Luxury goods products are not for the rich, but for those getting richer
One of the most widely held myths is that luxury goods products are for the rich. This is not the case – we surmise. Luxury goods products are for those who get richer. These people have newly acquired spending power, empty wardrobes, and the ambition to be recognised as “having made it”: a perfect combination for them to drive growth for luxury goods brands. The rich, by contrast, have everything, have nothing to demonstrate, and are therefore less likely to spend heavily in order to acquire the nth Italian suit, French handbag, or Swiss watch. They will replace, of course, and even add to their pile – but to a lower spend / capita / year level the more their wealth gets established.
In our analysis Online Offer Dive & Pricing Landscape FW15, the definition of Entry Price is the average price of bottom quintile items.
We point out at three major evidences:
1) There is a reverse U curve strong correlation between EBITDA margins and Entry Price points, with a maximum around 200 USD (R2= 0.71) [see image];
2) There is a direct correlation between Entry Price points and Revenue Growth in the past 5 years (R2= 0.33);
This can be explained by understanding the purchasing behaviours of new economies customers, namely Chinese/Taiwanese/Koreans/… , as well as the broader macro-economic picture. The higher-end growing faster is driven by the early adopters and is also a direct consequence of widening income inequality.
3.) Overall the most solid position in the industry, maximising at the same time Revenues Growth and EBITDA margins, is with Entry Price points around 200-250 USD.
This is where Mega-brands Luis Vuitton/Gucci/Prada plus Ferragamo and Moncler sit, with different degrees of success and at different points of their “cool trajectory”. Interestingly Mega-brands Hermès/Burberry plus Tiffany are positioned in the same territory – with an even more compelling entry price position around 150 USD.