Luxury firms will warily cut prices to boost sales
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Yawen Chen
LONDON, Dec 19 (Reuters Breakingviews) -Europe’s top fashion houses will reluctantly conclude that high profit margins are a luxury they can no longer afford in 2025. The likes of LVMH LVMH.PA, Kering PRTP.PA and Chanel aggressively hiked prices on handbags, shoes and jackets during the pandemic. As demand from Chinese consumers rapidly cools, CEOs will be forced to rethink.
The People’s Republic has been a disaster zone for luxury groups of late. For example, Kering, which owns brands like Gucci, suffered a 30% year-on-year fall in Asia-Pacific sales excluding Japan in the quarter to September 2024, mainly driven by China.
Most retailers would react by lowering prices. But luxury bosses are cut from a different cloth. Indeed, they have used the inflationary burst caused by the Covid-19 outbreak to hike prices. Between the end of 2019 and September 2024, luxury goods prices increased 54% on average, HSBC analysts estimated by tracking iconic products sold in France, such as Louis Vuitton’s 1,600-euro Speedy Bandoulière bag and Chanel’s 11,100-euro 2.55 flap bag.
Such a strategy buffed up the sector’s profitability. LVMH’s operating profit as a percentage of sales, for example, hit 27% in 2021 – the highest since at least the 2008 financial crisis – and remained elevated.
Now, though, the companies fear that cutting prices would dilute the value of their precious brands and erode margins. “We are not necessarily having the view that we should change strategies,” Jean-Jacques Guiony, LVMH’s chief financial officer, said in October.
Most fashion executives are still wishfully hoping the Middle Kingdom will bail them out. Chinese citizens account for a third of global luxury sales, and they were the sole driver of revenue growth in the first six months of 2024, Bank of America analysts reckon. But they have stopped swiping their credit cards both because of a sustained housing crisis and a stronger yen that made shopping in nearby Japan less of a bargain.
The problem for LVMH and its peers is that Chinese luxury spending may never recover. Real estate accounts for 70% of China’s household wealth, per a central bank survey, but residential sales in the 10 months to October 2024 were 40% below the same period in 2019 in both value and volume. The country’s household savings hit a record 149 trillion yuan ($21 trillion) in September and their growth vastly outpaced that of retail sales.
During the country’s previous property downturn in 2015, luxury brands had to slash prices by as much as 20%. At the time, the government rescued the real estate market. This time, though, President Xi Jinping is unlikely to waver.
That leaves the luxury industry with an unenviable, but inevitable, choice: if they want to avoid a further slide in volume, they will have to cut prices.
Follow @ywchen1 on X
This is a Reuters Breakingviews prediction for 2025. To read more of our predictions, click here.
Graphic: Luxury groups’ shares took a hit in 2024 https://reut.rs/3CWETuv
Graphic: Chinese savings nearly doubled in the last four years https://reut.rs/4gC7qnI
Editing by Francesco Guerrera and Oliver Taslic
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