Translated by
Nicola Mira
Published
November 15, 2024
The unbridled race to raise prices in the high-end sector seems to have reached its ceiling. The recent excesses, with prices doubling in five years, have clearly proved counter-productive. A fact that was emphasised on this week in Milan during the presentation of the annual global luxury market study by consulting firm Bain & Co., in partnership with the Altagamma Foundation, the association of Italy’s top luxury brands. During the Altagamma presentation, Prada boss Andrea Guerra harshly criticised the sector’s pricing strategy.
Guerra said that raising luxury goods prices to such an extent in recent years has been a huge mistake, and labelled this strategy a simplistic solution. “This was our biggest failure, because in doing so we betrayed consumers, for whom the perceived value of the product isn’t reflected in its price. Moreover, entry-level prices too have increased, so that the whole luxury sector has moved even further upmarket,” he added.
Another mistake would be to think that it would now be sufficient to simply reduce prices. “We won’t overcome market difficulties by raising or lowering prices, but by offering peerless products, while telling authentic stories and being credible. In stores, luxury labels need to be engaging and unique,” he said, noting how, in parallel, “luxury groups have lost between 5 and 6 margin points. By chasing blindly after prices, we’ve forgotten to monitor costs and operational efficiency. Besides, being careful with costs doesn’t mean putting a stop to investment, as is now happening in China, where most brands have halted all their projects.”
Guerra believes that it’s essential to have a long-term vision, maintaining a balance between sensible brand management and creativity. “[Labels] shouldn’t lean too far in either direction. This balance is crucial for our business.” Guerra observed that “the houses that are doing well at the moment all have long-term relationships with their creative directors, and an all-encompassing approach,” like Prada.
2024 has so far been a year of great change for the luxury market worldwide. The sector’s total sales were €1.478 trillion, a 2% decrease from the €1.5 trillion recorded in 2023. Revenue for the luxury goods segment alone, which includes fashion, leather goods, jewellery, watches and beauty products, was on par with last year, at €363 billion, after jumping 22% in 2022. Apart from the normalisation expected after the post-pandemic sales boom, it seems that consumers have not responded in ideal fashion to the policies put in place by luxury labels.
“The strategy of repositioning labels toward the very top end of the market has clearly contributed to its slowdown,” said Claudia D’Arpizio, partner at Bain & Co. and co-author of the study. “The strategy has been pushed too far. After years of luxury democratisation and a focus on inclusivity, the luxury industry seems to have taken a step backwards. Driven by inflation, the industry has sharply increased the prices of its most valuable products, but also its entry-level prices. It has also made accessing stores more complicated, often by appointment only,” remarked D’Arpizio.
“Only the very top of the pyramid, the wealthiest consumers, remained resilient in 2024, because they have effectively been at the heart of luxury labels’ strategies. While Gen Z consumers, who had been heavily courted through chic streetwear and sportswear in recent years, have now been abandoned. Even the very rich are beginning to find little justification for the excessively high prices set by the sector, notably since they do not consider themselves sufficiently pampered by labels. An impression accentuated by a certain lack of creativity, especially when they find almost the same products at 45% less on resale sites like The RealReal,” said D’Arpizio.
The pricing effect has chiefly had two disastrous consequences, according to the Bain & Co. study. By sharply increasing their products’ prices, luxury labels have reduced their volumes accordingly. This has had a knock-on effect on the supply chain and the textile industry, whose output fell by between 20% and 25% between 2022 and 2024.
“This is absolutely the first year in which production volumes are falling at double-digit rates. If we remove the beauty and eyewear categories, which have continued to thrive, we’re witnessing a real collapse that is putting at risk the entire luxury sector,” said Federica Levato, the study’s other author.
Another nefarious consequence of the sector’s high-price policy has been the disappearance in two years of 50 million high-end consumers, out of a total of 400 million worldwide. As a result, 45% of the luxury goods market’s global revenue is now generated by 2% of customers, the so-called Very Important Customers (VICs), who nevertheless perceive themselves as being increasingly less important, because of the flattening of the experiences offered and the buying pressure they are subjected to.
If we put everything in the context of an ever-more competitive and complex market, the luxury sector risks losing out on two fronts. By suffering revenue losses, and by losing market share. “With their elevation policy, labels have left a huge gap in the market. They now find themselves competing with retailers and mass-market brands, as well as resale operators. For example, the growth of sportswear brands and the success of Stefano Pilati’s collection at Zara are proof of this,” said D’Arpizio, who also mentioned the rising influence of local brands, as is happening in the USA.
“After focusing on upper-echelon customers, luxury companies have an interest in rethinking who the consumer they want to serve in the long term is. They need to start from basics, tapping loyalty to heritage, injecting plenty of creativity and content, offering impeccable products, but also developing a greater ability to create connections and fire up consumers,” concluded D’Arpizio.
Copyright © 2024 FashionNetwork.com All rights reserved.