Has Luxury Lost Its Shine? --- Customers are complaining that they are getting less bang for their buck at the luxury store

"Shoppers aren't imagining it: Luxury goods cost a lot more these days, with no improvement in quality to make up for it. Weak sales look like a more deep-seated problem than some brands will admit.

A basic cotton T-shirt with a Christian Dior logo will now set you back $1,000. Gucci's plainest black horsebit loafers ring in at $990. How about a Brunello Cucinelli cardigan for $8,995? Shoppers pay up for luxury goods precisely because they set them apart as people who can afford to spend large amounts of money on them. But brands can only push so far before cracks start to appear.

Psychologists who study consumer behavior point out that people buy designer goods for emotional reasons. The main one is to separate themselves from the crowd and signal where they sit in the social pecking order. Luxury brands spend billions of dollars a year on advertising to make sure that their products become totems of wealth and success in consumers' minds.

Some luxury shoppers like to telegraph their riches more than others. People who want to make a statement gravitate toward labels with bigger logos to send an obvious signal. The ultrarich, on the other hand, don't tend to shout about their wealth as much. They buy the costliest, but most discreet, luxury brands such as Hermes. One study found that for every $5,000 increase in the price of luxury goods, the brand's logo shrinks by a centimeter. In other words, the guy wearing head-to-toe logos is unlikely to be one of luxury's biggest spenders.

Because consumers value luxury goods as status symbols, they are willing to pay a huge premium for them. Luxury brands routinely charge a markup of eight to 12 times on the production cost of their goods, according to Bernstein estimates. This makes the business of selling luxury very profitable. Top labels can generate operating margins north of 30%, compared with around 7% for mass-market brands such as Gap or H&M.

Luxury brands are so-called Veblen goods: a category of consumer products that inverts the usual laws of economics. Instead of crimping demand when prices rise, luxury goods can become more sought-after if shoppers interpret higher prices as a sign that the goods are precious and scarce.

Except that isn't what is happening today. The average luxury product is 60% more expensive today than it was back in 2019, an HSBC analysis shows. But the industry is going through one of its rockiest patches in years.

Sales of the eight luxury brands that have so far reported their third-quarter results are down 4% on average from a year earlier. There is huge divergence between labels: Brands known for quality and creativity such as Hermes and Miu Miu are still selling well. Most others are suffering. Gucci has been the sector's worst performer, with sales plunging 25% in the quarter.

The slowdown might prove temporary. Chinese consumers, who generated more than half of the luxury industry's growth in recent years, are staying on the sidelines as the values of their homes fall. But consumers are also questioning whether luxury brands are worth the prices they charge today.

Gross margins have risen across the luxury sector since the end of 2019. Louis Vuitton owner LVMH boosted its gross margin more than 2 percentage points over that time; Cartier owner Richemont gained 7 percentage points.

This can partly be explained by Chinese consumers' increased spending during the pandemic in mainland China, where prices for luxury goods are higher. But beefier gross margins are also a sign that luxury companies have raised prices faster than they have invested in the quality of their raw materials.

"Prices were used as a way to cope with an avalanche of demand for luxury brands during the pandemic," says Luca Solca, luxury analyst at Bernstein. "But if customers have to pay higher prices, you have to give them something new and surprising."

One way to find out whether price hikes have hurt their appeal is to look at how brands are being discussed online. Based on an analysis of the dominant mood of social-media posts in discussions about luxury brands' prices from January through October this year, the main emotion of more than 60% of the posts was anger, disgust or sadness, according to Brandwatch.

To be sure, luxury brands might be using higher prices to manage a growing tension in their business. For the last two decades, they have increased sales by "democratizing" access to luxury. By pushing into cheaper categories such as cosmetics, sunglasses and small handbags, they have intentionally drawn in millions of new middle-class consumers.

Targeting this wider base of shoppers has more than tripled the value of the industry's global sales since 2000, and created some of the largest fortunes in Europe. Bernard Arnault, the founder of LVMH, is currently the third-richest person in the world. For a time, his company was the most valuable stock in Europe -- then it was overtaken by Ozempic drugmaker Novo Nordisk last year.

The problem is, brands' democratization has made them much more reliant on comfortable, if not rich, consumers for a huge chunk of revenue. More than half of the luxury-goods industry's sales are from shoppers who spend less than $3,000 a year on designer products. Alienate them with price hikes and sales will inevitably suffer." [1]

1. EXCHANGE --- Heard on the Street: Has Luxury Lost Its Shine? --- Customers are complaining that they are getting less bang for their buck at the luxury store. Ryan, Carol.  Wall Street Journal, Eastern edition; New York, N.Y.. 09 Nov 2024: B.11.