Unfashionable cut

Chanel's China price cut signals luxury turbulence

Luxury brands rarely lower their prices. For them to advertise the fact is unprecedented. So Chanel's announcement that it is making three of its most popular handbags more than 20 per cent cheaper in Asia is a sign of the turbulence in the industry.

The fabled French fashion label is aligning global prices. While the bags will be cheaper in Asia, European shoppers will have to pay 20 per cent more for the same items. Currency movements are partly to blame: the euro's recent depreciation has exacerbated already-significant price differences for luxury products.

Take Chanel's 11.12 handbag. Before the switch, the same bag that set you back euro 3,550 ($3787.5) in Paris costs euro 5,779 in Shanghai - a not-so-cool 63 per cent premium. After the switch, the gap will be around 6 per cent.

Most fashion houses have tended to charge 20 per cent more for their goods in Asia, after adjusting for local taxes. Yet the internet has made it trickier to hide these discrepancies from price-sensitive Chinese shoppers, especially as a large number tend buy luxury goods abroad. Watchmaker Patek Philippe cut prices in Hong Kong in February.

Privately owned Chanel's strategy will also help it to tackle China's booming unofficial market. As the price gaps have widened they have been exploited by so-called "haiwai daigou" - middlemen who arbitrage international differences. An authentic luxury product, bought in Europe but sold in Asia at a discount to local prices, may look like a fake and damage the brand's reputation. That's a headache for luxury groups which have poured huge sums into clawing back control of their retail outlets.

Long queues outside Chanel stores in China suggest the discounts could stimulate lacklustre demand, even at the expense of lower margins. But higher prices will dent sales in Europe.

Luxury goods firms have long relied on price hikes to boost revenue. Morgan Stanley analysts estimate price increases have accounted for a quarter of the industry's annual sales growth since 2004, and contributed up to 50 per cent of the increase in sales in 2013. Now brands face an unappetising choice between lower margins or turning a blind eye to damaging unofficial sales. Chanel has set a trend that others may have to follow.