The Impact of the Cost of Living on Premium Brands

Croud Luxe Marketing Team

20th May 2024

~ 7 min read

How are luxury brands being affected by the cost of living crisis?

In their recent “How strong is the pricing power of luxury goods” report, KPMG forecast the likely short- and medium-term future performance of luxury brands in this time of higher inflation and rising interest rates. In this article, we’ll cover the main points from this report and look further afield to discover the current thinking of leaders within the luxury sector.

We’ll cover:

  • Current forecasts for different luxury sectors from cars to perfume
  • How inflation and interest rates are affecting pricing decisions and perceptions
  • Adapting luxury brands to cope with economic challenges and evolving customer trends

Current forecasts for luxury sectors

KPMG and other forecasters seem to be broadly in agreement that, revenue-wise, there’s not much for luxury brands to get concerned about. Here are some of the highlights:

  • Cars: Luxury car brands like BMW, Mercedes and Audi have recently increased prices significantly by 6-12%. HNW consumers’ demand for super luxury cars coupled with their lack of price sensitivity provides shielding – for example, the market for cars costing more than $150K is booming in markets like India. Backing this up, McKinsey believes that the luxury car market will expand by 8-14% annually between now and 2031 while demand for cars costing less than $80,000 will remain subdued. 
  • Watches: The KPMG report states that luxury watches’ inherent investment value and demand for collectibles insulates them from major fluctuations in demand. The firm notes thought that mainstream buyers could defer purchases if prices go beyond their budgets. That said, Diamond Hill points out that, including during other high inflation and interest periods throughout the last 60 years, Rolex has upped prices by between 5% and 6% annually. One analyst expects 5.3% compound annual growth rate (CAGR) in the sector between now and 2028.
  • Fashion: Women’s luxury handbags have seen price increases of up to 22% between 2019 and 2022, according to the report. Production issues and material costs are driving the price rises however market forecasters are still expecting a compound annual growth rate in the market between now and 2026 of 5.66% (4.27% in the UK) with up to 10% growth in 2023 alone.
  • Jewellery: The report notes that big ticket luxury jewellery will continue to retain its appeal as an investment and status symbol. Global Insight Services notes that, despite inflation driving up the price of jewellery making it less affordable, they expect a 7.2% CAGR between 2021 and 2031.
  • Perfumes: According to the KPMG report, commodity price hikes have driven perfume prices up 12-15%. This may discourage gift purchases and impulse buys from mainstream luxury beauty buyers and rising prices may also impact the giving of premium perfumes as gifts. Despite that, Mordor Intelligence expects a CAGR in the market of 6.2% while forecasts from others reflect this belief.

Considered in the round, the luxury sector as a whole seems in rude health. Is that actually the case though?

Luxury pricing models in a time of high inflation and rising interest rates

Reflected in the forecasts above is the long-standing belief that, no matter the economic turbulence, the ultra-high-end market remains less vulnerable to inflation. The KPMG report suggests that rising prices is more likely to affect particularly mainstream and aspirational consumers who want to access luxury goods and services. It mentions that while price increases can enhance a brand’s exclusive image, there is a natural limit. If prices go too high, this will put off consumers with limited purchasing power.

KPMG warns that, during economic downturns, even affluent consumers are not completely immune to the effects. The global personal luxury market saw a significant dip of 9% in value during the 2008/2009 recession although China was unaffected. The consultancy firm cautions that luxury brands should prepare for potential economic troubles.

Vogue Business reports that, as a result of the 2008/2009 recession, luxury designs became less ostentatious and more minimalist, and that shoppers began to take discounts for granted. That may have worn off in the intervening years but, during this period of economic turmoil, KPMG suggests that brands could consider turning to discrete discounting like providing exclusive sales for loyalty members or personalised promotions for premium customers.

The consulting firm also warns that luxury brands, particularly those that have visibly increased their prices like Louis Vuitton, Hermès, and Chanel could reach a point where even their affluent customers find their prices too high. If customers perceive price gouging, they might switch to more affordable luxury brands or lower-cost and more mainstream alternatives. This could significantly dent luxury brand revenues in the longer-term. 

Findings from Deloitte Insights show that inflation is impacting all consumers, not just those with lower incomes. Both lower-income and high-income consumers believe companies are unfairly raising prices, which can decrease trust and purchasing intent.

Stephen Rogers, managing director of Deloitte Insights Consumer Industry Center, told Forbes that they had noticed a significant change in consumer sentiment since September 2022. Both middle and lower-income consumers were beginning to feel the effects of inflation. High-income consumers were also beginning to feel the impact, which could put luxury brands at risk. 

While inflation may be subsiding globally, it has been replaced by concern about higher interest rates. Mr Rogers warned that brands should carefully consider their pricing strategies to avoid triggering this switch among consumers.


What Croud Luxe thinks

Here’s where we speculate a little based on our knowledge of luxury brands, their core consumers and those who aspire for the luxury lifestyle.

  • Luxury rental: This is not exactly new – European CEO reported on it back in 2018 and McKinsey in 2020 but brands needn’t miss out on revenue because more consumers find the cost of outright ownership prohibitive. There could be an opportunity to grow your presence in this market if traditional sales revenues are hit.
  • Longevity: Although luxury brands traditionally have offered first-class extended warranties, maintenance and repair services, more could be made of it in their marketing campaigns. This would not only highlight their durability as well as highlight the fact that they are likely to last long enough to be resold at a later point.
  • Localism: This will be infinitely harder to organise depending on your range of products but there could be a benefit in opening manufacturing facilities closer to core market to create region-specific items (like for the Chinese market) and to reduce carbon emissions (great for ESG).

The next few years may be slightly tougher than before but, as we saw in the last financial crisis and through earlier periods of high inflation and interest rates, the luxury sector is adaptable and recovers quickly from setbacks. Brands that understand what’s happening among their core audiences and Thaspirational users now will emerge stronger at the other end.

We’ve worked with luxury brands for over 10 years now and we’re already in consultation with them on marketing and brand building strategies to make the most of the current situation. To find out more about our approach, please get in touch with us. We’d love to hear from you.

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