Thursday, 8 August 2024 Reading time : 4 minutes

The world of luxury is constantly changing. What was once a niche market for the wealthy has become a sector for the masses. But at its core, luxury is about marketing exclusivity and status. So how can the luxury industry harness the purchasing power of the masses while still serving a very wealthy clientele?

Economic theory tells us that demand for a good usually falls as prices rise. But there are exceptions to this rule. One example is the so-called Veblen effect, named after the US economist Thorstein Veblen. According to this, there are goods for which the relationship between price and demand is exactly the opposite: if the price of such a product, also known as a Veblen good, rises, it gains in exclusivity and quality - and thus becomes more attractive to consumers. This mechanism can be observed in luxury goods.

Bain & Company estimates that the global market for personal luxury goods, such as bags, clothing and jewellery, will reach more than USD 360 billion by 2023. The industry has thus recovered from the setback caused by the corona pandemic.

But luxury is not always luxury: opinions differ widely on whether luxury products should have a distinctive logo or an unmistakable style, recognisable only to the trained eye. The two variants are also known as loud luxury and quiet luxury.

Loud logos and quiet elegance

An important target group for loud luxury is hidden behind the acronym HENRYs (High Earners Not Rich Yet). These consumers earn a high income but have little or no wealth, often referred to as the 'working rich'. The segment is considered to be spending money generously and has the potential to build a fortune over time. Loud luxury is also popular among the affluent in Asia. LVMH's Louis Vuitton, for example, offers handbags with bold logos so that the luxury purchase is visible to everyone.

As customers become more selective, they are often looking for less flashy luxury items that are understated and of high quality. Many labels, including Louis Vuitton, are therefore offering products with a more discreet design. 

Of course, fashion trends are always subject to the zeitgeist. In recent years, social media platforms such as Instagram and Tik Tok have become increasingly important, helping to promote the «old money» trend, for example. This fashion style aims to imitate the lifestyle of wealthy family dynasties. The focus is on elegance, minimalism and tradition, or quiet luxury – however, this attention is also making quiet luxury increasingly visible. This development poses a dilemma for the luxury industry, which wants to capitalise on the demand of the masses, while at the same time maintaining a sense of exclusivity.

Wooing wealthy customers

Luxury companies are using a variety of strategies to convey the uniqueness of their brand. One of the pioneers is French heritage house Hermès, which produces limited-edition handbags that are only available to loyal customers. According to the company, the leather products are hand-stitched and made in France, which in turn justifies the premium prices.

Since the coronavirus crisis, many luxury companies have adjusted their pricing strategies, following the example of Hermès. French fashion house Chanel, for example, has reduced the availability of its popular «Classic Flap» handbags and almost doubled its prices compared to pre-crisis levels, according to the Wall Street Journal. Boutiques that are accessible only by invitation are also intended to offer exclusive shopping experiences for very wealthy customers. This is a strategy adopted by LVMH-owned Dior in Beijing, where it opened VIP salons during the coronavirus pandemic, according to the Chinese news platform Jing Daily.

In addition to these measures, luxury companies are trying to persuade customers who choose forgeries to buy the original. However, they need reliable methods to ensure the authenticity of luxury products – for the luxury industry, it is paramount that their goods remain Veblen goods.

Barrier Reverse Convertible on Luxury Equities
11.50% BRC on Hermes, LVMH, Kering
Barrier: 65%
Valor: 135804692

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