The latest earnings reports from the world’s leading luxury players have largely brought bad news. What’s more, there’s been a lot of uncertainty and chaos floating around all year, with online-only players like Farfetch and YNAP falling into the arms of new corporate owners. Saks Fifth Avenue and Neiman Marcus, along with Tapestry and Capri Holdings, are considering a merger as their sales and profits are lagging. All this leads one to think: How long will this last and what will happen next?

Air Comes Out of the Luxury Balloon

A few weeks ago, industry leader LVMH started the work as follows: surprising sales decline. Kering Group, owner of rival luxury conglomerate Gucci, followed a week later. 16% sales decline and profit warning. Estee Lauder also disappointed investors With a 4% sales declineit is also withdrawing its earnings guidance.

Yesterday, Tapestry managed to beat quarterly earnings expectations, but sales were flat overall, with the Kate Spade division down 7%. Accessible luxury rival Capri Holdings’ results were much worse, with sales falling more than 16%.

It’s Not All Bad News

Amidst this high-level malaise, Hermes bucked the trend Reported 11% sales increase for a quarter. Prada Group also achieved great results such as: Miu Miu brand doubled its revenues. While these are not small businesses, both companies enjoy the benefits of having a more tightly defined group of affluent target consumers, a more focused go-to-market strategy, and an overall better execution of their value proposition.

China Syndrome?

Much of this slowdown is driven by China (and Asia more broadly), a market that has become hugely important for many of the iconic luxury brands. Of course, many players saw relatively weaker sales in China throughout the year as the country’s economy stagnated and consumer confidence waned. More than a decade of disproportionate investment in China has created over-reliance on the region, and the resulting strong headwinds will make recovery difficult for these brands.

The Dirty Little Secret of Luxury

The problems of luxury run deeper than weakness anywhere else in the world. It is often overlooked how dependent both brands and retailers serving high-end customers have become on increasing prices to increase same-store sales.

The average price of luxury goods has increased by 60% since 2019, according to HSBC. For example, Hermes reported that 9% price increases were behind its 11% sales growth. I know from my own consulting work with brands that have experienced for years that almost all of their organic sales growth is attributed to higher average unit retail prices.

This strategy can make perfect sense when most of your customers have almost infinite spending capacity and your products are quite different and quite few (see Hermes).

But the more your customer base consists of exclusively wealthy people rather than the uber-wealthy, and the more you sell a lot of uncovetable products (see almost all accessible luxury brands and high-end department stores), the more vulnerable you become to the basic dynamics of price elasticity.

Moreover, the increase in the cost of entry to a brand makes it difficult to gain new customers. As a result, we have seen long-term problems in legacy brands’ ability to attract, grow and retain younger customers across established geographies. But in recent years, this reality has been masked as consumers across all demographic groups have more discretionary spending power due to the Covid stimulus. That tailwind is no longer there.

Is It Time for a Reset?

There are obviously macroeconomic factors that are beyond any company’s control. It is still debatable whether the current dynamics are just a pause or a major change. But with stocks and many high-end real estate markets at or near all-time highs (factors historically associated with strong luxury demand), one has to wonder whether something more fundamental is at play.

Luxury brand houses that have invested heavily in their own stores in Asia cannot easily hit the reset button. High-end department stores that are losing share as their sellers aggressively expand their direct-to-consumer efforts (both in owned stores and online) may need a complete rethinking of their operating models. Conspicuous young consumers are unlikely to convert into high-spending, fiercely loyal luxury customers with the same tactic that worked for their parents.

Whatever happens in the near future, it’s hard to imagine that the methods that worked in the past will serve the industry very well in the future. In fact, some bold action is almost certainly necessary.

As they say in Alcoholics Anonymous: “Half measures did us no good.”