When sales should be booming, many luxury brands saw their sales slow or even decline in the last quarter of 2022.
For example, LVMH, the industry’s pacesetter and market-share leader generating $86 billion last year, experienced a slowdown during the fourth quarter, with organic revenues up only 9%, after double-digit increases in the ~20% range during the first three quarters.
Gucci-owner Kering, the industry’s number two but far behind with $21.8 billion in revenues last year, experienced an 8% drop in comparable sales in fourth quarter, including a 15% decline in North America and a 19% cut in Asia Pacific from previous year.
Capri Holdings with Versace, Jimmy Choo and Michael Kors brands tumbled 6% in the final quarter of 2022. And Tapestry (Coach, Kate Spade and Stuart Weitzman) dropped 5% in its year-end quarter.
Now investors are catching on. European luxury stocks tumbled last week with the luxury sector losing over $30 billion in valuation.
“The sharp fall in share prices of groups including LVMH, Hermes International (down about 5.5% over the past five days) and Richemont (down about 6.5% over the past five days) suggests investors have a bad case of the jitters,” reported Forbes.com contributor Mark Faithful. ”Shares propped up by the assumption that the Chinese consumer would start traveling and spending, plus a soft landing in the U.S. luxury market, are now being questioned.” In addition, Prada fell 11%.
The Wall Street Journal reported that investors were most concerned about a cutback at entry-level price points that attract younger, aspirational shoppers, i.e. the HENRYs (high-earners-not-rich-yet). But even the wealthy may be losing an appetite for these brands which may appear to them as over-priced mass-market brands dressed in faux-luxury clothing.
The badge value of a luxury brand loses its value when everybody on the street is wearing it too. Instead, the wealthy are likely to turn to more elite brands that the masses have yet to learn about, let alone buy.
More Pullback Expected
Looking ahead, consumers across the income and wealth spectrum plan to cut luxury and premium spending the most, according to a new global study from PwC that measured over 9,000 consumers across 25 markets. Finding that a majority of consumers are holding back on non-essential spending, with luxury being the most non-essential of all, PwC reports that 96% of all surveyed consumers intend to make some adjustments to their spending habits.
In particular, the survey finds 53% of consumers plan to reduce their spending on luxury/premium or designer products. Mainstream fashion clothing and footwear purchases are also targeted for reduced spending by 41% of consumers, and travel is eyed for cuts by 43%.
“The cost-of-living crisis is having a material impact on how consumers purchase, both in-store and online,” said Sabine Durand-Hayes, PwC’s global consumer market leader, in a statement. “As prices rise, consumers globally are cutting back on non-essential spending, while spending more time looking for cheaper alternatives.”
Luxury Consumers Are Making A Cognitive Switch
Cheap prices are the last thing consumers expect to find when shopping luxury, but even if they are prepared to pay more, they may be surprised at how far luxury prices have risen over the past few years.
“For all top tier luxury brands and groups, a major portion of the growth in 2022 has come from strong pricing, and much less from like-for-like volume growth,” Milton Pedraza of The Luxury Institute shared with me.
“Even HNW (high-net-worth) and UHNW (ultra-high-net-worth) consumers tell the Luxury Institute that continuing to increase prices for the same products has its limits. We expect growth to be subdued for most of the luxury industry in 2023 and recovery in 2024,” he continued.
Stephen Rogers, managing director of the Deloitte Insights Consumer Industry Center, explained the psychological mechanism at work – called cognitive switching.
It is activated when prices exceed the acceptable ranges that people carry around in their heads. Consumers are then forced to do the mental calculus to determine whether to pay up, switch to a lower-priced alternative or do without. Even affluent consumers who can pay the price may be reluctant to do so.
“Lower-income consumers make these trade-offs, trade downs and switches all the time for financial reasons. But high-income consumers are not immune to making the same switches, but for different reasons,” he said.
“If consumers believe that companies are pricing unfairly, luxury brands could bump up against a cognitive switch where the high-income consumers are not willing to go, even if they can afford to pay the higher price.”
Shoppers Turning Their Mercedes Into Walmart
More affluents are trading down, rather than trading up. Case in point: Walmart CEO Doug McMillon just announced that much of its recent growth is thanks to higher-income consumers. “We’re gaining share across income cohorts, including at the higher-end, which made up nearly half of the gains we saw in the U.S. again this quarter.”
Intrinsic and extrinsic factors will both factor into the ‘richcession.’ The affluent have largely had their pandemic-fueled pent up demand for personal luxury satisfied over the past two years, with the market rising 32% from 2020 to 2021 and another 22% from 2021 to 2022, according to Bain-Altagamma.
And given the current economic environment, they may be more than willing to turn their purchase switch off until the turbulence subsides.
“For affluent consumers, luxury is a privilege, not a right, and as they look at the challenges they and the world at large face this coming year, they are signaling a willingness to trade off excess spending on luxury.
“Many plan to batten down the hatches and ride out any potential economic storm, as they did in the Great Recession of 2008 and 2009,” said Chandler Mount, Affluent Consumer Research Co.
Get insights into how to weather the economic storm coming to luxury in The State of Luxury Report 2023: The Industry Insiders’ View.