Price Hikes Only Fuel Appetite for Luxury Labels

Yet another hefty price hike has failed to dent Koreans' insatiable appetite for luxury labels.

The average price of a Chanel Classic handbag rose from US$2,850 in 2010 to $6,800 in late 2020, up 2.4 times after the French luxury company jacked up prices every year. Last year alone Chanel raised prices twice, but that still did not deter customers.

In fact the lines outside Chanel stores have grown even longer as people try to get their hands on the latest products as soon as they hit the shelves. That has also driven up the stock price of Chanel, LVMH, Hermès and other brands. Analysts say European luxury brand shares are as dependable as U.S. tech stock when it comes to steady growth.

So what is the reason people keep flocking to labels like lambs to the slaughter?

Luxury labels buck the market wisdom that demand drops when prices rose. On the contrary, the more the labels torture them, the more masochistic customers love them.

"If you look at the bottom lines of major luxury brands last year, earnings increased much more than price hikes," an industry insider said. "This was possible because sales increased on top of price hikes."

LVMH, which owns the Louis Vuitton brand, saw sales increase 12 percent on-year in the third quarter of 2020, while Hermès' soared 6.9 percent. The coronavirus pandemic simply had no impact.

Pundits explain that normal market principles no longer apply to the luxury-goods market. Yuanta Securities said in a recent report that investment in luxury assets like jewels and artworks has spread to high-end handbags and other premium products.

From a consumer's perspective, demand rises if a product is expected to become more expensive down the road, so from a supplier's perspective it only makes sense to jack up. Boosting supply at a time like that would make a product less scarce, so suppliers continue to control the volume in circulation. This is similar to what is happening in the real estate and stock markets.

How did the luxury products market end up mimicking the asset market? First, consumers crave luxury products more because they are exposed to more ads and information about them on the Internet. And with Instagram and other platforms they have even more ways of showing off their bling.

When the price of a Chanel handbag first approached W10 million last year, people started feeling it would be better to shell out a little more to buy a Hermès bag right away (US$1=W1,103). In other words, the more expensive the brand, the more popular it gets. That led to the plummeting popularity of cheaper brands such as Coach.

Another reason is the burgeoning market for used luxury products. People can now earn money quickly if they sell their used bags, and the resell value does not drop as much as it used to.

According to Bungaejangteo, an online shop selling used luxury products, second-hand Chanel classic flap bags, Rolex Submariner watches, Hermes Birkin bags and Rolex Daytona watches retain 90 percent of their original values.

Kwak Ho-young, a director at the shop, said, "Because prices rise around 10 percent each year, the prices of used luxury goods continue to remain high."