Consumption of luxury items has for long belonged to the “Leisure Class” as explained by Thorstein Veblen in this famous work- ‘The Theory of the Leisure Class.’ The “conspicuous consumption” of luxury goods by the wealthy has enabled them to establish and exercise their superior status in society. Post the industrial revolution the rise in purchasing power led to the emergence of new wealthy classes.
“The difference between desire and need is what explains the high price points of luxury fashion items.”
This gap helps luxury brands to maintain their exclusive status and aspirational value.
As with most businesses today, the COVID-19 transforming world is posing supply chain challenges. The emphasis on building resilience is rising. In these tough times, consumers will seek brands that empathize and exhibit sensitivity.
However, “The lethal combination of reduced foot traffic and decreased consumer spending in the first quarter of 2020 has brought the retail industry to its knees. In fact, more than 80% of fashion and luxury players will experience financial distress as a result of extended store closures.”
So instead of empathizing with consumers economically, luxury fashion brands are raising prices in retail. Let us discuss why.
The raw material cost of luxury fashion items varies globally.
Production costs usually inflate year by year and hardly spiral down.
Fluctuations in the interest rates and currency affect prices too, especially during crisis situations.
As one brand raises prices, the other follows to stay up on the luxury ladder.
Finally, consumer behavior is the ultimate cost driver.
“Bain estimating sales for the $300 billion sector to fall by up to 35% this year, bringing to a crashing halt a decade of spectacular growth, luxury groups are moving quickly to protect margins.”
Luxury Consumer and Aspirer
“Chinese shoppers are key for luxury brands as they accounted for 35% of global luxury spending in 2019. Bain expects its influence on the sector to grow even further in the next few years – making up nearly half of all luxury sales in 2025.”
Companies will want to compensate for the losses faced due to the shutting down of retail stores. In a way, they are also preparing for the surge of demand that comes with partial, complete, or short unlock.
“In China and South Korea, people were queuing outside Chanel stores as soon as rumors of imminent price increases began to spread on social media. Xie Lan, a documentary maker in Beijing, said she had managed to buy a handbag for nearly 30,000 yuan ($4,225) before the price hike.”
Coping up with the global Pandemic is seen as one of the purchase drivers.
“Work is busy and stressful, I wanted to give myself a treat,” she said by phone.
But with the financial crisis wrapping the current or aspirational luxury fashion consumers down, many will either wait till the prices drop or jump to a second-hand product online or offline.
Both, the companies and the consumers are meeting on a confusing landscape –
“The crisis mismatch”– A global economic slowdown that is leading to a reducing purchasing power and a spike in prices of luxury items. The obvious consequence is the creation of a deep rift followed by a behavioral shift.