Luxury faces a reckoning: What do Gucci, Burberry and LVMH need to do to survive?

The post-pandemic luxury market was unstoppable. Record profits driven by China’s reopening and the revenge-on-lockdown ‘urge to splurge’ sent profits at all the major luxury brands to unbelievable highs. 

Briefly, it looked as though the upswing was going to stick, with pundits – and papers – asking if it would ever end.

Now, results season has put a string of high-profile downturns in the news: profits at Burberry, Gucci and LVMH have all struggled to reach anything like their 2022 and 2023 highs.

What’s more, brands have started to roll out 50 per cent discounts on goods, in a dire sign for an industry that’s been able to force through huge price hikes over the past few years.

Luxury’s big dilemma

During the boom, many brands pushed up prices, but without really bringing anything radically new or different to the markets. Now, they are facing the consequence of the post-pandemic bloat.

“[Brands] find themselves trapped in an ivory tower with disappointing demand in China… [and] aspirational consumers being priced out,” Manfredi Ricca, Global Chief Strategy Officer at global brand consultancy Interbrand, said. 

They have turned to discounts to placate investors and turn a profit, but Ricca said this risks ostracising the rarity-conscious, high-net-worth consumer. Offering discounts is at odds with a luxury brand’s USPs and will only erode the brand in the long term.

Brands are faced with a choice. Reduce prices and market to the aspirational consumer or become one of a very small number of “must-have” brands. 

“There’s a need to be seen as aspirational, but also ultra premium,” analyst at research firm Savanta, Rachel Manning, said. It’s all about positioning, and if you don’t get it right “you’re in a really sticky spot, which is where we’re at now,” she said.

The aspirational consumer

According to Mckinsey, aspirational consumers account for 18 per cent of the total value of the fashion market and 50 per cent of the luxury market. 

Earlier this year, a New Reality Check study found that 56 per cent of consumers who earn over $100,000 (£77,000) per year have cut down on nonessential spending due to retail product price increases.

There’s a temptation for luxury brands to shun the aspirational consumer to focus on recession-proof, super-high earners.

“[These earners are] weathering the economic storm that the rest of the globe is trying to navigate,” Manning said.

But while price increases and a focus on the wealthiest consumers may help buoy revenues in the short term, these strategies may impede growth in the long term if pursued in a vacuum, according to a Mckinsey report. 

Instead, luxury fashion businesses “should simultaneously focus their efforts on building relationships with aspirational luxury consumers”, McKinsey said.

Competition from start-ups

Big brands are also likely to lose customers to trendy start-ups like Canada Goose and Stone Island. 

Ricca compares traditional players and upstarts to “motherships and airships”.

“We all think of luxury as behemoths [like Gucci and Prada]… But then you’ve got a new generation of really interesting smaller, leaner brands,” he said. “By pricing out aspirational consumers, these behemoths open up the [market] to these smaller brands.” 

“[They] really attract new consumers and especially the aspirational consumers by using in a very smart way new channels that are relatively inexpensive,” Ricca said.

Upstarts tend to take advantage of social media and the pull of influencers; brands like Canada Goose in particular have made a name for themselves through Gen Z customers. 

Millennials make up 32 per cent of the world’s population and, together with Generation Z, they’re predicted to make up 45 per cent of the global luxury market by 2025.

While trendy upstarts and traditional luxury players do “play to different spaces and different energy”, Manning said, younger customers are “looking for slightly different things from brands.”

It’s too early to tell without hard data though, she added. “It wouldn’t surprise me [if] younger people are leaning towards those brands.”

Acquisition for growth

The traditional cycle is for the motherships to acquire the airships – last week, luxury eyeglass brand acquired the struggling Supreme. 

Could acquiring these small upstarts provide an opportunity for the behemoths to appeal to a different audience?

Established brands offer investors stability and big margins, while upstarts offer fast growth, making acquisitions better for investors’ portfolios.

However, Ricca warned that this might not be the best way to ensure the long-term success of new or old firms in the industry.

“The current capital markets… don’t really enable the building of luxury brands,” Ricca said. “Maybe the right home for these small upstarts is private equity, where you’re keeping these brands away from the eyes of the quarterly review audiences.”

“Once [brands like Hermes] were upstarts, but they grew across generations by making sacrifices and saying no to fast growth and yes to creating a brand,” he added.

Brands face a choice

Only two key brands have managed to create both the rarity and desirability needed to appeal to the elite customers who make a company immune to economic moves: Hermes—the creator of the Birkin—and Ferrari. 

They have both weathered the luxury slowdown remarkably well: The Hermès Group’s consolidated revenue reached £3.2bn in the first quarter of 2024, up 17 per cent.

Ferrari reported similar results for the full year 2023: net revenue rose by 17.2 per cent year on year to reach £4.94 bn, while net profit was a record £1.06bn.

This leaves those companies stuck in the middle with two options, Ricca explained: to fight for the smaller group of elite customers or to become a slightly cheaper, premium brand.  

The second option, to become a premium rather than luxury brand, is more viable but requires compromises on price, rarity and brand. Profits are high here, but margins are smaller, and the short-term reward is greater. 

The best example of a brand facing this choice in the luxury market is Burberry. Having jacked up prices in an attempt to transition to a high-net-worth luxury brand, it has priced out aspirational consumers and failed to appeal to the small pool of recession-proof customers. The company’s share price has fallen 57 per cent in the last year.

“Burbery needs to make a choice,” Ricca said. To lower prices and be premium or to stick with its luxury strategy and try to compete with Hermes. The second will take longer and require significant investment, while the former is likely to go down better with investors hoping for a quick turnaround at the company. 

“There’s no right or wrong, but it’s all about being consistent with one of the two strategies,” he added.