Pricing Strategy in Luxury Goods Industry – Chanel leads the way

http://www.scmp.com/news/china/money-wealth/article/1786725/how-chanel-sets-fashion-global-business
I came across this interesting article in www.SCMP.com on how Chanel is trying to differentiate its pricing strategy. The general expectation is that a few other brands may follow suit. Essentially, the strategy now is to reduce the prices in China by about 20% and slightly increase the prices in Europe.
Hitherto, the pricing strategy of all luxury brands was predicated on the theme of “aspiration” and set at a high price and some brands like Hermes also attempted to limit the number of products available at stores. This twin strategy was aimed at exclusivity as a critical factor in the purchase decision. The Financial Times recently stated that “The richest 1 per cent had 48.2 per cent of the world’s wealth in the year 2014, according to widely cited research from Credit Suisse, but that share has fallen and risen over the past 15 years. It is lower now than in 2000 and 2001”
Whilst the income inequality in certain countries like India, China, Indonesia, etc has increased, at a global level the income inequality has actually decreased and is decreasing further every year. This means that at a global level, incomes across countries are slowly but surely converging, thus resulting in overall greater affordability. With greater purchasing power and concomitant factors such as power of social media to influence trends, we see greater democratization of purchase decisions – the exclusivity factor thus is slowly losing its grip. On the other hand, the pressure to achieve top line growth works in favour of making products available to consumers. Hence, brand pricing strategy can no longer rely solely on exclusivity, and the growth imperative militates against limiting product availability.
Why is this new pricing strategy being implemented? I have not come across any specific analysis on this key question as all analysis seems to focus on the immediate uptrend in volume growth in China. Here is my 2 cents on this strategy that aims to increase domestic consumption in China and simultaneously discouraging Chinese customers from buying in European markets.
There are 2 factors in my view that explain this shift in consumption patterns driven by the new pricing strategy:
1. Heavy investments in stores in China have till date not yielded the desired local growth; we have no concrete numbers but the industry rumour is that some brands are bleeding financially and have reached a point of store closures so as to remain viable. If true, then the attempt to lure Chinese customers to buy locally in China makes a lot of sense. This strategy also supports the Chinese government’s economic strategy to boost local consumption.
2. The anti-corruption drive in China has reportedly resulted in key customers staying away from the luxury goods stores. This is certainly true for the gifting segment, and for items procured during overseas trips to Europe. As we know, in many sensitive sectors such as Banking, the government retains the passports of key managers/executives who need to obtain prior approval for any overseas trips (as a mechanism to reduce corruption and flee the country to avoid prosecution). But if the products are available at a competitive price in the domestic market, then the genuine customers will buy in local stores. Here I see a shift away from small leather goods to RTW and more expensive bags/shoes. Thus affordability is also a key driver in this market at this juncture as it widens the consumption base and brings in genuine customers who have declared their incomes and paid taxes properly.
Whatever the result, I am keen to study whether the luxury goods market is sensitive to price.

About Prasanna Bhaskar

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