Getting the price/positioning ratio wrong now would be tragic

Getting the price/positioning ratio wrong now would be tragic

Chanel claims again a price increase. Analysts applaud Hermès‘ list price adjustments. But they reproach Gucci for pushing them too high, ending up in a shadow cone between premium and luxury. Fashion is pushing up to shelter margins in this 2024 difficult for volumes. But precisely because of this, keeping the price/positioning ratio in balance is crucial. Especially in light of the uncertainties of the Chinese market, which is among the wealthiest but apparently intends to pull the brakes.

Who can afford it

Analyst Thomas Chauvet explains why the price increase is good for Hermès: for accounting reasons. Given that the brand’s leather goods production grows by 7% each year, overall revenues could be affected in 2024 by a flattening of earnings from non-leather products (watches, jewellery, clothing, and more). “However”, writes Chauvet, “pricing (+7% in 2023 and +8-9% in 2024) should limit the downside risks to revenues”.

Chanel wants to follow in the footsteps of Hermès and, in fact, is constantly raising its prices, to the point that some of its bags have reached a value of EUR 10,000. A month ago, it was the president of the fashion division Bruno Pavlovsky who explained why prices are rising. This time it is Chanel CEO Leena Nair who reiterates the concept to Bloomberg: “We use fine raw materials, and our production is very rigorous, laborious and artisanal. So, we increase prices according to inflation”. Nair also reiterated that the company has no plans to list.

The sensitivity of the price/positioning ratio

But brands like Hermès and Chanel have high pricing power: they are at the top of the luxury pyramid. Those who are not in the same position cannot wield the same power. This is the case for Gucci, especially in China. Kering CFO Armelle Poulou confessed: “The Chinese market is quite polarised between customers’ appetite for high-end or more affordable products. Gucci, more positioned in the middle, does not benefit from this polarisation”. It is the Chinese customer that determines the success or failure of brands with such contrasting performances. As Bernstein points out, LVMH‘s Chinese revenues increased by 10% in Q1 2024. While retail sales fell 19% in Asia for Kering and 28% for Gucci. China dragged Brunello Cucinelli upwards. Bernstein sees a “normalisation of the market and changing travel patterns and a weaker economic environment”.

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