Only the Best Luxury Brands can Hike Prices

Louis Vuitton pushed through multiple price increases on its products during the pandemic, an option not available to all its competitors

By guest author Carol Ryan from Wall Street Journal

One way to tell which luxury-goods brands are in fashion is whether they managed to raise prices in the middle of a pandemic.

LVMH Moët Hennessy Louis Vuitton LVMUY reported resilient results Tuesday, after the Paris market closed. While overall revenue fell 16 % at constant exchange rates in 2020, the luxury conglomerate’s closely watched fashion and leather goods division did better. Sales only slipped 5 %, and operating margins were higher than in 2019. The unit is crucial as top brands such as Louis Vuitton and Christian Dior CDI -0.50% generate two-thirds of the company’s total operating profit most years.

Price increases in particular protected LVMH’s bottom line, although other factors such as rent renegotiations also helped. Louis Vuitton lifted prices on certain handbags by up to 6 % in May last year and a further 3 % this month, according to Jefferies data. At Christian Dior, prices were increased by up to 11 % in some markets.

Other top brands are doing the same. At privately owned Chanel, its best-known handbag is now around one-fifth more expensive globally than at the end of 2019. The latest increase was in the U.S., where a classic flap bag now sets shoppers back by USD 400 more than in November. Gucci, owned by LVMH’s French peer Kering, recently pushed through a 22 % price increase on its Dionysus bag in Korea.

Most years, luxury brands use price increases to offset inflation in input and labor costs as well as currency moves. But 2020 has been exceptional. “Recent price increases have been pretty aggressive…In normal years, a typical rise would be 5 % to 6 %,” said Kathryn Parker, an analyst at Jefferies. The move boosted profit as sales have been under pressure. LVMH’s chief financial officer Jean-Jacques Guiony told analysts that the company could raise prices in 2020 because it was restrained in the previous four years.

However, pricing power looks unequal across the sector. British trench-coat maker Burberry BURBY didn’t change prices on existing products in 2020, and made only small increases in January this year. This may be another sign that the company’s turnaround is fragile. Bottega Veneta, which is otherwise one of Kering’s most-promising smaller brands, has only increased prices modestly, UBS data shows. After years of underperformance, it probably hasn’t yet built enough clout to drive up prices without losing customers.

LVMH’s stock has been exceptionally strong over the past year and changes hands for 34 times prospective earnings, giving the company a market value equivalent to $314 billion. Investors’ high expectations help explain why the shares barely rose at the Paris open on Wednesday. Yet the company’s capacity to keep profit flowing in the face of widespread store closures offers reassurance that it can continue to deliver—even if shoppers pay the price.