Luxury Brands Need to Win Back Middle-Class Shoppers

Individually, middle-class consumers don’t spend a ton of money on designer goods, but they are still a crucial group for big brands. More than half of global luxury purchases are made by 330 million-or-so people who spend less than €2,000 a year on expensive handbags, clothing and jewelry, according to Boston Consulting Group. That is equivalent to roughly $2,180.

Very wealthy clients that splash more than €20,000 a year on designer goods are a smaller group of around 2.5 million individuals who account for 10% of luxury sales. Although these customers are heavy hitters, most of the industry’s growth over the past decade has been driven by so-called aspirational shoppers trying to keep up with the Joneses, particularly in Asia.  

These buyers are now under pressure in the two most important markets for luxury goods: China and the U.S. 

Chinese shoppers are spending less because their homes are falling in value. Listing prices for secondhand properties are down around a tenth since mid-2021, which is encouraging people to save rather than spend their cash.

Meanwhile, Americans earning less than $50,000 a year, who developed a taste for luxury during the pandemic, have pulled back most sharply, based on credit-card spending data from Bank of America. Middle-income consumers earning up to $125,000 have also tightened their belts as higher prices across the economy have left them with less money for luxuries.

The pullback is putting weaker luxury brands under strain. Last week, British trench coat maker Burberry scrapped its dividend, replaced its chief executive officer and issued a profit warning after sales slowed dramatically in the three months through June. Its shares have plunged to levels last seen in 2010.

Operating profit at watchmaker Swatch fell 70% in the first six months of the year compared with the same period of 2023 because of a “huge reduction in demand” in China. German designer Hugo Boss also issued a profit warning and said shoppers have deserted its stores in China.

The industry’s woes are partly self-inflicted. Brands have raised the price of their goods so high that they have become unaffordable for many middle-class shoppers. In a push to “elevate” the label, Burberry released new handbags that were 58% more expensive on average than older models, according to Bernstein analysis. The strategy alienated its traditional customers without a compensating lift from rich shoppers.

To lure shoppers back, some brands are quietly cutting prices. These aren’t end-of-season discounts, but a permanent reset of full-price items. Lowering prices this way used to be a no-no in the luxury industry, as it sends a signal that the brand misjudged the value of its goods. 

Burberry recently cut the price of its medium-size Knight handbag by 22%, according to Bernstein. It has reduced prices on all bags designed by Daniel Lee, the brand’s creative head since 2022, by 5% on average. Burberry’s new CEO Joshua Schulman previously worked at affordable luxury brand Coach and wants to make the label accessible to its core customers again. This will mean a wider range of new entry-level goods, and maybe more price cuts on existing products too.

Yves Saint Laurent, which is owned by French luxury group Kering, also appears to be under pressure. It has reduced the price of most sizes of its bestselling Loulou bag in U.S. stores. A small version that would have set shoppers back $2,950 in January, according to the Wayback Machine, now costs $2,650. The bag is still considerably more expensive than at the end of 2020, when it was priced at $2,050.

For now, the cuts are targeted rather than across the board. And they are focused on leather goods, where brands can’t afford a big dip in sales. Handbags have grown to account for 45% of a typical luxury brand’s total revenue, according to UBS, up from 34% in 2008.

Some companies will weather the downturn better than others. Cartier’s owner Richemont is less exposed to the middle-class slump as only the wealthiest shoppers can afford pricey jewelry brands like Van Cleef & Arpels. Last week it reported that jewelry sales rose 4% in its most recent quarter compared with a year ago, which was better than the 1% increase analysts were expecting.

The most exclusive brands, such as Hermès RMS 1.50%increase; green up pointing triangle, maker of the Birkin handbag, and Louis Vuitton, which is owned by deep-pocketed LVMH MC 1.97%increase; green up pointing triangle, may also prove resilient when they report earnings this coming week. Kering-owned Gucci is also pressing ahead with plans to focus more on the wealthiest customers. However, management sees that it needs to position the Italian brand higher than it is today, but not too high either.

Catering to aspirational consumers is good business. These shoppers are still expected to generate half of global luxury sales over the coming years. Swatch thinks its cheaper watch brands have “excellent opportunities for further growth and market share gains” in today’s tougher environment, though the company does have a reputation for optimism.

If luxury brands continue to sideline middle-class shoppers, more reasonably priced labels will step in. This is already happening in China, where consumers are trading down to local brands like Songmont that are well designed and significantly cheaper than Western labels. “Brands cannot afford to alienate these customers,” says Claudia D’Arpizio, luxury senior partner at Bain & Company.

After spending the past few years treating top clients to exclusive events and one-to-one service, the luxury industry needs to reconnect with its roots.

Write to Carol Ryan at carol.ryan@wsj.com