The Wall Street Journal reports today that Louis Vuitton "increased its handbag prices globally this week, in some cases by double-digit percentages, according to Bernstein Research." Louis Vuitton, of course, is a major brand house within the global luxury brand conglomerate, LVMH. The parent company owns a variety of luxury brands including Bulgari, Givenchy, Tiffany, Christian Dior, Moët & Chandon, and Dom Pérignon. Last year, I published a case study about LVMH's acquisition of the American jeweler, Tiffany. Thus, I took special interest in this news today.
The article quotes LVMH's CEO, Bernard Arnault: “We have an advantage on quite a few other companies and groups, which is that we have a degree of flexibility on our prices. In the face of inflation, we have the ways and means to react.” In addition, the article quotes Kathryn Parker, an analyst at Jefferies Group: “Luxury really is immune. They have the pricing power to offset any underlying cost inflation.”
The story caught my attention because many firms will face an interesting challenge in the months ahead. As costs rise, can companies increase prices accordingly to maintain margins? Unlike LVMH, some firms will find it difficult to pass on those increased costs in the form of higher prices. Companies need to ask themselves: Are we investing in the activities that will maintain or enhance willingness-to-pay on the part of our customers? In some industries that are quite different than luxury goods, competitors with deep pockets and strong balance sheets will take the opportunity to NOT raise prices as much and try to grab market share during this inflationary period. Similarly, companies with huge cost advantages over rivals may undercut their competitors and steal customers. If they have a cost advantage, competitors will not be able to match those price cuts without seriously damaging their bottom lines. Therefore, understanding the competitive landscape, and the cost structure and balance sheets of your rivals, is critical as one contemplates price increases.
As firms think about how to adjust prices given the rampant inflation taking place, they have to think carefully about the investments required to continue to maintain or enhance willingness-to-pay. Are we investing appropriately in research and development, product quality, customer service/experience, and the like? Do people perceive our products as having higher value rival and/or substitute products? Those firms making the right investments will be able to increase prices to account for cost inflation, while others will find customers balking at the price tag for their products and services.
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