Louis Vuitton has raised prices in China. Other brands could follow
BCR News (Swati Bhat/Mumbai): Luxury fashion may become more expensive in 2020, but that will ultimately be down to what the big houses decide to do.
That is already starting to happen in some markets. The median price for Louis Vuitton products has increased by nearly 4 per cent in China over the last year in local currency terms, according to Deloitte’s BenchMarque tool. The cost of Louis Vuitton’s assortment has also gone up in Japan and the UK, but has been flat in most other major countries. (A spokesperson for Louis Vuitton declined to comment.)
Other brands appear to be making similar moves. Jing Daily reports that Chanel, Bottega Veneta and LVMH house Dior, have all recently become a bit more expensive in China. How big increases could be worldwide in 2020 is debatable. Sarah Willersdorf, partner and managing director at Boston Consulting Group, thinks they are likely to be negligible, while Credit Suisse is expecting “aggressive” price increases across all key markets.
Why prices go up
A large number of factors go into determining the prices paid by consumers for luxury goods, including the cost of raw materials, the cost of shipping these around the world, tariffs, local taxes, general inflation in the costs of goods and services, and most importantly, foreign exchange rates (FX). “Pricing decisions tend to follow FX moves when prolonged,” Francesca Di Pasquantonio, managing director of equity research at Deutsche Bank, writes via email, pointing to how some brands have followed the China price hikes with increases in Korea.
Cross-border purchasing generally goes up when one region has better prices than another and whole businesses have been developed around helping people find the lowest prices for luxury products across markets. Price increases are also often the result of brands positioning themselves as more premium, like Burberry, which has raised prices in the UK by 10 per cent over the past year.
However, most companies have purportedly increased prices over the past decade to better align Western prices with those in China, thereby encouraging domestic consumption in the world’s fastest-growing luxury market. When the Chinese government announced a VAT cut in April, Louis Vuitton announced it would pass savings on to customers and decrease its prices accordingly. Prices are now closer than they have ever been, with a Louis Vuitton Speedy bag only 12 per cent more expensive in China than in the US.
Despite its public commitment to parity between China and other markets, allowing prices to come too close together could lead to decreased business in markets that are now reliant on Chinese tourist spending. At some points this year, it was cheaper to buy luxury products in Shanghai than it was in Tokyo, a shopping destination for visitors from China and one that is seeing a boost given the troubles in Hong Kong. “Companies respect their own geo-pricing balance,” says Di Pasquantonio.
The question is whether this bump in prices will transfer over to other markets once a healthy price gap is restored, if that is the aim. Luxury houses probably could have raised prices more in the last few years. Instead, brands modified their price architecture, says BCG’s Willersdorf, introducing high-cost items like the £14,000 Louis Vuitton trunk as well as entry-level products like sliders and phone cases around the £200 mark.
The luxury goods industry’s solid growth is set to continue into 2020, per McKinsey estimates, and such stability may tempt brands to finally pull the price lever. This is made more likely, says Jason Gordon, UK private sector analytics lead at Deloitte, because a lot of what luxury brands procure is sold in US currency and the weakening euro is making the manufacturing process more expensive. “Inevitably, something is going to have to happen.”
