Customers Are Quitting Luxury Brands as Price Hikes Go Too Far

Price increases have reversed this long-term trend. The cost of the average luxury product has risen sharply since the start of the pandemic, albeit with big variations across brands. True, some customers would have pulled back anyway as inflation ate into their disposable incomes. But millions of others have been priced out. 

“Finding regular size [handbags] at less than $3,000 from reputed brands has become virtually impossible,” says Luca Solca, luxury-goods analyst at Bernstein.

Expensive brands aren’t only selling to fewer people, they are selling far fewer products. The number of units sold by the luxury industry this year is expected to be 20% to 25% lower than in 2022, according to Bain. Strip out more-affordable categories such as cosmetics and sunglasses, which are still in demand, and volumes might be down as much as a third for products such as handbags and shoes.

Designer brands have historically increased their prices at twice the rate of overall inflation. But at the height of the pandemic, demand was so strong that they were able to raise prices much faster than the increase in their own cost base. 

Take Christian Dior’s CDI -0.90%decrease; red down pointing triangle medium Lady Dior handbag. According to a Bernstein analysis, the purse cost 3,900 euros in 2020 but is 5,900 euros, or equivalent to roughly $6,200, today—a 51% increase. The estimated cost to make the bag has gone up 18% over that time, from €330 to €388. As a result, shoppers are currently paying 15 times what the bag costs to manufacture, up from 12 times in 2020.

Higher prices have juiced profits but made luxury shoppers more sensitive to how far their dollar stretches at the designer store. They still seem happy to buy from brands that they perceive to offer quality, while skipping everyone else. Ironically, this flight to quality is benefiting some of the most expensive names in the business, including Hermès RMS 0.44%increase; green up pointing triangle and Brunello Cucinelli BC -0.11%decrease; red down pointing triangle, which still do most of their manufacturing in-house rather than outsource it.

Shoppers are also spending on categories they feel offer better value for money. Prices for luxury jewelry haven’t risen as much as for handbags, which might explain why Cartier owner Richemont has been one of the luxury industry’s more resilient performers this year. In September, U.S. luxury consumers spent 2.6% more on jewelry than they did during the same month of 2023, but they spent 13% less on designer handbags, according to credit-card data from Citi.

The other winners from the spending shift are cheaper labels and the resale market. Challenger brands are stepping in to fill the lower price ranges that top luxury labels have vacated. Midprice handbag brands such as Polene, The Curated, Cuyana and Ateliers Auguste are popular with Gen Z consumers who are more skeptical of luxury than older generations. These companies price their purses anywhere from $300 to $700. L Catterton, which is the private-equity arm of the family behind LVMH MC 0.22%increase; green up pointing triangle, recently took a stake in Polene.

The secondhand market is winning customers who still want to buy top luxury names, but not at the prices brands are charging in their stores. The resale business has grown three times faster than the primary luxury market since 2019.

This month, the world’s biggest luxury resale website, The RealReal REAL 8.88%increase; green up pointing triangle, said sales rose 11% in the third quarter compared with a year earlier, as more shoppers turned to its platform for value. Notably, it is experiencing fast growth in luxury handbags that cost $1,000 to $3,000, a price range where there is little choice in the primary market. The company’s stock has gained nearly 75% since it reported its latest results.

It might be that megaluxury brands consider the loss of entry-level shoppers as the trade-off for protecting their exclusive image. LVMH’s financial director, Jean-Jacques Guiony, said on the company’s latest earnings call that he doesn’t think introducing affordable products is the answer to the industry’s slowdown. “I think it would be a mistake. We have to stay true to what we are.”

That might turn out to be a sensible strategy if luxury giants are concerned that their products are becoming overexposed. Rival brands are happy to mop up the millions of customers the industry is leaving behind.

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