The health crisis, along with supply chain disruptions and strong demand, has led to a rise in raw material prices, resulting in a return of inflation. According to INSEE, France is experiencing a level of inflation (5.5%) not seen since 1985. However, amidst global economic uncertainties, the luxury sector stands out as resilient. The question arises: why is luxury able to navigate the crisis successfully, and what strategies should luxury houses adopt?
Despite a successful year in the markets, the luxury sector is facing challenges in 2022. Key players such as Aston Martin, Ferrari, Hermès, LVMH, and Kering are experiencing a downward trend. Investors are particularly concerned about developments in China, which represents the luxury houses’ biggest market. President Xi Jinping’s plan to continue the zero-Covid policy if reelected and the struggling real estate market with heavily indebted households have the potential to impact Chinese growth and luxury results.
The outlook for the United States and Europe is not necessarily more optimistic. The US is dealing with inflationary pressures, while Europe is at risk of recession. However, luxury seems to be the most sheltered sector of the economy for several reasons. Luxury consumers are less price-sensitive compared to the mass market, allowing luxury houses to increase their prices in response to rising raw material costs without impacting sales. The high prices of luxury products also soften the impact of price increases. Additionally, luxury caters to populations less concerned about purchasing power or investment choices. While luxury has a relatively stable consumer base and can rely on the dynamism of the American market, managing the coming months may still prove challenging.
The major luxury houses need to carefully navigate passing on the price increases of raw materials. Finding the right balance between maintaining rarity, which is essential to desire, and remaining in touch with the clientele is crucial. Luxury houses may need to adapt their approach during this crisis to successfully navigate it. Inflation reframes the communications landscape, directly affecting purchasing power. Luxury brands may become more discreet in their logo displays, placing more emphasis on their iconic products, which thrive during times of crisis. Additionally, embracing Web 3.0 and leveraging technologies like NFTs and cryptocurrency presents an incredible opportunity for luxury brands to attract new customers while maintaining their desirability.
In conclusion, the luxury sector has shown resilience in the face of the current crisis. With a relatively stable consumer base, less price sensitivity, and the potential for growth through new technologies, luxury houses have the opportunity to navigate these challenging times successfully. However, careful strategies and adaptation will be crucial in managing the impact of inflation and addressing market uncertainties.
Useful Links:
1. Financial Times
2. Vogue Business
