Has Luxury Lost Its Shine? Customers are complaining that they are getting less bang for their buck at the luxury store (a case of Veblen goods)

By Carol Ryan of The WSJ. I have more below about economist Thorstein Veblen and his concept of Conspicuous Consumption. Excerpts:

"Shoppers aren’t imagining it: Luxury goods cost a lot more these days, with no improvement in quality to make up for it. Weak sales look like a more deep-seated problem than some brands will admit. 

A basic cotton T-shirt with a Christian Dior logo will now set you back $1,000. Gucci’s plainest black horsebit loafers ring in at $990. How about a Brunello Cucinelli  cardigan for $8,995? Shoppers pay up for luxury goods precisely because they set them apart as people who can afford to spend large amounts of money on them. But brands can only push so far before cracks start to appear. 

Psychologists who study consumer behavior point out that people buy designer goods for emotional reasons. The main one is to separate themselves from the crowd and signal where they sit in the social pecking order. Luxury brands spend billions of dollars a year on advertising to make sure that their products become totems of wealth and success in consumers’ minds.

Some luxury shoppers like to telegraph their riches more than others. People who want to make a statement gravitate toward labels with bigger logos to send an obvious signal. 

The ultrarich, on the other hand, don’t tend to shout about their wealth as much. They buy the costliest, but most discreet, luxury brands such as Hermès RMS. One study found that for every $5,000 increase in the price of luxury goods, the brand’s logo shrinks by a centimeter. In other words, the guy wearing head-to-toe logos is unlikely to be one of luxury’s biggest spenders. 

Because consumers value luxury goods as status symbols, they are willing to pay a huge premium for them. Luxury brands routinely charge a markup of eight to 12 times on the production cost of their goods, according to Bernstein estimates. This makes the business of selling luxury very profitable. Top luxury labels can generate operating margins north of 30%, compared with around 7% for mass-market fashion brands such as Gap or H&M.  

Luxury brands are so-called Veblen goods: a category of consumer products that inverts the usual laws of economics. Instead of crimping demand when prices rise, luxury goods can become more sought-after if shoppers interpret higher prices as a sign that the goods are precious and scarce. 

Except that isn’t what is happening today. The average luxury product is 60% more expensive today than it was back in 2019, HSBC analysis shows. But the industry is going through one of its rockiest patches in years. 

Sales of the eight luxury brands that have so far reported their third-quarter results are down 4% on average from a year earlier."

"consumers are also questioning whether luxury brands are worth the prices they charge today."

"beefier gross margins are also a sign that luxury companies have raised prices faster than they have invested in the quality of their raw materials."

"if customers have to pay higher prices, you have to give them something new and surprising."

"Based on an analysis by social-media data company Brandwatch, there was an increase in negative comments about luxury brands on online platforms late this summer"

"For the last two decades, they have increased sales by “democratizing” access to luxury."

with "cheaper categories such as cosmetics, sunglasses and small handbags"

"brands’ shift toward democratization has made them much more reliant on comfortable, if not rich, consumers for a huge chunk of revenue. More than half of the luxury-goods industry’s sales are from shoppers who spend less than $3,000 a year on designer products. Alienate them with price hikes and sales will inevitably suffer."

Also see Veblen Goods by Andrew Loo of CFI (Corporate Finance Institute) . Excerpts:

"Veblen good is a type of luxury good named after American economist Thorstein Veblen. It shows a positive relationship between price and demand [it should say quantity demanded-CM], and thus an upward-sloping demand curve.

The demand [it should say quantity demanded-CM] for a Veblen good rises (drops) when its price increases (decreases). A Veblen good generally is considered a high-quality exclusive product and a status symbol. When the price goes higher, its status symbol makes the Veblen good more desirable to consumers with high social and economic standing. Some common examples of Veblen goods include luxury cars, wines, handbags, fine jewelry and watches and even sneakers."

"Conspicuous consumption is another relevant concept of Veblen goods. It represents the purchase of goods and services to display one’s economic power and social status, motivated by the desire for prestige.

The concept of conspicuous consumption was also identified by Thorstein Veblen in his book The Theory of the Leisure Class (1899). In the practices of conspicuous consumption, a higher price makes a product more desirable for its status symbol, which explains the features of Veblen goods from a sociological perspective."

Adam Smith may have beaten Veblen to the punch. In The Wealth of Nations, he wrote:

"With the greater part of rich people, the chief enjoyment of riches consists in the parade of riches, which in their eyes is never so complete as when they appear to possess those decisive marks of opulence which nobody can possess but themselves. In their eyes the merit of an object which is in any degree either useful or beautiful, is greatly enhanced by its scarcity, or by the great labour which it requires to collect any considerable quantity of it, a labour which nobody can afford to pay but themselves. Such objects they are willing to purchase at a higher price than things much more beautiful and useful, but more common." (the entire book is online)

In Veblen's chapter on "Conspicuous Consumption," there is no mention of Adam Smith. 

There is statistical or empircal evidence that supports Veblen's theory. A Ph. D. student found that rich families do spend more on "Conspicuous Consumption." 

See also Doctoral Thesis Says Rich People Spend More on Conspicuous Things. Excerpts:

"Ori Heffetz, a doctoral student in economics at Princeton University (back in 2005-now he is a professor at Cornell University), has developed the first broad-gauged index of product visibility. Sure enough, he finds in his thesis that conspicuous items make up a greater share of the consumption budget in wealthier families."

"Mr. Heffetz estimated the relationship between the amount spent on each of 29 products and a household's income, using data on 3,924 households from the 1997 Consumer Expenditure Survey, conducted by the Bureau of Labor Statistics. The "income elasticity of demand," defined as the percentage change in consumption for a 1 percent increase in income, summarizes the degree to which a good is a luxury or a necessity. A good is a luxury if a 1 percent increase in income is associated with more than a 1 percent increase in consumption of that good.

Mr. Heffetz's analysis indicates that the higher the visibility of a good, the more likely it is to be a luxury item. For example, spending on cars and jewelry, two highly visible items, rises as a share of a household's budget as its income rises, while spending on home utilities, an inconspicuous category, falls as a share of the budget as income rises."

Related posts:

Is Starbucks coffee no longer a Veblen good? (2024)

China's Government Cracks Down On Displays Of Wealth On Social Media (2022)  

(See In China, Bragging About Your Wealth Can Get You Censored: Online posts by users showing off their receipts, over-ordering food or scattering money have been deemed vulgar. Regulators say such content leads young people astray by Vivian Wang and Joy Dong of The New York Times.)

Payless sold its discount shoes for $600 a pair at mock luxury influencer event (2018)

Federal Reserve Economists May Have Discovered Another Cause Of Bankruptcy (if a neighbor wins the lottery people start spending more on consumption to keep up) (2016)

Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!) (2007)