LONDON, United Kingdom — There seems no end to fashion inflation. Indeed, in recent years, the price of designer fashion items has risen steeply and disproportionately versus that of consumer goods more broadly. In fact, The Wall Street Journal reported in March that “the average price of luxury goods jumped 13 percent in 2013 while the USA consumer-price index rose only 1.5 percent. A Chanel quilted handbag is now $4,900, 70 percent more expensive than the same item five years ago.”
But Chanel is by no means alone. In August 2013, Reuters reported that “Hermès, the maker of €6,000 to €30,000 (about $8,000 to $40,000) Birkin and Kelly bags, is hiking its prices after increases by its rivals such as LVMH's Louis Vuitton and Kering's Gucci earlier this year."
In China, price increases have been felt even more sharply as some luxury brands continue to set the base price of their goods higher than what they charge for the same items in the US or Europe, even before luxury taxes and currency adjustments are taken into account. “Hefty import tariffs and consumption taxes, as well as higher pricing strategies, can increase prices in China to 50 percent more than a shopper would pay elsewhere. A Louis Vuitton handbag costs 30 percent more in Beijing than in Paris,” reported The Economist in April of this year.
"As we showed in our reports, there was also a portion in the price gap that was just higher prices (and margins) tout court," confirmed Luca Solca, the head of luxury goods at Exane BNP Paribas.
Luxury brands have made much of the fact that labour and materials costs continue to rise. The wages of private-sector workers in China, where many luxury products are made, have increased by double-digit percentages in recent years. The cost of cotton rose 13 percent year-on-year, while cattle prices are at record highs. But this does little to explain the difference between the base price of a luxury handbag purchased in the West and the very same handbag purchased in China.
With human psychology at play, increasing prices can sometimes elevate the desirability of certain luxury goods, as consumers associate higher prices with increased cachet and greater exclusivity. But Chinese consumers are no fools. And pricing differences between the West and China are becoming more transparent every day, driven by the Internet and growing international travel. More than fifty percent of luxury products bought by Chinese are purchased outside the country. In turn, each of these transactions makes artificially high China prices more and more difficult to sustain.
"I believe the price gap between China and Europe is difficult to maintain, as Chinese consumers have the Internet, daigou and travel a lot. The more luxury becomes a middle class phenomenon the more so, as middle class consumers are more sensitive to price differences," Solca continued.
Purchases made by Chinese consumers now represent roughly one third of total worldwide sales for luxury houses. But growth is decelerating, significantly impacting results. Sobering second quarter results published last week by LVMH revealed sales growth of only 3 percent, half analyst expectations of 5 to 6 percent and less than a quarter of the 14 percent sales growth the group reported for Q1 of 2012. Second quarter sales growth at Louis Vuitton in Mainland China has all but collapsed, dropping from 9 percent in Q1 2014 to zero percent for Q2.
In this context of falling demand and greater global transparency, ongoing price inflation and continued pricing disparity that puts luxury brands on a collision course with Chinese consumers' willingness to pay is a wholly risky strategy.