The Strategist

Luxury Loses its Charm

05/27/2015 - 17:33

The prompt rates growth in luxury sector get out of fashion. The five-year fast, despite consequences of financial crisis, increase in sales and profits was replaced by the delay reflecting the faded enthusiasm of Asian consumers, sharp jumps of exchange rates and geopolitical instability. Some of the largest companies from the sector, which recently had no visible cataclysms, are terrible suffered.
As the rating of the most expensive world’s brands BrandZ Top 100 made by the Millward Brown company, the cumulative cost of the brands connected with goods of luxury testifies decreased by 6% for the last year. On growth rates, they were overtaken by much less glamourous sectors, including insurance, retail trade in goods of mass demand, telecommunication and technology.

The luxury sector was beaten by the large-scale anti-corruption Chinese campaign, because of which sales of expensive goods, which are quite often presented as gifts, fell struck. Also student's protests in Hong Kong, where 15% per annum of world sales of luxury goods were made, and also the recession in Russia, in many respects provoked by the conflict round Ukraine, had negative impact as well.

But adverse dynamics of exchange rates became one of the main factors. After general and creative directors left Gucci in December, the company recorded decrease in sales by 8% in the first quarter and let know that they are going to correct the prices as decline of euro considerably strengthened their divergence in different regions. The weakening of euro, which undermined financial performance of the Italian company, and the shown fatigue of consumers led to its falling on 16 points to the 76th place.

Then, Richemont company, the second for market capitalization producer of luxury goods, unexpectedly changed the forecast of profit for the worse in April. Analysts partially connected it with sharp growth of the rate of franc in January after the Swiss National Bank refused its binding to euro.

Dynamics of exchange rates affected the difference in the prices not only at Gucci, but also at many other brands. Now, the same subject can cost in the European capitals 50% less than in the large Chinese cities, what is undermining brand value. Chanel, for example, reduced the prices of the handbags more than by 20% in China in March, and as much raised them in the Eurozone. Unlike it, Hermes declared that they do not intend to level the price.

- We have a large base of loyal clients in France and all around Europe, – the CEO Axel Dumas told to analysts.

– If we significantly raise the prices here, we will lose local clients, and we do not want it".
Hermes has succeeded to endure delay in sector better than many competitors; the company expects growth of sales for 8% at calculation for constant exchange rates this year. Nevertheless, according to Millward Brown, the cost of the brand was reduced by 13% to $18,94 billion (the 55th place). It, the rating authors assume, can reveal the fact that luxury brands have difficulties in forming balance between the prevalence and an exclusivity in consciousness of the buyer during an era of almost instant communications and a wide circulation of mobility.  

Hermes is a rather conservative brand, which is not too actively developing presence at the Internet unlike more available luxury American Tory Burch and Michael Kors brands. The last can brag of millions of admirers in social networks, such as Instagram.

Many megabrands, including Louis Vuitton, Gucci and Prada, already declared that their online stores reached the suitable size. It is partially explained by their desire to protect the value of brands in application to different languages and the countries, especially in China, which remains the powerful engine of sales.