You will notice that Hermès is not mentioned in the following Wall Street Journal article. This is because Hermès continues to show double-digit sales increases. Perhaps the WSJ headline should have read: Soaring Luxury-Goods Prices Test Moderately Wealthy's Will to Pay. After all, the moderately wealthy who buy brands such as Chanel, Louis Vuitton, and Jimmy Choo aspire to buy Hermès. Hermès is for the wealthy, or those that are not but don't mind maxing out their credit cards for a few years for the "privilege" of carrying the Hermès logo.

Soaring Luxury-Goods Prices Test Wealthy's Will to Pay

Sales Growth Slows as Competition Heats Up; 'Prices Have Gotten Really Crazy' 

 

A crackdown by China on giving gifts to officials has slowed sales. Above, a Cartier store in Shanghai. Bloomberg News

 

Despite expanding into new markets, the luxury-retail business has been relying on price increases to drive sales. Now, even the very wealthy are nearing the limits of what they are willing to spend.

In the past five years, the price of a Chanel quilted handbag has increased 70% to $4,900. Cartier's Trinity gold bracelet now sells for $16,300, 48% more than in 2009. And the price of Piaget's ultrathin Altiplano watch is now $19,000, up $6,000 from 2011.

Such increases for some of the world's most expensive indulgences far outpace inflation and contrast with the middle and lower end of the retail market, where even small increases can turn off shoppers.

At the high end of the market, a higher price can add to a product's allure, according to one economic theory. But the practice is seen by critics as a flimsy platform on which to build sales growth, one that already could be reaching its limit and might prove precarious if the economy sours.

Spending on luxury apparel, leather goods, watches, jewelry and cosmetics reached $390 billion last year, according to Boston Consulting Group. But growth is starting to slow from its postrecession pace. Sales of such items rose 7% last year, down from the 11% annual rate in 2010 through 2012, according to the firm. BCG forecast that sales growth would hover around 6% for the next few years.

A crackdown by China on giving gifts to officials has caused much of the slowdown.

But there are also signs that price increases are starting to wear thin with Western customers amid heightened competition from more-affordable brands.

"Luxury brands are at risk of losing customers who cannot or do not want to pay more," said Claudio D'Arpizio, a partner with consulting firm Bain & Co.

Connie Oclassen of Mill Valley, Calif., said she couldn't buy as many pairs of Jimmy Choo flats as she used to, since prices climbed to $650 a pair from $495. In the past she would buy four or five pair a year. This year, the retired marketing executive will limit herself to three.

"Prices have gotten really crazy," she said as she browsed at New York's Henri Bendel recently.

Sales at Gucci, which is owned by France's Kering SA, KER.FR +2.09% fell 2.1% last year. And British handbag maker Mulberry Group MUL.LN +0.26% PLC said that lower-than-expected sales last year would decrease profit substantially. Mulberry's chief executive said more-affordable brands, such as those from Hong Kong's Michael Kors Holdings Ltd. KORS -0.05% , had siphoned off customers.

LVMH Moët Hennessy Louis Vuitton SA MC.FR +0.84% said sales growth for fashion and leather goods slowed to 5% last year from 7% the year before, excluding the effects of acquisitions and currency movements. But the French company said it increased prices on its Vuitton products around 3% to 4.5% last year without an impact on its business.

"The client base is used to that type of price increase," Chief Financial Officer Jean-Jacques Guiony said. Vuitton raised the price of a monogrammed Speedy bag in the U.S. by 15% last year to $910. That made it 32% more expensive than in 2009.

The higher prices are masking weaker growth in volume. "Companies are selling fewer units," said Luca Solca, an analyst with Exane BNP Paribas.

An economic theory holds that for certain goods, higher prices increase desirability and drive sales, rather than suppress demand as they would for ordinary products. Economists refer to such luxury products as Veblen goods, named for American economist Thorstein Veblen, who described the phenomenon.

Higher prices didn't dissuade Brooke Palmer, a public-relations director from Tampa, Fla., who shopped for shoes on a recent afternoon at Saks Fifth Avenue in Manhattan. Footwear is an investment, she said. And she raved about her first pair of Christian Louboutin shoes—red strappy sandals she bought 10 years ago and still wears.

"I could buy cheaper shoes, but they wouldn't last," Ms. Palmer said. "And they wouldn't make my feet happy."

The high-price strategy carries risks. Luxury brands pushed through steep increases before the recession only to have sales plunge when the crisis hit and the stock market tumbled, prompting even well-heeled consumers to slash spending.

One reason ultraluxury brands are raising prices is to distinguish their products from entry-level luxury goods that are fast picking up market share.

"The more Tory Burches and Michael Kors there are, the more the Chanels and Louis Vuittons will try to price up," said Milton Pedraza, the chief executive of the Luxury Institute, a research and consulting firm.

The unintended consequence could be that the luxury brands drive even more customers toward less-expensive rivals.

High-end brands said the price increases are necessary to maintain quality and offset the rising costs of production.

"We are no different from other luxury brands in regularly adjusting our prices as our models, production costs, raw materials and exchange rates change," a Chanel spokeswoman said.

Wage and material costs have increased. Wages in China have risen 62% since 2007. And the price of native steer hides, a benchmark for leather, has increased about 17% over that period, while the price of gold has more than doubled, according to FactSet and SIX Financial Information.

But rising costs don't account for all of the increases, industry executives said. The U.S. price of a basket of luxury goods tracked by market-research firm Euromonitor International rose 13% last year, while the consumer-price index increased just 1.5%.

Andrea Ciccoli, the founder of Level Group, which operates e-commerce sites for brands such as Stuart Weitzman and Galliano, said higher leather and gold prices should translate into price increases of no more than a few percentage points.

In Europe and the U.S., brands have pushed prices higher in part to capture more money from Chinese tourists who buy luxury goods abroad to avoid tariffs that can add 40% to prices at home.

The brands also have a rising supply of wealthy people to cater to. Credit Suisse estimated 1.8 million people joined the ranks of the world's millionaires last year.

But even for those who can afford it, higher prices are starting to bite.

Jamie Moore, a homemaker in Cleveland, Tenn., said that on her annual shopping sojourn to New York, she usually splurged on a Prada handbag, for which even a basic nylon model can cost $1,230. Not this year.

"The prices have gotten so expensive that I'm not buying one," she said.

By

Suzanne Kapner and

Christina Passariello
March 2, 2014 6:42 p.m. ET
http://online.wsj.com/news/articles/SB10001424052702304585004579415110604829016