The Decline of Expensive Luxury
The luxury goods sector grapples with a significant decline in its customer base. Over the past two years, the industry has lost around 50 million customers, marking the first contraction in shopper numbers in decades.
- For three decades, luxury brands expanded their customer base by courting middle-class consumers, fueling a "democratization" of luxury.
- This approach tripled the industry's size. However, sharp price increases since the pandemic have reversed this trend, making luxury products inaccessible for millions.
According to Luca Solca, a luxury-goods analyst at Bernstein, finding regular-size handbags at less than $3,000 from reputed brands has become virtually impossible.
Fewer Products, Higher Prices
The industry isn’t just selling to fewer people—it’s also selling far fewer products. For the year, the number of units sold is expected to be 20% to 25% lower than in 2022, according to Bain. When excluding more affordable categories like cosmetics and sunglasses, volumes could be down by as much as a third for items such as handbags and shoes.
Designer brands historically increased prices at double the rate of inflation. During the pandemic, however, demand surged, allowing brands to hike prices even further. Take Christian Dior's medium Lady Dior handbag as an example:
- Price in 2016: €3,200
- Price in 2020: €3,900
- Price in 2024: €5,900 (a 51% increase since 2020)
- Manufacturing cost increase: 18%
Today, consumers pay 15 times the cost of manufacturing, compared to 12 times in 2020. While these price hikes have bolstered profits, they’ve also made shoppers more discerning about where their money goes.
Winners and Losers in the Luxury Market
Some of the most expensive names in luxury—like Hermès and Brunello Cucinelli—have benefited from this shift. These brands are seen as offering better quality, largely because they continue to manufacture in-house rather than outsourcing. Shoppers are gravitating towards categories perceived to offer better value.
- Luxury jewelry, for instance, hasn’t seen price hikes as steep as handbags, helping brands like Cartier owner Richemont weather the storm.
- In September 2024, U.S. luxury consumers spent 2.6% more on jewelry than in September 2023 and 13% less on designer handbags.
- Mid-priced labels like Polène, The Curated, Cuyana, and Ateliers Auguste are capturing younger consumers.
- These brands appeal to Gen Z, who are more skeptical of luxury’s allure than older generations. Handbags from these companies are priced between $300 and $700, filling the gap left by top-tier brands.
- The resale market has grown three times faster than the primary luxury market since 2019. Platforms like The RealReal have seen significant growth with Q3 2024 sales up 11% year-over-year. The RealReal’s stock has surged nearly 75% following these results, highlighting the growing appetite for secondhand luxury goods.
Luxury giants like LVMH appear unfazed by the loss of entry-level shoppers. Jean-Jacques Guiony, LVMH’s financial director, stated that offering affordable products isn’t the solution to the industry’s challenges.
Disclaimer
Please note that Benchmark does not produce investment advice in any form. Our articles are not research reports and are not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.
Credits
Photo by Felix Fuchs / Unsplash.
