Losing its shine
Why sales of luxury goods are slowing
Luxury- goods firms experience a decline in sales in Japan. After half a decade of stagnancy, sales have fallen dramatically in 2008 for most of the brands. LVMH for example, the biggest luxury-goods provider, experienced a drop in sales of 6% in the first six months and this year might be the first year in which its sales in the Japanese market decline.
This article is related to the economic concept of demand, because less demand in Japan is the reason why the sales of luxury products have fallen in 2008. Demand is defined as a schedule or a curve that shows the various amounts of a product that a consumer is willing and able to pay at each of a series of possible prices during a specified period of time. The article lists different factors that influence demand for luxury-goods in the Japanese market. The weak economy and the appreciation of the Euro against the Yen have caused demand to decrease. That’s because the buyers of luxury products in Japan who are mostly middle class people are more heavily affected by these economic trends than rich customers. Another reason for less demand for luxury-goods is the fact that Japan’s population is aging. Young singles are the main target group of luxury-product firms, because they are fashionable and willing to pay high prices for luxury goods. However, as Japan’s population ages, there are fewer buyers of luxury goods. So as this example shows, the size of a market is a very important determinant for the demand and due to the decrease in the number of consumers for luxury products, the demand has fallen as well. The article talks about another factor that has caused demand for luxury goods to fall. The article explains that over the years, consumers have developed a more sophisticated taste. As opposed to the days when huge amounts of money were paid for a big logo, buyers are now interested in the craftsmanship and the value for money. That’s why the demand for cheaper substitutes has increased as the example of “Coach”, a maker of more affordable handbags and accessories, illustrates. The example of “Coach” combines two factors, which can shift demand. Since the buyer’s taste has changed, companies which produce similar goods than LVMH have reacted and decided to make their goods more affordable. So the demand for products produced by LVMH has decreased, since competitors like “Coach” have lowered the prices of their products. This is called a direct relationship as the price of substitute B goes down and thus the demand for product A as well. The relationship between product A and substitute B is visualized by the following graph:
Due to less demand and the new consumers’ preferences, Louis Vuitton or Gucci have released less expensive collections. This move can be explained by a basic economic concept. By decreasing the prices of their products, Gucci and Louis Vuitton are hoping to attract more customers, thus to increase the quantity demanded for their products. This idea represents the law of demand which says that as the price of a product is going down, the quantity demanded of that product is going up. Often, demand curves are used to illustrate the law of demand. That’s how a demand curve looks like:
Why sales of luxury goods are slowing
Luxury- goods firms experience a decline in sales in Japan. After half a decade of stagnancy, sales have fallen dramatically in 2008 for most of the brands. LVMH for example, the biggest luxury-goods provider, experienced a drop in sales of 6% in the first six months and this year might be the first year in which its sales in the Japanese market decline.
This article is related to the economic concept of demand, because less demand in Japan is the reason why the sales of luxury products have fallen in 2008. Demand is defined as a schedule or a curve that shows the various amounts of a product that a consumer is willing and able to pay at each of a series of possible prices during a specified period of time. The article lists different factors that influence demand for luxury-goods in the Japanese market. The weak economy and the appreciation of the Euro against the Yen have caused demand to decrease. That’s because the buyers of luxury products in Japan who are mostly middle class people are more heavily affected by these economic trends than rich customers. Another reason for less demand for luxury-goods is the fact that Japan’s population is aging. Young singles are the main target group of luxury-product firms, because they are fashionable and willing to pay high prices for luxury goods. However, as Japan’s population ages, there are fewer buyers of luxury goods. So as this example shows, the size of a market is a very important determinant for the demand and due to the decrease in the number of consumers for luxury products, the demand has fallen as well. The article talks about another factor that has caused demand for luxury goods to fall. The article explains that over the years, consumers have developed a more sophisticated taste. As opposed to the days when huge amounts of money were paid for a big logo, buyers are now interested in the craftsmanship and the value for money. That’s why the demand for cheaper substitutes has increased as the example of “Coach”, a maker of more affordable handbags and accessories, illustrates. The example of “Coach” combines two factors, which can shift demand. Since the buyer’s taste has changed, companies which produce similar goods than LVMH have reacted and decided to make their goods more affordable. So the demand for products produced by LVMH has decreased, since competitors like “Coach” have lowered the prices of their products. This is called a direct relationship as the price of substitute B goes down and thus the demand for product A as well. The relationship between product A and substitute B is visualized by the following graph:
Due to less demand and the new consumers’ preferences, Louis Vuitton or Gucci have released less expensive collections. This move can be explained by a basic economic concept. By decreasing the prices of their products, Gucci and Louis Vuitton are hoping to attract more customers, thus to increase the quantity demanded for their products. This idea represents the law of demand which says that as the price of a product is going down, the quantity demanded of that product is going up. Often, demand curves are used to illustrate the law of demand. That’s how a demand curve looks like:
As the down warding slope of the graph suggests, the price and the quantity demanded are inversely related. As one of them goes down, the other one goes up.
In my opinion, luxury brands like Louis Vuitton and Gucci are still relying on their outdated image and have not adopted the sense of competition. That’s what the situation in the Japanese market shows. While sales of luxury brands are decreasing, sales of cheaper competitors are rocketing high. Releasing less expensive collections can be a solution to stop the downfall, but in my eyes it is more important for luxury-goods companies to renew their image and become more innovative. However, the decrease in the sales of luxury-goods firms only refers to the Japanese market. This can mean two things for the future. Due to its huge volume (one quarter of global luxury goods sales), the Japanese luxury market can be an indicator for the development in the global luxury market. On the other hand, the situation in Japan can be regarded as an individual case, which doesn’t have further dramatic effect on other countries luxury goods markets. However, I think that if luxury-goods firms don’t change their marketing concepts, they will encounter similar problems not only in Japan.
1 comment:
Good article, nice start to your commentary. Your first diagram is not one we learn, so it should not be included. The second graph can now be re-drawn to include both a supply and demand curve.
You do a nice job of identifying the determinants of demand that are affecting the luxury goods market, but you don't talk much about the most important determinant of demand for LUXURY goods, which is income. As income growth has slowed in Japan the demand for these luxury items has fallen.
See if you can strengthen this commentary now that you've learned supply AND demand, including your understanding of equilibrium and how resources are allocated by markets based on supply and demand.
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