In 2021, when I was teaching a class on resilience and luxury strategy, a student asked me if Chanel’s price increase was to make up for the rise in cost of supply chain and raw materials. This was a topic I have been observing for a while and I responded with, “I don’t believe it is entirely because of that…”. While for most, the superficial answer would be yes, since this is what the luxury brands are telling us. In this article “Designer handbags from Chanel will now cost more…” from Business Insider published in 2020, Bruno Pavlovsky, the President of Fashion at Chanel, indicated that the price increase was to offset the increasing cost of raw materials in the midst of the coronavirus pandemic.
In those price increases, we saw the iconic Chanel bags (classic flap, 2.55, Boy, Gabrielle, and Chanel 19) increase a range between 5% and 17%, with the Chanel Flap bag rising the most.
However, in a surprising twist, a later article “Chanel Again Raises Prices of Classic Handbags” dated March 2022, Bruno Pavlovsky came out to suggest that while the COVID pandemic is over, and logistic issues should have retuened to normal, but prices will continue to increase due to two main reasons:
“Since the pandemic began, Chanel has accelerated the pace of increases due partly to rising production costs, and partly to positioning.”
he also adds:
“You can’t be the most luxurious, the most desirable brand and not have a price positioning that is high on the market today,”
The article dives into the common consensus drawn by consumers, which suggests that Chanel was probably raising their prices to meet the price point of its toughest competition — Hermes. And while Bruno Pavlovsky denies this, most Chanel consumers insists on believing this correlation.
The big question still looms — what exactly is the truth? Is Chanel truthfully transferring its upstream costs to its final customers, or is this a way to generate more profits for a company? Well, let’s take a look:
To note, Chanel is a privately held company, but since 2017, the company has started to release a simplified financial report to be more transparent and committed to sustainability. While Chanel SAS holds a number of different brands, it is not shared whether the financial results reflect only the Chanel brand excluding other holdings in its portfolio.Because Chanel only publishes an annual financial report, we do not have a good measure of Chanel’s performance in the second half of 2020. In comparison LVMH and Kering Group that publishes results every quarter, demonstrates that there were significant improvements between the 1st and 2nd half of 2020.
However, as we can see Chanel’s profit took a significant hit in 2020, with a loss of over 70% between 2019’s profit generation. This could be due to a number of reasons:
- For Chanel’s fashion business (excluding cosmetics and licenses in eyewear), its entire distribution is through brick and mortar. For this reason, the revenues were impacted due to closure in certain countries and the lack of other sales channels
- With the exception of shoes, Chanel directly own and operate most of its retail channels. During the pandemic, Chanel dipped into its own finances to pay its 7500 employees in France without relying on government subsidies for 8 weeks, as reported by the Fashion Network in April 2020.
- As indicated previously, Chanel does not disclose if the financial results also include the sales of Chanel Beauty, as the Cosmetics and Fragrances sector was most affected by the pandemic. LVMH’s Perfume & Cosmetics division saw a loss of 30% in revenues and -750% in their profits.
Due to its resistance against e-commerce, it meant that Chanel would have suffered significant losses due to inventory management, retail leases and other fixed cost that would have dipped into the company’s profit. Additionally, with travel retail which is a lucrative distribution channel for Chanel Beauty and Eyewear were also greatly impacted.
In the following year, Chanel made a remarkable turnaround. It’s revenues grew by 35%, and its profit was almost doubled that. A number of strategies could have attributed for the incredible rebound, and price hikes was definitely one of them. If I were Bruno Pavlovsky, I too would think that price increases were a necessary evil. However, some could argue that maybe their incessant price increases has left a bad taste in consumer mouths. Many have complained about the aggressive price hikes, where some have taken to social media to suggest that while Chanel products have almost doubled in price since before the pandemic, the quality and workmanship of the products has instead decreased.
But when you analyse Chanel’s 2022 financial results, it indicates that perhaps Chanel is working through high costs in both its production and supply chains. Despite the revenue growth (+9%), the increase in operational profits (+5.4%) does not proportionally match the revenue increses. This could indicate that while Chanel has expanded its sales (either volume or value, or both), it had encountered challenges in maintaining a proportionally profitable model due to rising cost in some areas. This could boil down to supply chain or other upstream processes, as its operating margins look very healthy at 34%, which suggest that their operations are increasingly efficient in managing OPEX and/or the deployment of cost-cutting measures internally.
So, if I were to go back to 2021 and answer my student’s question. My answer remains “I don’t believe it is entirely because of that… Context matters — as we do not know the complexities of Chanel’s operations, the price increases in their fashion division could also have been a way to subsidise rising cost in other areas within Chanel.”
Updated April 8th, 2024
In an article by WWD published on March 8th, 2024, Bruno Pavlovsky was asked about the upcoming price increases at Chanel, and he shares that:
“We’re not chasing a market positioning, but we’re raising our prices to cover our costs. Most of our competitors have already increased their prices this year. We haven’t raised ours, so yes, there will be an increase fairly soon,” he said.
This further confirms that Chanel has costs in other areas that need to be covered, as well as, catching up with the industry standard or restructuring. While the general consensus believes that Chanel is only chasing profits, since a lot of its goods are of lower quality. Through a personal discussion with Gruppo Florence CEO, Attila Kiss, that supports the Italian manufacturing of Chanel goods, most of the suppliers have not changed, and Chanel is one of a handful of luxury brands that have paid in advance and continue to support artisans in Italy.
The quality issues Chanel are facing might be rooted in other areas across the value chain or simply through the increase of production volume. Whatever that might be, it has remained a mystery for many, even industry insiders.
