They said the pricier, the better it sells...“Now nobody is buying” Luxury in decline [Soso World by Lee Yoon-Jung] - 경향신문

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“The more expensive it is, the better it sells.” This has been the growth formula that luxury brands stuck to in recent years. Even when bag prices jumped by several million won, the sentiment that ‘if I do not buy now, it will get more expensive’ spurred spending, and brands used successive price hikes as an important lever for sales growth. But that formula is now wobbling. Shares of LVMH, the world's largest luxury group, have fallen about 35% so far this year, and Gucci has logged 12 consecutive quarters of sales declines. Many consumers who used to buy luxury goods are closing their wallets or turning to relatively affordable ‘small luxuries’ such as cosmetics·fragrances.

Recently, overseas outlets including Reuters reported that luxury consumption has not been recovering in the same way as before, analyzing that a ‘lipstick effect’ is emerging in which consumers spend on relatively less burdensome items such as cosmetics·fragrances rather than high-priced bags or shoes. With economic uncertainty persisting, the tendency is strengthening to seek consumption satisfaction at a comparatively small cost instead of buying items priced in the thousands of euros.

The change is even clearer in the recent French stock market. The market capitalization of cosmetics company L'Oreal has surpassed LVMH, the parent of Louis Vuitton. According to Reuters, on the 15th (local time) L'Oreal's market cap was about 203 billion euros (about 323 trillion KRW), and LVMH was about 201 billion euros (about 320 trillion KRW). It was the first time since 2017 that a non-luxury company topped the French market by market cap. It reflects not so much an explosive jump in L'Oreal's valuation as a sharp decline in the valuation of LVMH in recent years.

So what has happened at LVMH? Overall revenue at LVMH has not fallen. First-half revenue this year was 38.644 billion euros (about 61.5 trillion KRW), and total second-quarter revenue rose 3%. The issue is the quality of sales and future growth prospects. First-half revenue in the fashion·leather goods division, which includes Louis Vuitton and Christian Dior, actually fell 1%. It did return to 1% growth in Q2, but still lagged the overall growth rate of the group.

Investors are turning their backs on the luxury market. On the 3rd, Reuters reported a broad decline in European luxury stocks, interpreting it as waning investor conviction in a recovery of luxury spending. Bank of America's analysis also showed that luxury demand in the third quarter slowed by about 3 percentage points from the previous quarter. Softer demand in major markets including the United States, China, Japan, and South Korea played a role.

Economic uncertainty and steep price hikes are cited as factors behind the demand slowdown. The growth engine for the luxury industry had been pricing policy. Louis Vuitton likewise raised prices every year. The signature Louis Vuitton ‘Neverfull MM’ sold for 990 euros (about 1.58 million KRW) in Europe in 2019 but has risen to 1,550 euros (about 2.47 million KRW) this year. That is a 57% increase in seven years.

As prices climbed, luxury industry revenue rose alongside. The problem is that a substantial share of the growth relied on price increases rather than higher volumes. McKinsey analyzed that more than 80% of luxury industry growth from 2019 to 2023 came from price hikes. During this period, the luxury market grew about 5% per year on average, but the effect of selling the same products at higher prices far outweighed that of selling more products.

McKinsey expects price increases will no longer serve as a growth engine as they once did. In particular, among non-ultra-wealthy general consumers who had been buying luxury goods, many can no longer bear the higher prices and are delaying purchases or exiting luxury consumption altogether.

In a report published this year, McKinsey senior partner Jemma Dauri analyzed, “The luxury industry has entered a period of ‘recalibration’,” and “repeated price hikes have created a ‘crack in trust’ between consumers and luxury brands.” If consumers do not feel commensurate value in product quality, creativity, and the experiences brands provide to match the rise in luxury prices, it becomes harder to accept the higher prices. Global consulting firm Bain & Company estimated that continuous price increases have pushed about 60 million consumers out of the luxury market.

Louis Vuitton is not the only high-end brand struggling. In the first half of this year, Gucci recorded revenue of 2.757 billion euros (about 4.39 trillion KRW), down 9% from a year earlier. Reuters reported that Gucci's revenue has nearly halved over the past three years, analyzing that aggressive price hikes and shifting consumer tastes have driven some customers away.

While spending on items that require shelling out thousands of dollars at once, like luxury bags, is slowing, consumption is continuing for cosmetics or fragrances that provide satisfaction for relatively little money. This is the so-called ‘small luxury’. The fact that cosmetics company L'Oreal recently surpassed LVMH in market capitalization on the French stock market is a symbolic scene that illustrates this shift.

Nick Anderson, an analyst at German investment bank Berenberg, pointed out, “Consumers with reduced capacity to buy expensive luxury goods are seeking satisfaction in relatively less burdensome items like lipstick,” and “excluding the ultra-wealthy, demand for luxury is structurally weakening, and concerns such as a slowdown in the Chinese economy and inflation are also constraining luxury consumption.”

Luca Solca, a luxury analyst at U.S. investment bank Bernstein, said in an interview with Vogue that large luxury brands need to adjust their product mix to lower price points to ease the price burden on consumers. In fact, last month Gucci priced its new ‘Mercato’ bag at around $2,000, about 27% below the average price of its existing bags.

Then, will luxury consumption revive simply by adjusting prices? Achim Berg, former McKinsey senior partner and founder of the fashion-industry think tank Fashionsite, does not see today's luxury market as a matter of ‘price’ alone. He said, “Many brands have raised prices faster than they have improved quality,” and “the gap between price, quality, and the value perceived by consumers has widened.” In other words, relative to the steep price hikes, product quality, craftsmanship, materials, and durability have not improved enough for consumers to accept. Indeed, revelations that cheap China-linked subcontractors have been used in Italy's luxury supply chain have raised doubts about the craftsmanship and quality that luxury brands have long touted.

Berg noted, “In the past, consumers wondered, ‘Can I afford luxury goods?,’ but now they are asking, ‘Are luxury goods truly worth it?,’” and “the very way consumers look at luxury has changed.”