The prices being commanded by luxury brands are still going up. After boosting them early this year for things leather goods, fashion accessories, and perfumes, Louis Vuitton, for one, raised price tags again in October. Moncler similarly sent prices up (by 10 percent or so) for this season’s offerings, with the company’s management stating in a call with analysts last month that it plans to raise prices again for “at least the next two to three seasons.” These moves follow from earlier price-hikes implemented by Dior, Kering’s Gucci and Saint Laurent brands, and Richemont’s Cartier, among others, and ahead of plans for a sizable spike courtesy of Hermès, which recently revealed that its prices will increase by 5 to 10 percent in January 2023. All the while, Chanel has not been shy about sending price tags soaring on several occasions over the past couple of years.
Maybe more interesting than the price increases, themselves – which have become relatively commonplace over the past couple of years, in particular, and which appear to be normalizing to some extent – are the markets where these price tags hikes are – and are not – playing out. When it comes to differentiated increases, most are primarily focused on handful of markets, including the European Union and Japan, and notably exclude the U.S. and China.
Evening the Playing Field
Looking at China, the lack of price hikes from luxury brands like Louis Vuitton, for instance, seems to be a nod to the fact that prices are significantly higher there than in other markets, and thus, represent an effort by the world’s largest luxury goods brand to even out the price playing field a bit. (As of February 2022, when Louis Vuitton first raised prices this year, Exane BNP Paribas analysts said that the gap between the luxury brand’s prices in Europe and China “remained relatively unchanged,” at an average of 41 percent versus an earlier 40 percent.)
The result of Louis Vuitton’s varying increases last month – which did not include Mainland China, Hong Kong, the U.S., or Japan – is that “the widest differentials are slightly lower,” Jefferies analysts Flavio Cereda and Kathryn Parker stated in a recent note. “However, with the application of local taxes and European tax refund there would still be a more than 50 percent difference between a Chinese person buying at home versus in Europe.”
Pricing distinctions are notably striking for Moncler, as well, with Jefferies analysts pointing out that the Milan-based outerwear-maker’s “price architecture” in Europe versus Asia is “abnormally high and is being addressed via differentiated price increases.” Moncler’s price increases over the next several seasons are slated to be highest for markets like Europe, Turkey, and Japan, with the company’s management confirming that it expects a 40 percent price gap between Europe and China in 2023, and is aiming for a 30 gap “in the long term.”
Still yet, Kering’s management touched on the price gaps between markets in a Q3 conference call in October, characterizing the current differentials across regions as “unsustainable in the long term.” (Given the “complex macro situations in Europe,” Kering says it is not rushing to fix these gaps in the near term.)
Notable differences in prices for luxury goods sold in China are not exactly a novel phenomenon; as the Financial Times reported back in September 2017, citing Deloitte data, “Luxury goods are now on average 32 percent more expensive than identical items in France – compared with 41 percent [in 2016].” A softening of regional price premiums was “most pronounced for clothing and footwear,” the publication stated at the time, noting that products in these categories “were almost 50 percent more expensive in China [in 2016],” but fast forward one year and those goods were “carrying a premium of about one-third.”
Deloitte pointed to a decline in the value of Chinese renminbi against the euro as helping to drive the normalization of prices between markets, with an analyst for the consultancy saying back in 2017 that brands and retailers “have so far been content to let changing forex erode the Chinese price premium.”
More recently, in March 2019, Bain & Company data showed that “the Chinese government’s reduction in import duties and stricter controls over gray markets – combined with brands’ efforts to narrow the price gap with overseas markets – led more Chinese consumers to make their luxury purchases in China, instead of traveling to previous bargain locales, such as Hong Kong, Seoul, Tokyo and cities in Europe.” The consulting firm said at the time that it anticipated that brands would “continue to narrow the price gap with overseas markets.”
As brands continue to fine tune their pricing, especially with the Chinese market in mind, it is worth pondering what is driving these efforts.
We have suggested in the past that there is likely an element of risk at play for luxury brands when it comes to prices in China. As Beijing continues to crack down on everything from big tech and crypto to celebrities, gaming and wealth inequality, one question worth considering is whether – and when – Beijing will take a hard stand against the consistently eye-watering mark-ups that are being thrust upon Chinese consumers on the mainland by non-native luxury brands. And since luxury players are so heavily reliant on China – and prized super-spenders, in particular – for revenue, the stakes when it comes to this market are especially high. (Bain puts China on track to nab the title of the largest luxury goods market in the world by as early as 2025.)
Putting COVID concerns to the side, Cereda and Parker echoed these risks back in October 2021, saying that “the real downside to the [luxury] sector” comes by way of “the threat of regulatory intervention,” including “possible intervention on the local price architecture.” Specifically, they suggest that this could come in the form of “increased pressure from the Chinese authorities on mall operators to accelerate the process [of narrowing the price premium for luxury goods sold in China] by putting pressure on brands.” While this is one possible scenario, it is not clear how likely it is to come into play.
From a consumer perspective, they note that “there is a growing spotlight on price differentials now and the extent to which the Chinese consumer is perhaps being taken ‘advantage’ of,” which could fuel discontent among customers and Chinese officials, alike.
Either way, the general consensus in terms of price disparities between Europe and Mainland China is that 20 to 25 percent is the appropriate figure, taking into account cost inputs, etc., according to Cereda and Parker. They note that “this is clearly where all brands will eventually end up in time.” Until then, brands benefit from their ability to generate sizable sums from the Asia-Pacific market, and especially, enduring demand from the Chinese mainland.