Bad news for richest 1% as luxury firms hike prices


Luxury brands are mulling more inflation-busting price rises, in the face of strong foreign exchange headwinds and changing Chinese shopping habits.

Prices of luxury goods rose 4 percent annually between 2012 and 2014, and some could rise up to 6 percent this year, according to a note from Sanford Bernstein. The financial research firm based its research on its index tracking the prices of 19 bestselling products across greater China and Europe.

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Ultraluxe brands such as Hermes and LVMH could hike prices between 4 and 6 percent this year, while Gucci, Prada and Burberry are likely to see 2-to-3 percent price inflation, driven by the strong euro and sterling and the changing habits of Chinese customers.

The single currency has risen around 6.2 percent against the U.S. dollar since last year, while sterling has gained 10.1 percent.

"Luxury goods companies have strong pricing power," Mario Ortelli, senior European luxury goods analyst at Sanford Bernstein, told CNBC in a phone interview. "Increasing prices is a way to protect your revenues from headwinds from foreign exchange (FX) and from changes in demand. It is a way to extend your margins."

Luxury companies that sell products from fashion to beverages have been warning about the negative impact of strong currencies. Last month, British designer Burberry said the strong sterling could impact its profits, while luxury eyewear maker Luxottica said profits were affected by currency volatility in the first quarter of 2014. This has pushed these designers to raise prices in local currencies.

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The changing purchasing habits of Chinese consumers have also driven the luxury price rises. Over the past few years, Chinese consumers have increasingly travelled to Europe to buy goods, because of the savings they can make on tax.

Price rises have reflected this habit, with goods in Europe rising by more than those in mainland China. Luxury goods in Paris saw annual price rises of 4.2 percent between 2012 and year-to-date 2014, for example, while products in Shanghai rose by only 1.6 percent.

As a result of price hikes in Europe, the savings Chinese could gain from shopping abroad had fallen to 26 percent by March 2014, down from 35 percent in July 2012.

Mixed views on price rise gains

While higher prices will improve some brands' margins and revenue, analysts are unconvinced that every brand will reap the benefits.

Rahul Sharma, managing director of Neev Capital, warned that price hikes had already proved detrimental to certain upmarket brands.

"Every year it is fair to say that the sector has pricing power and it flexes it. The key thing I would say is that they have had really big price increases since 2009, and for some brands, like Mulberry, it has blown up," he told CNBC in a phone interview. "Not every brand can keep increasing prices. Some have the brand equity."

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France's Hermes has been one of the most aggressive brands in hiking its prices, along with Louis Vuitton, known for its iconic "LV" print. They have been followed by Richemont and Gucci.

"The likes of high-end brands such as Hermes and Chanel have no price resistance and consumers lap it up. The jury is still out on brands like Gucci," said Sharma.

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In terms of products, handbag prices rose 6 percent year-on-year between 2012 and year-to-date 2014. Jewellery prices rose 4.5 percent in the same period.

Experts said the rise in prices was as much about retaining brands' exclusivity as driving margins.

"We do see companies pushing prices up to reclaim that exclusivity," Anusha Couttigane, fashion consultant at Conlumino, told CNCB in a phone interview.