Sunday, November 02, 2008

To increase or not to increase? That's the question.

Rumor has been circulating that Chanel will increase the price of their "classic" bags by 20% starting tomorrow. A bag priced at $2,850 will then be $3,420. 

Does that mean that the Chanel bag I purchased in Feb.2008 appreciated in value, and so I need to buy one more before the price goes up again? Hardly.

At the same time, consider the following case:

If you invested in Oct.2007 at the peak of the S&P500 of 1,565, your investment has been down 38% as of October 31, 2008, when the S&P closed at 968.75. 

Now, please compare the 38% stock market decline (interpretation - an average stock investor has lost 38% investments) with the 20% price increase by Chanel. Oh, by the way, did I mention that the Euro is depreciating? How disturbing is that? 

Not only won't I purchase a Chanel bag now, I would argue that the price increase initiated by Chanel is silly. I had this conversation with our retail analyst the other day. I told him that Chanel was being silly. But his answer is that I'm one of those "aspirational" consumers who are not the core customers of Chanel's. That's fair. However, I would also argue that some of the uber rich who don't even blink before shedding $3,500 on a bag are probably sophisticated enough to realize that they are better off walking a few blocks up to the Hermes store instead. By spending a few thousands more, they can bring home something better made, more exclusive and possibly more recession proof than the mass-produced Chanel bags. Assuming that the non-core customers contribute to 30% of the bag sales (by numbers of bags sold), and 30% of the uber rich crowd are more investment savvy, Chanel will only sell approximately half of the numbers of bags they used to. That's more than sufficient to offset the price increase of 20%. Furthermore, I am afraid that the brand will be damaged by its relentless and greedy price increase without offering better quality, product innovations or service improvements. 

CNBC just reported that Chanel has cancelled the plan of a price hike. But a peek at the Purse Forum proves that the Chanel sales force around the world haven't been informed about the final decision yet. To increase or not to increase? That's the question. If you find out what happens tomorrow, please post here and let us know.