This week, an exploration of new insights on luxury pricing and spending. Scroll down to use Glossy+ Comments, giving the Glossy+ community the opportunity to join discussions around industry topics.
Fashion companies are continuing to raise prices, even as luxury consumers seek out discounts. At the same time, luxury retailers catering to wealthy customers are showing mixed results. Consultants are now urging fashion leaders to increasingly leverage data when making price hikes to best ensure alignment with consumer demand.
“The industry needs volume growth. So, … you’ve got to think quite forensically about what is going to drive volume … and where there is opportunity to [manipulate] the margin mix,” said Anita Balchandani, senior partner at McKinsey & Company and co-author of “The State of Fashion 2024,” during this week’s media briefing on the report. “We expect players will get more scientific about how they think about pricing, versus [making] very blunt price increases.”
She added, “We’re excited about the broader applications of AI and Gen AI to help make this industry much more responsive to consumer demand.”
Earlier this week, while discussing the company’s accelerated road to profitability, The RealReal CEO John Koryl noted the luxury resale company’s recently updated seller commission structure, which disincentivizes products that would sell for less than $100. Those have proven unprofitable, he said.
While the change could easily result in a loss of entry-level shoppers, it could also work to the benefit of the company’s newly introduced advertising offering.
“We have a very enviable customer base,” Koryl said. “[Advertisers] want to talk to our 34 million members, and they want to talk to the people who consign more than $10,000 in luxury goods a year.”
A valuable customer base can also work to attract brand partnerships. Retailers like luxury e-commerce platform MyTheresa often team with brands to treat their top-spending customers to unique experiences. For example, in the last quarter, the company hosted an exclusive dinner and party in Warsaw, Poland to celebrate the launch of an exclusive Magda Butrym capsule collection, as well as private events with Rabanne and Flamingo Estate.
McKinsey’s report, published on Wednesday, shows that 435 fashion executives surveyed in August-October 2023 said they expect their company to increase prices across product categories by at least 5% in 2024.
For its part, Chanel, which has become notorious for regularly upping its prices, most recently implemented a 6-8% increase in regions including China, Japan and Australia. In a Financial Times opinion piece published on November 22, Robert Armstrong argues that “luxury prices have gone too far.” The costs of designer goods have extended beyond what brands can justify by attributing rates to a premium look and quality, he says.
Cost pressures on fashion companies are set to abate, said Balchandani, who described the industry as moving into a “cost control era.” Only 18% of executives surveyed said they expect the cost of goods sold to increase by more than 5%, and just 19% said their selling, general and administrative expenses will rise by more than 5%.
But at the same time, McKinsey reported widespread industry uncertainty about what’s in store for 2024. Answers were more evenly split, compared to prior years, when survey participants were asked how fashion industry conditions will evolve in the year ahead compared to the current year. Twenty-six percent said they’ll be “better,” 37% said they’ll stay the “same” and 38% answered “worse.” McKinsey has posed the question to executives since 2017.
On Tuesday, MyTheresa reported a revenue boost of 12% year-over-year, to €187.8 million, for the quarter ending on September 30. The double-digit increase was exceptional, compared to competitors’ recently reported results, yet reflected slowed growth; in the prior quarter, the company reported a 16.5% sales increase. On the same note, gross merchandise value rose 8% year-over-year, compared to 13% last quarter, and gross profit margin declined by 6.5 percentage points.
The brightest spots in the earnings report relate to what MyTheresa calls its “top customers.” Company representatives have historically declined to elaborate on the description, only sharing that those fitting the bill spend a “significant” amount annually. Overall, the customer base grew by 19% year-over-year, while the number of U.S. top spenders increased by 56%. Top spenders reportedly accounted for nearly 40% of total sales and, in part, upped MyTheresa’s average order value by 5% to €660.
On a less positive note, CEO Michael Kliger blamed the drain on the company’s profits on heavy discounting across luxury. MyTheresa, meanwhile, has long avoided price cuts. Kliger owed the widespread promotions to an “excess stock of fall-winter merchandise” on the market. He expects inventory levels to level out within the first half of 2024, he said.
In September, Kliger spoke with Glossy about the company’s focus on its highest-spending customers, saying that affluent customers can’t be lured by deals and instead simply buy what they want, when they want it.
It’s worth noting that luxury fashion marketplace Farfetch, which has recently struggled and is now rumored to be going private, has upped its focus on its top-spending Private Clients in recent years. In 2022, the top 1% of its customers generated more than 27% of its gross merchandise value.