Last month, Hermès announced plans to increase its production capacity with the addition of two new leather goods workshops in France. Its announcement in March followed the news in its latest results that sales growth at the French luxury goods group eased in the last quarter of 2021 because its self-imposed production caps kept the company from meeting demand for its handbags.
Its shares fell by 7 percent on the day, its worst trading day since September 2016 and its lowest price in more than eight months, Reuters reported at the time.
The company said in February that it caps volume growth in its leather goods production at 6 to 7 percent per year, preferring instead to have long waiting lists for its products rather than accelerate production. However, with its announcement in March - the addition of two production sites based in L’Isle d’Espagnac in Charente and Loupes in Gironde which are set to open between 2025 and 2026 - that may be about to change.
The workshops are in addition to three other sites already under construction in France, adding to Hermès' long-term plans to meet the burgeoning demand it faces for its products.
Likewise, an announcement from LVMH in February to increase its production in France with two new workshops expected to open before the end of the year demonstrates the kind of voracious demand that the luxury market is seeing at the moment, particularly as the market rebounds from the challenges seen at the start of the global COVID-19 pandemic.
Despite the uncertainty experienced by the global markets, demand for iconic luxury goods during the past two years has grown. Data from our special report The Deep Dive found that interest in iconic products is at an all-time high, with Google searches for “Cartier Love Bracelet” up by 27 percent during the period of January to October 2021 (3,404,000 searches) or by 20 percent for “Louis Vuitton Neverfull” iconic bag (1,655,000 searches for this query).
More recently, further data analysed by DLG for this article shows that interest in the Hermès Birkin and Kelly bags has grown by 37 percent and 86 percent respectively, when comparing Google searches from March 2019 - February 2020, to March 2021 - February 2022. Likewise, for Louis Vuitton, interest in its Capucine bag rose by 162 percent in the same period, 62 percent for the Twist bag and 36 percent for its Alma bag, demonstrating that demand for luxury goods is still going strong.
If anything, what we have witnessed is that meeting and balancing demand has become one of the main challenges that luxury brands now face, particularly when it comes to forward planning and determining the pace at which one produces. Make too little and you can’t meet customer demand. Make too much and you have a surplus of products that could end up damaging your brand equity.
“Brands have to be very tuned in to the customer's psyche right now,” said Robert Burke, CEO, and Chairman of consultancy Robert Burke Associates. “Luxury consumers have gone through a great deal of change over the past two years; in terms of how they view their assets and in terms their spending habits.”
Part of being in sync with their customers is knowing how to achieve the right balance, Burke added. “Consumers understand supply and demand. There is a balance and a scale that you have to hit to not put off the customer because of excessive wait times or unavailability.”
“But right now, they’re very frustrated with supply chain issues,” he continued. “The more wealthy they are, the less tolerance they have… And if they don't buy from you, they have enough disposable income to spend it on another brand. And that's just the reality.”
So how do brands strike that right balance?
The first thing to note is the reality. During the pandemic, it was hard to anticipate what demand there would be for luxury goods, whether those products could continue to be made due to COVID restrictions and if brands could even sell their products to customers when stores were closed, resulting in many brands deciding to scale back so that they could assess how best manage the situation.
However, as the past two years have shown, luxury is experiencing a rebound and now brands have to once again pivot to a new strategy, particularly one that focuses on markets with significant growth potential like the United States.
“I think a lot of the brands were surprised by the magnitude of the rebound over the past 18 months, and so they got into a situation where the volumes were incredibly tight, and they thought that it was appropriate to add some production capacity,” said Erwan Rambourg, managing director and global head of Consumer & Retail Equity Research at HSBC.
“Demand in the sector has been incredibly resilient,” Rambourg added. “Most companies are still seeing very, very buoyant demand in the United States, which is linked to the recruitment of a younger, more diverse consumer than pre-COVID.”
It comes as little surprise that brands like Hermès and Louis Vuitton are scaling up production, particularly as demand from markets like the United States continues to help drive quarterly sales growth. “They're looking at the long term,” said Burke. “They're confident that if demand stays the same or grows, which it probably will, they'll be positioned to supply the demand.”
However, if demand eases, can brands manage a potential surplus?
“No one knows what will happen in six months, but if they need to pull back on production, the margins are good enough,” said Burke. “What they don't want to do this is short term or long term is miss out on any momentum by being too scarce.”
“Both brands, rightfully so, are very confident that once the customer goes down this luxury path of buying their product, they will continue,” Burke said of Hermès and Louis Vuitton. “They're not going to flood the market with their products, because that would go against everything they stand for, but they're pretty bullish that customers are going to end up being a repeat customer. And we're also bullish specifically because we believe that the United States is an opportunity to grow further for luxury brands right now.”
Another way that some brands are trying to manage demand is through their pricing, as seen with Chanel, which has once again increased the prices on some of its products in early March, after raising its prices three times in 2021.
“The volumes have been so tight that there have been a lot of brands recently increasing prices,” said Rambourg, noting the moves of Chanel, Louis Vuitton, Hermès, and Rolex. “Pretty much every brand has increased their prices and pretty much every brand has made the case that the volumes are not affected by their price increases given how buoyant the demand is,” he added.
But this short-term approach of raising prices carries the risk of putting off the luxury consumer, particularly if brands don’t keep the pace of their peers.
“If at some stage, the consumer becomes accustomed to the idea that she will be paying as much for Chanel as for Hermès, it creates a precedent that people might think: oh, actually, Chanel is a better brand. Because if people think that prices are reflective of quality, then it becomes a risk for a brand that Hermès not fighting with their prices where they would be completely legitimate in doing so,” said Rambourg.
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A better approach to take is perhaps the one seen at Louis Vuitton, which has managed to protect its brand equity and pricing by hyper-segmenting its consumers and the product offering.
Not only has Louis Vuitton been so good at hyper-segmenting the product into different handbag ranges and developing more accessible price points, but they also diversified into jewellery, sneakers, and fragrances, said Rambourg.
“They’re also been super specific about who they are communicating to,” he added. “So, if I'm a Vuitton consumer, I will get messages that I that will make me think I'm the only one buying a Vuitton product, even though I'm one of millions, obviously.”
“Even within their stores, the experience is specific,” he continued. “They have very big stores where they can accommodate uber-wealthy individuals in a VIP salon who are accustomed to drinking the champagne they prefer with their sales associates that they've been seeing for the past 20 years and up-and-coming first-time purchasers who will be treated differently, but the idea is they all leave the store being delighted by the experience.”
Looking forward, what remains clear is that luxury brands must work on ensuring that they stand out from others in the competitive market, particularly in the United States where demand is increasing further.
“There's a more diverse customer base, there's more emerging wealth and the US has proven that its secondary cities are very, very valuable,” noted Burke. “The US is not completely dependent on international tourism, so that's a very encouraging aspect, and places like Short Hills, New Jersey, and Nashville, Tennessee Dallas, and Austin have done incredibly well.”
For Rambourg, brands will need to distinguish themselves through their creativity. “No one needs luxury. Absolutely no one needs luxury. So, give me a reason to step up from this sofa here and go to a store. Anyone can live without it, but at the same time it's part of who we are as human beings to aspire to beautiful things,” said Rambourg.
“Luxury has a feel-good factor,” he added. “People need escapism, people need to put their minds on something positive. The perception of many luxury brands is very joyful and very positive and enables you to change a bit your outlook on the world. And so, for me, the gap between the winners and the losers is just creativity. The willingness to be bold, to be creative, and to take risks. But that's the reason people push the door of those stores.”
Additional reporting by Louise-Anne Fort.