The global economy is not doing so well nowadays. Some countries are even on the brink of financial crisis. A number of nations have to deal with extremely high unemployment rates. Indeed, we are in tough times that call for some belt tightening measures. Does mean that our appearance and fashion purchases should suffer as well? Maybe not. However, with the current economic situation, can we still afford to buy branded items?
The bad news is despite the badly performing global economy, prices of designer fashion items such as ready-to-wear clothes, handbags, and shoes have been quickly increasing over the past decade. Sure, there will still be those rare good finds that will not cost that much. When we speak of luxury items, the price increase seems to be a continuing one with no hope of letting up anytime soon. Reports show that prices of luxury fashion items have risen at more than twice the rate of the general inflation.
Let’s see some examples:
- The Chanel 2.55 bag currently rivals the price of an Hermes Kelly bag a decade ago. The famous Channel bag cost $4,800 in 2000 but its price has now risen up to $7,600. This 60% price increase is way too disproportionate when you look at the U.S. Consumer Price Index which has only increased by 27% in the last decade. The Consumer Price Index measures the price level of consumer goods in the country.
- Ten years ago, ready-to-wear dresses that cost $10,000 and above were rare. Currently however, this price range seems to be the trend. A leather and boucle Fendi dress is being sold for over $13,000, while an embroidered tartan skirt by Fausto Puglisi is selling for more than $10,000.
- In 2003, the Manolo Blahnik’s popularized by Carrie Bradshaw cost $485. It currently costs $755 or a 56% increase over the past decade.
With the dizzying rate of the price increases of these luxury fashion products, it would be good to go to the root of this trend. Why are the prices rising and how far will they go? Read on to find out more.
Expensive and Rare Raw Materials
One of the reasons behind the drastic price increases of luxury items is that raw materials are becoming more rare and expensive. For instance, cotton prices have been increasing since the global financial crisis has started. Demand from China pushes the prices further this year. As of June 2013, cotton costs $93.08 or a 13% increase year-on-year.
Prices of cattle, which is being used for leather goods, are expected to rise in the United States by 7.3% this year.
Rising Production Costs
Another culprit in the price increase would be the rising costs in producing these luxury items. Shareholders expect gross margins of these companies to be around 65%. For instance, a luxury bag that is sold for $4,000 in the market would cost around $1,400 to produce and to bring to the market.
Apart from the raw materials discussed above, other things that contribute to the final price would include fulfillment, manufacturing, and design. Marketing costs would include those highly expensive glossy fashion magazine advertisements. Retail costs would include salaries of sales staff and rentals of prime real estate. The prices of these have increased in the past decade too.
Rising Labor Costs
Rising labor costs are also to blame for the increase in the prices of luxury items. In France, for instance, labor costs are expected to reach the highest levels ever this year. Over the last decade, monthly average salaries had a 15% increase in the Caribbean and in Latin America, and an 18% increase in Africa. In Asia, monthly average wages almost doubled in the last 10 years. These places are important manufacturing centers.
Anticipation of Markdowns
Luxury brand companies also anticipate markdowns in their prices and this contributes to the dramatic increase in prices of their products. Brands fear marking things down. While some companies like Louis Vuitton and Hermes do not discount their products, most companies anticipate discounting at least a part of their products so they can clear inventory efficiently.
It is common to see boutiques and department stores give discounts of more than 70%. After all, more and more people are now waiting for discounts before buying these luxury items. Why buy a pair of shoes for $2,000 when you can get it for $500 a few months later?
Designer brands that regularly go on sale would normally be forced to artificially inflate their prices to address margin pressure. These companies should note however that in the long run, this could affect brand loyalty and could lead to price resistance.
Desirability and Perception
Prices of these luxury fashion items are also affected by desirability and market perception. People have the mentality that a highly expensive item translates into something more exclusive and thus, more desirable to have. Some brands like Burberry increase prices to attract new and wealthier clients and to appeal to the high end market.
The biggest culprit in the increasing prices of these luxury items is the fact that there are more people willing to pay the price. Yes, times are tough but as long as there are people out there who are able to buy these items then we can expect the prices to just continue soaring.
In 2012, the number of high net worth individuals in the world has increased by 9.2% to a total of 12 million people. These folks have combined total assets amounting to $46.2 trillion. Most of these people are still based in North America but the number of these high net worth individuals has also been increasing in the Asia Pacific region.
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