Why are luxury goods not selling well? Purchasing power has declined by over 30% in ten years, and the middle class is being squeezed out!
The luxury goods market is facing difficulties, with the purchasing power of middle-class consumers declining by over 30% in the past decade, leading to challenges in the sales of high-end handbags. A Morgan Stanley report indicates that the price growth of luxury goods far exceeds disposable income in the United States, and major brands have "priced out" middle-income consumers. Meanwhile, affordable brands like Coach have achieved sales growth in the market gap. The luxury goods industry needs to adjust its pricing strategy; otherwise, it will continue to face declining sales
The sale of luxury handbags is becoming increasingly difficult, and the performance of luxury goods giants is collectively "shrinking." The underlying reason is that middle-class consumers are being driven out, with the affordability of iconic handbags deteriorating significantly by 30% over the past decade.
According to news from the Chase Trading Desk, Morgan Stanley stated in its latest research report that the affordability of iconic luxury handbags has deteriorated significantly by 10%-33% over the past decade, with luxury prices rising far beyond the growth of disposable income in the United States, leading to middle-income consumers being "priced out" by major luxury brands.
The direct consequence of this trend is the release of market space for more affordable brands, with brands like Coach (average price $300), Totem, and Polène achieving a 15% same-store sales growth in the first quarter, benefiting from this market gap.
Morgan Stanley believes that the luxury goods industry is facing a growth bottleneck, with the simultaneous decline in demand for LVMH products from consumers in China, Europe, and the United States for the first time in over 30 years, and its "script" of raising prices during economic downturns has already failed.
Morgan Stanley further stated that relying on high-net-worth individuals cannot sustain the industry's historical average growth rate. This means that luxury companies must implement strict pricing discipline or adjust their product mix over the next three years, or they will face continued sales declines. However, according to current trends, restoring affordability will also take time; for example, a Chanel handbag will take 8 years to return to its affordability level of 2015.
Purchasing Power Significantly Deteriorates, Middle-Class Consumers Forced Out
The purchasing power of iconic handbags often serves as a "barometer" for the overall price trend in the luxury goods industry, and this indicator has significantly deteriorated in the United States over the past decade.
Morgan Stanley tracked the prices of three iconic handbags and found that luxury prices have risen far beyond the growth of disposable income in the United States. Taking the Louis Vuitton Neverfull as an example, this handbag currently sells for $2,130 in the U.S. (excluding tax), with a compound annual growth rate of 8.5% over the past decade, while disposable income in the same period only grew by 4.5%.
A more intuitive comparison shows:
- Louis Vuitton Neverfull: Price has increased 1.5 times relative to average disposable income over the past decade
- Dior Lady Dior: Increased from 9.5% of annual income to 10.4%, an increase of 1.1 times
- Chanel Classic Flap: Increased from 11.7% of annual income to 16.6%, an increase of 1.4 times
Morgan Stanley stated that the excessive rise in luxury prices has systematically excluded middle-class consumers, leading to a simultaneous decline in demand for LVMH products from consumers in China, Europe, and the United States for the first time in over 30 years, resulting in a drop in sales. Morgan Stanley expects that the sales decline in LVMH's fashion and leather goods division in the second quarter of 2025 will be the most severe in over 30 years, with a high single-digit decline expected This trend creates opportunities for more price-advantaged alternative brands. Relatively affordable brands like Coach are experiencing strong growth, with an average handbag price of only $300, and same-store sales growth of 15% year-on-year for the quarter ending March 2025. Similar trends are also seen in categories such as champagne compared to Prosecco, cognac compared to tequila, and whiskey.
Traditional Growth Models Face Challenges, Recovery Requires Long Wait
Morgan Stanley believes this trend is forcing the luxury goods industry to face a growth bottleneck, as relying solely on high-net-worth individuals cannot sustain the industry's historical average growth rate. For investors, this means luxury companies must implement strict pricing discipline or adjust their product mix over the next three years, or they will face continued sales declines.
Morgan Stanley states that traditional growth models are facing challenges:
Historically, leading brands like Louis Vuitton would adopt counterintuitive strategies—raising prices—during economic downturns. This strategy worked in 2009, when the brand's revenue actually grew by about 3%, despite a severe contraction in household spending. However, under current circumstances, luxury brands can no longer rely on price increases as a traditional lever.
Industry optimists argue that comparing luxury pricing with average income is misleading, as demand in recent years has been more driven by household wealth creation. Morgan Stanley refutes this view:
This argument has two key issues: First, the improvement in product quality does not match the average price increase; second, except for a few brands at the top of the luxury pyramid, most leading brands still need middle to upper-middle-class consumers to achieve growth, as relying solely on high-net-worth individuals cannot sustain the industry's mid-to-high single-digit growth rate.
However, recovery may be a long process, Morgan Stanley states:
Based on current trends, assuming an average annual price increase of 2% over the next few years (the minimum requirement for brands to maintain global pricing consistency), and that disposable income in the U.S. maintains a compound annual growth rate of 4.5% over the past decade, the affordability of Dior and Louis Vuitton handbags will take about 5 years (i.e., until 2030) to return to 2015 levels, while Chanel will take 8 years.
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