The personal luxury goods market has seen the most significant disruption in recent history, and is now stronger than ever.
Bain reports that after reaching a record global high of $307billion in 2019, industry sales fell by 22% in 2020. However, they recovered and even topped it in 2021. They reached $309 billion. Bain reports that the global recessions of 2008 and 2009 only resulted in a 9% drop in sales over the same period.
Farfetch, a global luxury retailer with multiple brands, saw an initial drop in luxury clothing, shoes, and accessories prices. However, this price quickly rose. Although the average selling price for luxury shoes and clothing rose modestly, it still rose to $648 and $486 in February 2020 respectively and $653 and $521 respectively by May 2021.
According to Dataweave, however, the price rise of luxury accessories was quite remarkable, going from $456 to $633.
Farfetch offered discounts on 90% of the Louis Vuitton bags during the initial period after the pandemic. This dropped to 33% during the second half of 2020, and then in 2021 not one Louis Vuitton bag or any other accessory, clothing or shoe, was available for sale.
The fact that luxury consumer demand for luxury goods grew so strongly in 2021 due to pandemic restrictions on travel and shopping, and rising prices, is external validation of findings from a new study by Pierre Valette-Florence and Joel-Noel Kapferer published in the Journal of Business Research.
They conducted a cross-cultural study on luxury consumers in China and Brazil, Japan, France and Germany. The goal was to determine the price of luxury products from various motivators, both intrinsic and extrinsic. “Luxury for yourself or luxury for others”
Luxury for others rose to the top, and luxury was a desirable commodity. It didn’t take into account intrinsic values such as quality and sustainability.
High price drives demand
Kapferer was not surprised that luxury brands were more popular because of their higher prices. It is one of the anti-laws in marketing, as outlined by Vincent Bastien and Kapferer in their seminal book The Luxury Strategy. Break the Rules to Build Luxury Brands.
Surprisingly, however, was another surprising finding from the research. They write that “Unexpectedly, the high-quality pursuit is not a driver.”
The recent arguments of Hermes, Chanel, Hermes, and Louis Vuitton about the price rises are hollow. They cite rising costs of goods and labor.
Kapferer, Valette-Florence wrote that luxury high prices are not about tangible benefits. Price is not a cost or a quality cue. It can also be a source for pride or satisfaction. The price is value. It’s determined by the product or service’s value as well as the value the buyer gets.
Luxury brands have increased their prices recently, not because they wanted to or believed that they could, but in order to maintain a strong demand. Economic theory is not able to integrate luxury pricing. Luxury consumers’ behavior is a challenge to the principles of classical economics which holds that higher prices should lead to lower demand.
Recent history and the study found that the economics of luxury markets work in the exact opposite way. It also applies across borders.
Luxury items are expensive and satisfy consumers’ psychological need for status and exclusivity. Luxury consumers show their loyalty by purchasing luxury items.
“Price is a fee for the privilege to display the logo of a well-known company and co-brand your own brand. They write that luxury expensiveness is valued based on its intrinsic benefits.
It is important to be a conspicuous symbol of luxury
Kapferer and Valette Florence designed the research to conceal conspicuous consumption, which is socially unacceptable. Seven key variables were measured among the luxury-affluent consumers they surveyed. They were distributed equally in six countries.
- Status Signal
- High Quality
They asked: “Why do people still associate luxury with high prices?” They believe luxury is synonymous with expensiveness. What are the benefits?
Kapferer, Valette-Florence and others note that their study is one of few that considers price from a psychological perspective rather than an economic one. This is also one of few studies to consider sustainability as a motivator for purchase.
They discovered that luxury is defined by high prices. Its value lies in status signaling, secondarily in exclusivity, and first in its price. It is universal across all cultures and demographics. This includes income, age, gender, and respondents’ perceptions of their relative “richness”.
As factors that influence luxury consumers’ perceptions of value, both high quality and sustainability were rejected.
This means that high prices signal to consumers the luxury of an item. However, the values used to justify high prices by brands – high-quality craftsmanship, sustainability – aren’t nearly as important as high price.
These implications are huge. One, prominent logos should be de rigor.
They write that “if peers are aware of high-end luxury products, such products can create respect, admiration, and status for consumers.” “Discreet logos are often too subtle to be useful. These logos are not as prominent as conspicuous ones and can be difficult to price.
Another reason is that high prices can help consumers gain social status. “The second-greatest effect of the search for exclusivity is that people get value from having something they cannot have, experience, or enjoy due to price barriers. Both consumers consume and define luxury to improve their social standing.
Kapferer’s and Valette-Florence’s conclusion
Luxury requires visibility. ‘No-logo’ designs do not suit an industry that demands conspicuous consumption. It is impossible to experience true luxury if it isn’t visible.
Luxury is like Janus, with two faces. One face is focused on the self and seeks self-reward through high quality, pleasure and great experiences. The other is oriented towards others and seeks social recognition and exclusivity. High prices can only nurture the latter.
“The main operational implication from our research is that the luxury sector must leverage this 2nd face to maintain its policy of ever-rising prices.”
Be aware of caveats
Researchers acknowledge that respondents were asked about their recent purchases of lipstick, lipstick, lipstick, jackets for men and women, sunglasses for men and women, and shoes for women above a specific price point. This was to determine what “accessible luxury” means, as opposed to jewelry, automobiles, yachts, or villas.
Practical reasons meant that inaccessible luxury consumers were not included in the study. They are highly net-worth (HNW), making them difficult to access for research purposes.
Kapferer and Valette Florence believe that HNW consumers would have a lower desire to signal their social status than the sample they studied. Their desire for exclusivity would not change. HNW consumers are more likely to be motivated by high quality than their sample.
The study’s findings are of particular relevance to the luxury market. The rapid growth of the luxury market, except for certain categories, has been largely attributable to the aspirational, accessible luxury segment.
Francois-Henri Pinault, Kering’s CEO, was quoted as saying that “The number of potential customers is now approximately three billion people.” Statista estimates that just over 20 million high net-worth individuals are worldwide.
Expect higher luxury prices
While the world is at risk from Russia’s war against Ukraine and its threat of global economic collapse, we can expect luxury price inflation to continue. Clearly, luxury brands weren’t affected by rising prices during the pandemic.
Even if luxury consumers are temporarily priced off the market, luxury brands can expect stronger consumer demand in the long term.
Walter Loeb, a Forbes.com contributor, asked “Luxury brand prices rise sharply – will it cut demand?” The answer from Kapferer & Valette-Florence to this question is a clear “No.”