Why Chanel raises prices for second time in 2020?

In a statement released Friday 6th November this year, Chanel has confirmed a second round of price increase on majority of its handbags and some small leather goods, as the consequence of recent significant exchange rate fluctuations between the euro and certain local currencies. 

Adding the initial 15% growth in May, Chanel’s most coveted bag lines have risen by more than 20% compared to last year. Take for instance, Classic Flap, one of its best-selling products, has been re-adjusted to 51,500 RMB (€6500*) this time, up by as high as 35% within one year and half. 

Many other luxury brands have likewise bumped up prices multiple times this year to recoup lost spending caused by the epidemic. Louis Vuitton raised its handbags’ price in March and May, up to 3000 RMB (€379*) increase. Celine and Prada followed suit and raised by 15% and 10% higher respectively.

In a situation when businesses suffer from drastic sales and footfall declines, it might seem an unlikely moment to push up prices. But, price adjustments due to the changing cost of raw materials, floating exchange rates, or issues with human labor are nothing new in the world of luxury. Regular price raises, in fact, have been a common practice of luxury houses to protect and boost the perceived scarcity and desirability of their products, in order to rectify brand value and retain existing clientele’s loyalty.

But not all brands can afford it. “The ability to raise prices is a manifestation of brand power”, says Jefferies luxury goods analyst Flavio Cereda. For products that are not substantially symbolic and top-of-mind, prices augmentation moves them into a field of comparison with offerings from other brands that have higher tractions and might cause a huge drop of demands and big loss of sales.

Looking at how the second-hand market reacts to hikes into the primary market is a good measure of a brand’s pricing power. Hermès, thanks to its signature Birkin bags that are considered as a better investment than gold during the recent economic downturns, has proven particular resilience while weathering the storm and reported a brisk business with third-quarter sales of 1.8 billion, an increase of 4.2%, outpacing analysts’ previous expectations and swinging back to growth.

That’s why, very often, price raises are initiated by top performers. Chanel’s recent decisions on steep price lifts could be a natural result of accumulated brand equity, leading to the premiumization of positioning for upscale status.

Also, with the on-going international travel restrictions, as claimed by Chanel, these adjustments are made in all the countries where it is necessary and are the guarantee that Chanel items are sold at equivalent price levels throughout the world, to encourage consumers buying locally. In fact, luxury brands have been normalizing their regional pricing architectures for the past several years. In 2015, Chanel announced price alignment strategy and boldly dropped its prices in China for the first time, along with a sharp increase in the U.S. and Europe. Compared with above 50% few years ago, the differential has reduced to around 30% this June according to UBS Evidence Lab data, a level that has allowed brands to resume price increases after a few years break.

In this special context of COVID-19 pandemic, price increase does have been effective in defending margins as seen from brands’ latest financial reports. In Q3, Louis Vuitton narrowed its decline to 7%, with the fashion & leather good sector bucked the trend and recorded a 12% growth to €5.945 billion, together with Dior, became the two major contributors of the recovery of LVMH group. At the same time, the market value of Prada has returned back to HK$80 billion. As Patrizio Bertelli, the group CEO revealed earlier, since the epidemic eases in China, Prada posted a strong recovery, with sales growth up to more than 60% in following months, already far exceeded than the level of the same period in 2019.

What worth noticing is that except Mainland China and South Korea, almost all other markets are still shut down. Though price increases are applied worldwide, the sales momentum is basically driven by wealthy Chinese consumers, who are set to account for nearly 50% of global luxury spending by 2025 according to Bain & Co. Longer than usual queues are formed at Chanel stores from dawn as soon as rumors of imminent price rise began to spread on social media, consumers with pent-up demands are eager to buy before the policy kicks in. It brings a wave of sales, but in the meantime, brands should be careful with the risk of over exposure. 

However, it’s doubtful if this will be a sustainable technique that can be replicated multiple times. In the long run, brands shall always aim for consistency of their pricing architecture, in align with the external competitive environment and within its internal product portfolio. Apart from that, companies’ accelerated deployment of localization strategy and digital channels, various factors have jointly led to the surprisingly positive financial figures this quarter. How to exploit tactical opportunities in the post-pandemic era? This is the biggest challenge lying in front of luxury brands now.