Reasons why Chanel is so expensive

Not only Chanel, many other high-end brands such as Rolex, Hermès, Dior, Prada, Louis Vuitton, Gucci also considerably increased their selling prices to maintain their expensive and luxurious image.

In early March, Chanel raised the prices of purses and handbags by an average of 5%, following an earlier 17% increase in January. This is the brand’s sixth price increase in the past 12 months, according to Korea Joongang Daily.

Classic Flap, a handbag with a length of 23 cm and a width of 14.5 cm, has a current price of more than 10 million won ($8,050), 36% more than in November 2020 and almost double that of 10 years ago.

Chanel isn’t the only luxury brand pushing up prices. Rolex, Hermès, Dior, Burberry announced product price adjustments earlier this year. Prada, Louis Vuitton and Gucci also raised their prices in February, respectively.

Initially, the economic recession caused by the pandemic was seen as the cause of the price increase. However, for now, while the market is recovering at an accelerated pace, luxury brands continue to raise prices.

Steady price increases will inevitably lead to the loss of customers, but these companies seem to care less about that. They want to protect their high-end image to attract wealthy and loyal customers rather than following the post-pandemic “revenge buying” trend.

The Law of Scarcity

In 2019, 70% of all luxury purchases from Chinese customers were made in the US and Europe.

Sales began to decline in 2020 due to travel bans and global supply shortages.

Chanel reported an 18 percent drop in revenue from 2019, to $10.1 billion, and a 41 percent drop in profits to $2 billion in 2020.

LVMH, which owns about 70 brands, including Louis Vuitton, Dior, and Kering, which owns Gucci and Saint Laurent, experienced a 16% drop in sales.

In 2021, companies will quickly offset losses by raising product prices when the market begins to recover and demand for purchases rises again in the US, China and Korea.

According to research firm Bain & Company, global luxury sales last year surpassed pre-pandemic levels in 2019, reaching around $311 billion, up 29% from 2020.

But in addition to strong post-pandemic demand, there is another factor driving up the price of luxury goods: the law of scarcity.

Chanel is a good example. When the French brand became famous last year due to the trend of “revenge purchases” (impulsive spending fueled by feelings of frustration and missed opportunities due to covid-19) and the resale market. As luxury grew, some wealthy customers moved away from Chanel.

“I decided not to visit the Chanel store anymore after seeing a bunch of people waiting outside the store,” said the 43-year-old South Korean customer, who has worn Chanel products for more than 20 years.

This consumer added that now, when it comes to Chanel, many Koreans will only think of things like resale or “open race,” the term used to refer to queuing all night in front of a department store to wait for sales to open.

Hermès strategy

To make their products more attractive, luxury brands have to make them harder to reach, harder to own.

Market analysts see Chanel’s pricing scheme as similar to that of Hermès, a brand that targets only wealthy customers.

The price of a medium-sized Chanel Classic Flap bag has risen 93% over the past decade, from 6.1 million won to 11.8 million won, a rate that exceeds the consumer price index.

Brands that are considered high-end but are priced lower than Rolex, Hermès or Chanel don’t raise prices as often. For this group, the question of whether customers can afford to buy the product is very important.

On the other hand, Hermès and Chanel customers are largely unaffected by price fluctuations. Instead, these people tend to prefer luxuries that are inaccessible to the average consumer.

That’s why luxury brands are looking at the rich young generation in the Chinese market. According to consultancy Knight Frank, the US has the most super-rich people with assets worth more than $30 million in the world, but China is home to more emerging millionaires and billionaires.

It is estimated that the super-rich in China will exceed 100,000 by 2025.

Bain & Company estimates that China will account for half of all luxury consumption worldwide by 2025.

However, some experts do not believe that brands can continue to raise prices.

Continued price increases could meet resistance if governments begin lifting travel bans and China continues to report slower-than-expected economic growth.

Goldman Sachs forecasts that China’s luxury market will grow 9% year-over-year. This figure is much lower than the previous growth forecast of 13.5%, both due to the low growth target and the crisis of the real estate market in the country of billions of inhabitants.

Analyst Luca Solca says luxury brands could experience “painful corrections” if prices continue to rise at the breakneck pace of recent years.