This Week's Obsession: Designer Bags, How High Will Prices Go?
It may be hard to understand what's behind the latest price increases by both Chanel and Hermès, when news about the economy is mixed. Perhaps this is because luxury shoppers are divided into two groups. The first group is the HNWI (High Net Worth Individuals) who represent only 5% of the luxury customer base but represent 40% of the sales. "How can this be?" you ask. It's because on average these luxury consumers spend £34,000 per year!
Where as the other group, the HENRYs (High Earners Not Rich Yet) make up 95% of luxury consumers and 40% of the sales. On average these HENRYs spend £2,000 per year. So it would appear that most of Chanel and Hermès customers fall in the HNWI category.
What is Driving the Price Increases?
What could be driving the a price increase of 16.9% for the Chanel Medium Classic Flap Bag? Some people believe is has to do with Chanel's desire to be priced more closely with Hermès' Kellys and Birkins. Someone on Instagram made a great point that handbags made of leather and fake gold are suddenly more expensive than jewellery and watches made of precious stones and real gold. It used to be the chain of this bag was 24K gold plated - but no more. Fortunately the mini flap only increased 11.9%, yes that's said tongue and cheek.
According to the Financial Times the brand has increased prices 20% in the last 18 months. The article states that there's another reason for this price increase. Please use the sharing tools found via the share button at the top or side of articles.
In contrast to increases in the previous 18 months, the latest changes are designed to “harmonise” pricing across markets, Bruno Pavlovsky, Chanel’s president of fashion, told the Financial Times. “Because of the evolution of the exchange rate, the gap between prices in Europe and prices in Asia was becoming too big.” The changes mean that a Chanel Boy bag now costs the same in Shanghai as in Paris — a rarity in the luxury sector. Products in China tend to cost 30 to 60 per cent more than in Europe, which our understanding was due to the taxes and duties in China. So how does that justify putting the prices up in Europe who doesn't have the same tax and duty structure as China?
The article goes on to say that the increases were partly because of rising manufacturing costs and reflected the value of new in-store restoration services and a five-year guarantee on bag purchases.
But according to Jefferies analyst Flavio Cereda-Parini, the changes at Chanel were less about rising costs and more about positioning the brand in the same price category as rival Hermès and above Louis Vuitton and Dior.
Louis Vuitton raised prices 7 per cent late last month after jumps of 10 per cent in 2021 and 4 per cent in 2020. Hermès lifted prices 3.5 per cent last year compared with 1.5 per cent previously.
Cereda also said inflation was also driving prices higher. Historically, top brands price products at 2.5 times the rate of inflation, making handbags in particular not only a justifiable purchase for luxury consumers but also an attractive proposition for investors. We think much more justifiable for the HNWIs not the aspirational luxury shoppers .
According to Chanel, customers have responded well to the changes. Raising prices has not only improved margins for leading brands but also boosted their prestige, creating what UBS analysts call “a virtuous circle of pricing power and brand desirability”. Our quickie poll held on Instagram found that 95% of our followers feel the prices are unjustifiable. Hmmm, while not a huge sample size one can't help but ask the question, "Who are these customers that have responded well, and how many are there?"
What about Hermès Price Increases for 2024?
Mirroring what occurred this week in Europe and the United States, the United Kingdom also was hit with Hermès’ notable price increases on its coveted handbags.
Hermès CEO Axel Dumas emphasised during an investor call discussing first-half 2023 results that price increases are primarily tied to production costs rather than demand. In other words, Hermès would not increase prices simply because it could. Rather, hikes would reflect the actual expenses incurred in manufacturing these luxurious items. Most took this to suggest that moderate price increases were on tap for 2024, unlike the more substantive increases of 2023. However, despite these assertions, the specific increments in costs contributing to these price shifts remain elusive. And the increases are greater than anticipated.
The new UK prices rose for 3.7% to 9.6% for the most coveted Hermès bags in 2024.
More Luxury Club announces the first 'THE ONE' of 2024
Well on that note, why not pivot to a new way of owning these gorgeous pieces without breaking the bank. What would be a better selection for the first ONE of 2024 than an Hermes Kelly in Black Epsom Leather with Palladium Hardware? We say there isn't one. Epsom leather gives the bag great structure and durability. It's a great choice for frequent city commuters and flyers, allowing you to travel worry-free with your bag and being able to enjoy the hustle and bustle without much knock-on effect on the appearance.
It seems obvious as the prices continue to rise, now is the time to adopt a new way of owning these works of art. This bag currently is being sold for £14,950 but buy joining the More Luxury Club, you pay £3289 for a 20% share that means you can wear this beauty a minimum of 10 weeks per year. Every year, for the rest of it's life. Which will be a very long one, because we will clean and maintain her to ensure she stays in pristine condition.
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