The worsening of inflation is leading many companies to raise the price of their products, which is a potential threat to their consumption. Heineken is the latest in that long line to announce that it will raise the prices of its beer in “brave” amounts. A situation that negatively affects all sectors, except luxury. The difference between this sector and that of mass consumption lies in its relatively inelastic demand.
The increase in prices and accompanying economic insecurity does not reach luxury consumers, who if they can afford a €10,000 handbag, they can pay an additional inflation rate of €1,000. Luxury brands have steadily increased the prices of their bags throughout the pandemic and this has not been a shock to high-income consumers in the US and Chinese markets, as the Kering Group and LVMH have found.
The Italian house Gucci, part of the Kering Group, registered a 32% increase in sales from the fourth quarter of 2021. This growth is the result of a cocktail that combines having “ambassadors” such as Harry Styles, Jared Leto or Dakota Johnson; the publicity that has accompanied the premiere of The Gucci House by Ridley Scott; and the power of prices.
In total, the Kering Group reported revenue of €17.6 billion in 202135% more than the previous year and 13% higher than the levels of 2019. For its part, its main competitor and undisputed king of luxury, LVMH, registered a record profit of 12,000 million euros in 2021driven by booming demand in the US and China.
A behavior that does not occur only in the brands that encompass these two groups. Maison Chanel increased the price of its emblematic medium-sized 2.55 bag up to three times, each of them represented an increase of 1,000 dollars. Since November 2019, the price of the Chanel bag has experienced a rise of 60%according to Jefferies. Despite constant price increases, the shortage of 2.55 in the Chinese market is such that consumers can only buy one a year.
Mass consumer brands are the flip side of fashion. The increase in prices derived from inflation is strongly affecting its profitability. The Swiss food giant Nestlé has warned that the increase in the price of raw materials and transport costs could dent its profitability for the second consecutive year. Unilever, for its part, expects the cost of inflation eat up its underlying operating margin, on the order of 140 to 240 basis points this yearas published Fortune.
Hermès does not reap such good results
Unlike Gucci, the French firm did not have good results in the last quarter of 2021. According to the report presented this week, Hermès leather goods division sales fell 5.4% due to capacity limitations. In total, its sales amounted to 2.38 billion euros, below the consensus forecast of 2.53 billion euros.
The French firm was forced to increase its prices to cope with rising production costs and currency fluctuations. Hermés increased global prices by 3.5% on average in 2021above the usual 1.5% rate, though well below more aggressive price increases from competitors such as Louis Vuitton, which raised prices an average of 7% worldwide.
Axel Dumas, CEO of Hermès, has assured in statements to the CNBC what there is no strategy to boost growth by increasing prices.
The publication of these results far from forecasts caused Hermès share price fell 7%posting its worst day since September 2016 and its lowest price in more than eight months.
Luxury bets on the metaverse
The luxury sector, like many others, does not want to miss the party of the metaverse. The first forays were carried out by Louis Vuitton, Balenciaga and Gucci with collections to dress virtual avatars. These last two fashion houses also have teams fully dedicated to Web 3.0 and the metaverse.
In early February, Gucci successfully launched SuperGucci, a series of NFTs created in collaboration with Superplastic, the American specialist in Superplastic artistic toys, and that correspond to physical figures of painted porcelain. Likewise, the Italian luxury firm has acquired a digital space in The Sandbox, where it plans to offer “immersive experiences”.
Philipp Plein is another of the firms that has been launched into the metaverse, in this case with the purchase of a huge extension in Decentraland for which he has paid the equivalent of 1.2 million euros. Prada, for its part, has launched its Linea Rossa sportswear line, made up of virtual suits and outfits, for the extreme sports video game Riders Republic, according to reports Fashion Network.
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