators to perform the miracle of fashion alchemy of creating more demand with fewer resources. are.
China and the United States, the world’s largest consumer economies, are attracting attention. On October 12, China announced financial stimulus measures aimed at restoring economic growth. “The government may be looking to support consumer morale ahead of next year’s Lunar New Year (late January),” Bernstein analysts said. “But from what we know about the broad stimulus package, it doesn’t seem like there are any direct measures aimed at consumers.”
Chinese consumers “have money in their coffers to spend. Stability in the real estate and stock markets could boost sentiment,” said Morningstar analyst Elena Sokolova. But “for now, it’s more of a hope than anything.”
In mid-September, the United States announced its first interest rate cut in four years, cutting the main lending rate by 0.5 percentage points. Federal Reserve Chairman Jerome Powell said the larger-than-expected interest rate cuts were made to keep the United States in a “strong position.”
Overall, the outlook for the U.S. economy appears cautiously optimistic. “The only one that has any signs of life at the moment is the American consumer. It depends on the brand of course, but we expect the US cluster to do better than other nationalities,” Rambourg said. .
Sales to willing buyers remain weak, but pandemic-era bets on opening and expanding boutiques in secondary U.S. cities could start to pay off if projects materialize. HSBC says that although many wealthy American consumers don’t live in big cities, luxury physical shopping experiences are closer to home, potentially repatriating spending. Alternatively, if demand does not recover, the brand could find its cost base in the U.S. overextended.
The next big thing?
This isn’t the first time the luxury goods industry has panicked over how things are going and needed big new ideas. Haute couture was replaced by ready-to-wear. Ready-to-wear opened the door to popular lines and licensing. Then came the revolutionary concept that designers could revive luxury brand “codes” and build global brands, most notably introduced by Karl Lagerfeld of Chanel in the 80s. With the decline of department stores in the 2000s, the industry gradually shifted its focus to more profitable handbag categories (sizeless, seasonless, expensive) to reduce exposure to the volatile and unprofitable designer apparel business. Now it looks like this.
More recently, in response to the economic downturn in the mid-2010s, luxury has opened up to a new generation through casualization and streetwear, offering entry-priced products such as hoodies, sneakers, and sporty mini bags. These products not only reached younger, less affluent customers, but also provided a way for brands to exist in people’s lives, away from galas and boardrooms.
Analysts believe the most successful brands going forward are likely to be those that “create new footholds” to entice entry-level customers to spend again. Lowering prices or reintroducing end-of-season sales is anathema to luxury brands, but they’re waiting for customers to grow and the prices of their core products to rise, while offering smaller, simpler, and more expensive products. They are expected to carefully offer new products at low prices.
The problem is, T-shirts and keychains don’t seem like a revolution this time around. Meanwhile, the brand is also working to strengthen its cultural influence, engaging more deeply with enthusiasts of sports, art, music and more to keep the brand vibrant in the absence of big new aesthetic ideas. I’m trying.
Brands are also rapidly changing their creative leadership. New designers from Chanel, Fendi (as yet unnamed), Valentino (Alessandro Michele), Givenchy (Sarah Burton) and Tom Ford (Haider Ackermann) will be introduced in the coming seasons. Reinvigorate demand.
For the most part, it’s a cast of familiar characters. Will one of them come up with the next big idea?
Disclosure: LVMH is part of a group of investors that collectively hold minority interests in fashion businesses. All investors have signed a shareholder document guaranteeing BoF’s complete editorial independence.
