GUCCI cannot be sold, and Hermès bucked the trend and rose. Why is the gap so wide between luxury goods?

Wen| Jiang Han’s Vision

In the global luxury goods market, several major luxury goods giants have begun to stage a situation of ice and fire. On the other hand, GUCCI has fallen into an awkward situation where it cannot be sold and has begun to close stores frequently. However, Hermès has shown a thriving situation and is rising against the trend. People can’t help but wonder why is the gap between luxury goods so large?

1. GUCCI cannot be sold, Hermes bucked the trend and rose

According to China Times, two boutiques, Gucci Rio Department Store and New World Daimaru Department Store, have closed after completing their last day of business on February 16. At present, the number of Gucci stores in Shanghai has been reduced to seven, located in Shanghai Hang Lung Plaza, Shanghai ifc International Financial Center Shopping Mall, Qiantan Tai Koo Li, Ganghui Hang Lung Plaza, iapm, ITC and Hongqiao Airport.

The shrinking action of stores is also a reflection of the sluggish performance of the brand. On February 11, Kering Group released its 2024 full-year financial report. Data showed that the group’s full-year revenue was 17.194 billion euros, a year-on-year decrease of 12%; net profit attributable to the group was 1.133 billion euros, a sharp drop of 62% year-on-year.

As the world’s leading luxury goods group, Kering Group owns a series of well-known fashion, leather goods and jewelry brands such as Gucci, Saint Laurent, Bottega Veneta, Balenciaga, and Boucheron.

Among them, the performance of the core brand Gucci was particularly sluggish, with annual revenue falling 23% year-on-year to 7.7 billion euros, becoming a major factor dragging down the group’s overall performance. As the main brand of Kering Group, Gucci’s sales account for nearly half of the group’s total revenue. However, Gucci’s performance continues to decline in 2024. Sales in the fourth quarter fell 24% year-on-year to 1.92 billion euros, and revenue in all quarters of the year showed double-digit declines.

In sharp contrast, Hermes. According to reports from Wall Street, French luxury goods group Hermes reported results showing that revenue in the previous quarter increased by 18% to 3.36 billion euros, exceeding market expectations. Demand for handbags and garments is strong in all markets around the world.

In 2023, Hermès has raised the price of its products by 7%, and will continue to raise the price by 9% in 2024. Hermès executives said that most of the price increases were implemented at the beginning of the year, reflecting fluctuations in input costs, including labor and raw materials, and exchange rates. At the same time, Hermès also announced plans to increase the production of leather products by 6% to 7% this year.

Due to the extreme need for brand tonality. The lower the economic situation, the more it is necessary for top luxury goods to maintain their uniqueness and capture the hearts of the rich. Handbags like Hermes Platinum Bags, with an average price of around 150,000 yuan, can only be affordable to consumers who are highly immune to the uncertain economic situation.

2. Why is there such a huge gap between luxury goods?

In recent years, the global luxury goods market has shown a significant trend of differentiation: traditional luxury brands represented by GUCCI are facing sluggish growth, while Hermes has bucked the trend and maintained strong growth. What should we think of this?

First of all, the chain of luxury contempt gives Hermès an advantage. In China, the existence of the chain of contempt for luxury goods is almost a recognized fact, and Hermès occupies the absolute king position in this chain of contempt, which is unmatched by other luxury brands. The essence of this phenomenon is actually the brand premium of luxury goods, and Hermès undoubtedly has stronger brand price bargaining power.

For a long time, Hermès has successfully created an extremely luxurious and unique brand image through clever brand marketing strategies. It strictly controls the output of products and adopts a limited supply method to create a kind of scarcity. For example, the global supply of certain styles of Hermès bags is extremely limited, and consumers often need to book in advance or even wait for years to get them. This scarcity not only increases the value of the product, but also makes consumers flock to it. At the same time, Hermès focuses on close cooperation with high-end social circles and fashion circles, and frequently appears in various top fashion events and celebrity gatherings, further enhancing the brand’s popularity and reputation. In the hearts of consumers, owning a Hermès product is not only a commodity, but also a symbol of identity, status and taste, representing an extremely luxurious lifestyle.

In contrast, although GUCCI is also a well-known luxury brand, it is slightly inferior in terms of brand uniqueness and high-end image creation. GUCCI’s products pay more attention to the expression of fashion trends, and their design style is relatively more youthful and popular. Although this design approach that focuses on popular elements can attract young consumers who pursue fashion, it is difficult to compete with Hermès in terms of depth and durability of brand value.

Secondly, the consumption circles of different luxury goods are completely different. From the perspective of consumer groups, there are significant differences in the number of people who buy Hermès and GUCCI, which is one of the important reasons for the different market performance of the two.

Most of the people who buy Hermès are truly rich. For these high-net-worth people, asset income is their main source of income. They have a rich investment portfolio, including stocks, real estate, funds and other assets. The appreciation and return of assets are the main means for their wealth growth. This source of income is relatively stable and is difficult to be directly affected by economic fluctuations. For example, during the economic downturn, although the stock market may fluctuate, the assets they hold such as real estate may still maintain a stable value and may even increase in value over time. Therefore, these truly rich people can still maintain strong purchasing power in the face of changes in the economic environment and continue to love top luxury goods such as Hermès. For them, purchasing Hermès products is not only a consumer behavior, but also a satisfaction of identity and social needs. It is an important way for them to demonstrate their status and taste in high-end social circles.

However, most of the users who buy GUCCI are actually middle class. The middle class usually relies on wage income as its main source of income. Their income is relatively fixed and sensitive to changes in the economic environment. Once the downward pressure on the economy increases and companies face operating difficulties, they may take measures such as layoffs and salary cuts, which will directly affect the wage income of the middle class. Under such circumstances, the middle class, which is mainly supported by wage income, will inevitably be more cautious when consuming. Although the price of GUCCI’s products also belongs to the category of luxury goods, it is relatively low compared to Hermès. For the middle class, it was originally a choice when they pursued quality life and fashion trends. But when economic pressure increases, they will prioritize cutting such unnecessary consumer spending and switch to more affordable alternatives or reduce the frequency of purchasing luxury goods. Therefore, economic fluctuations have a greater impact on the spending power of the middle class, which in turn leads to a decline in market demand for GUCCI.

Third, the polarization of luxury goods has become inevitable. The current luxury goods market is showing a rapid polarization trend, which has also profoundly affected the market performance of GUCCI and Hermès.

Entry-level luxury goods, such as some of GUCCI’s relatively low-cost product lines, are increasingly being replaced by cost-effective alternatives. As the consumer market becomes increasingly mature and diversified, consumers are paying more and more attention to the cost performance of products. In the field of entry-level luxury goods, many alternative brands with more people-friendly prices and similar design styles to luxury goods have emerged on the market. Through precise market positioning and marketing strategies, these parity brands have attracted the attention of a large number of entry-level luxury consumer groups. Although these equivalent products may not be comparable to real luxury goods in terms of quality and brand connotation, they are very attractive to consumers who pursue fashionable appearance and are more price-sensitive. In addition, with the development and popularization of e-commerce platforms, consumers have more convenient channels to obtain information, and they can more easily compare the prices and styles of different brands of products, which further intensifies competition in the entry-level luxury goods market.

In contrast, high-luxury brands such as Hermès maintain their high-cold advantages. With its profound brand heritage, excellent product quality and unique brand image, Hermès occupies an unshakable position in the high-end luxury goods market. For high-net-worth consumers, what they pursue is not only the practical value of the product, but also the uniqueness, scarcity and ultimate quality experience represented by the brand. By strictly controlling product output, adhering to high-end positioning and unique design style, Hermès satisfies this group of consumers ‘pursuit of ultimate luxury.

Fourth, once consumption concepts change, the luxury goods market will inevitably change significantly. In the long run, more and more middle class people are beginning to understand what they really need. In the past, luxury goods were a status symbol for the middle class, and owning a GUCCI product allowed them to gain certain recognition in social situations. However, with the development of society and the maturity of people’s consumption concepts, the middle class has gradually realized that luxury goods cannot truly represent their own intrinsic value. This trend of Muji products has been clearly reflected in Japan before.

The change in consumer mentality also reflects the return to the essence of consumption. Today, as material life becomes increasingly rich, people no longer just pursue the halo of the brand, but pay more attention to the value of the product itself. For Hermès, the high quality and uniqueness of its products can still attract the attention of consumers, because these consumers buy Hermès based on their true recognition of its quality and brand culture. For GUCCI, if it cannot further improve product quality and brand connotation, it will be difficult to maintain long-term competitiveness in the market solely by relying on fashion trends.

Currently, the luxury goods market is undergoing a profound transformation from identity symbols to value storage, from social currency to cultural capital. Under such circumstances, various luxury brands are undergoing an unprecedented transformation.