Is the Price Alignment Strategy in Luxury Fashion Brands Sustainable in the Long Run?
Following the global economic crisis in 2008, the Eurozone took a dip in 2015, while the global economy is slowly adjusting itself en route to recovery.
Luxury brands that shy away from sensitive price adjustments for fear of diluting their brand image took a leap of faith by implementing price alignment strategies across key markets. This move took the fashion industry by storm as price adjustments and any price promotions have always been a taboo for top luxury players like Louis Vuitton, Hermes and Chanel, where price point have always been a bench mark associated with the desirability of their products. A revision of pricing downwards might tarnish the brand’s image, as the perceived value of products is coherent with the price point of the products.
Why are brands looking to adopt this price alignment strategy?
There has always been a price gap between luxury personal accessories purchased in Western Europe and luxury personal accessories purchased domestically in other regions like Asia Pacific. This is attributed to the fact that the top luxury brands in the world originate from Western Europe. The nascent price harmonisation move was adopted in light of the falling euro, which drove the existing price gap of luxury goods in Western Europe and the rest of the world even further, due to the currency exchange rate effect. For example, the euro depreciated against the Chinese yuan by 15.2% in 2014-2015.
This made it relatively cheaper for the Chinese to purchase luxury personal accessories in countries like France rather than domestically. Hence, luxury players that are impacted by cross-border consumerism decided to adopt this price alignment strategy. Among the luxury players, Chanel took this bold move by reducing its prices in China, where it holds the position as the number two bags brand, behind only Louis Vuitton.
Aside from players in the bags category, Swiss-made watch brand Tag Heuer is singing the same tune by adjusting its prices in Asia Pacific. Instead of permanently reducing the prices marked on its labels, retailers that we spoke to are offering a 15% discount on the marked prices, citing the reason that it was due to the falling euro in 2015. Indeed, we understand that this is only a temporary adjustment, as price revision is underway following the recovery in the Eurozone, which reflects the Tag Heuer management’s decision to adopt a price alignment strategy.
Effectively, the price alignment strategy adopted by brands would result in prices of products being revised downwards in the key target markets of these brands outside of their country or region of origin. Typically, prices of products in luxury brands are cheaper in Western Europe or North America, where most luxury brands originate from. Another reason driving Chanel’s strategic business decision to revise its prices, particularly in China, was to combat the grey market, which has been affecting its brand image. The price gap between domestic purchases and cross-border purchases fuelled a grey market in China, where “dai gou” is popular. “Dai gou” refers to the term where one purchases an item, usually from a luxury brand that originated in Western Europe or North America, on behalf of domestic consumers. This indirect form of commerce is often detrimental to the sales performance of the brand in the local market, as locals seek goods from the grey market instead.
The impact of price alignment strategy on brands
With the price alignment strategy in place, this would boost the sales performance of brands in the local market. Countries like France, Switzerland and Italy are heavily reliant on tourism expenditure, especially within the luxury personal accessories industry in these countries. As brands seek to harmonise their pricing across the globe, there would be less incentive for consumers to purchase these goods overseas in order to take advantage of the price discrepancy as a result of the currency exchange rate effect. Naturally, this would negatively impact the amount of tourism expenditure in fashion and luxury goods hot spots like France, Switzerland and Italy.
In Tag Heuer’s case, Western Europe registered the biggest brand share in retail value RSP, with Asia Pacific shadowing closely with sales of US$367.9 million in 2014. Moving forward, should the management decide to continue with the price alignment strategy, Western Europe would no longer take the lead globally in terms of retail value sales. Instead, there would be a shift in regional sales performance, with Western Europe losing its leading position and passing the baton on to Asia Pacific. This is because, for fashion brands, a significant proportion of sales recorded in Western Europe are attributed to demand from cross-border consumers from Asia Pacific.
Is the price alignment strategy a way to go?
Given the increasingly volatile economy, the price alignment strategy would not be sustainable in the long run as constant revision of prices would exacerbate the problem that brands face with the grey market. Adopting a price alignment strategy would lead to speculation among consumers every year with regard to the pricing of products based on currency fluctuations. This would fuel the growth of another grey market in which consumers would purchase the products when prices are lower, in anticipation of selling the products when the prices are higher. Additionally, the perceived value of the brands’ products is coherent with the price point of the brands. If not handled carefully, this downward revision of prices would dilute the brand’s equity and it may be an irreversible action that spells doom for the brand.