How do luxury brands fare during a recession?

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The global economy is struggling. Cost of living crises are affecting populations throughout the developed countries, where household incomes are shrinking disproportionately with monthly bills.

While many may consider that expensive luxury brands would be the first to fall foul of the cut in people’s spending, it is often the reverse that happens – that the luxury brands see a consistency in sales and even at times an upturn, while the high street names are the ones that take a real battering.

Everything in proportion

A key reason for this is that those who can afford the price tags associated with luxury brands are barely affected by the rises in living costs. Proportionally a 10-15% increase in household expenses for the average earner takes a significant chunk out of their monthly income. For those with a significantly higher income, that proportion shrinks quite considerably to the point where it is negligible. So if you are used to buying one designer handbag a month (rather than one a year after saving up for months and months) then an extra few quid on your supermarket shopping is not going to make that much difference.

During the 2008 recession, luxury brands saw a dip of about 10 per cent in sales. However, recovery was rapid, and the reason for this was put down to strong consumer confidence in brands that had a lot of history and tradition behind them. Many had ridden the waves of many economic turmoils and understood that the strength and legacy of their brand was what gave them the deep foundations that could carry them through.

Strong profit margins

For those well established brands working to high profit margins, they had created for themselves a stable foundation that would carry them through the hard times. Brands working to narrower profit margins were in a more precarious commercial position and had less elasticity.

Strong customer loyalty

During tough times many luxury brands such as men’s jewellery, designer handbags and haute couture fashion reduce their spend on advertising. There are two reasons behind this:

  • They already have a loyal cohort of repeat purchasers among high net worth individuals who are less conscious of the advertising but will continue to invest in the products because they form part of their lifestyle. It is not necessary to continue advertising to this demographic as they are already considered ‘raving fans’.
  • Continuing to advertise to a wider audience that is made up of those with lower income who need to save up to buy occasional luxury products as a treat might appear in bad taste. The luxury brand will want to avoid any negative public perception. Continuing to advertise a lifestyle that is beyond the dreams of many during a cost of living crisis is fundamentally in bad taste. Commercially it is also a waste of money, as the target audience is not in a financial position to purchase any product even if they wanted to. The Return on Spend of any advertising campaign would make it unviable.

Equally, while many high street brands attempt to stimulate demand by imposing large discounts, this strategy is one that luxury brands avoid at all costs. Imposing discounts immediately dilutes and devalues the brand, which in turn dilutes the quality of their key customer base. Maintaining high prices and strong brand arrogance is crucial to the long term sustainability of luxury brands.

No brand is completely infallible, and over the years many have fallen by the wayside. However, the market is set to grow to over $600 billion by the end of the 2020s, and the big names are sitting pretty, recession or no recession. 

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