Summary
Discounting and over distribution could spell the end to many luxury and aspirational brands. Here's why.
Analysis
It’s unusual for true luxury brands to lower their retail prices despite deceases in commodity costs or changes in currency values. That’s because these brands tightly control their manufacturing and distribution so that there is always greater demand than there is supply. Rolex is one such example where prices have consistently increased from $1,000 in the early 1970’s for a men’s 18K President to $5,000 in 1982. Since then, gold prices decreased from nearly $850 to $320 in early 2001, the US experienced three recessions, the dollars strengthened from 0.52 to 0.67 pounds sterling Yet Rolex increased its retail price to about $25,000 during the 20 year period.
One of the characteristics of a true luxury brand is that it’s relatively inelastic. By that I mean the change in demand by consumers is less than the change in price at a given point in time. So with in a moderate price range of say plus or minus 20%, demand is likely to be about the same for Rolex. Consequently, lowering prices isn’t likely to increase overall demand, but it could reduce profits and dilute the efficacy of the brand. Granted, lower prices could shift market share from one competitor to another, but in the case of brands that operate their own stores, lowering prices doesn’t make much sense.
Encouraging discounting is exactly the last thing luxury brand mangers want to do, even in a recession. In fact, luxury brands are usually very aggressive in discouraging retailers from discounting. For example, Rolex decreased it global distribution by about 50% between 1992 and 1994. In particular the number of stores selling Rolex decreased from about 1,600 doors to less than 800 during that time. In the process, Rolex was able to eliminate much of its discounting problem, as well as, increase units sold globally.
Whether European manufactured luxury products have more margin flexibility is problematic at best, but regardless, higher margins should be channeled into brand building not into reducing price. Unfortunately, many luxury brands have recently tied their pricing to commodity and monetary movements rather than pricing to market by managing supply. Now consumers see many luxury products as commodities which is precisely the opposite message brand managers want to send to consumers. Clearly, if this commodity pricing mentality continues, many luxury brands and even more of the aspirational names won’t have much consumer appeal as this new economy emerges.
