Recent earnings reports from the world’s top luxury players have largely brought bad news. Moreover, a fair amount of uncertainty and chaos has been in the air all year as money-losing online-only players like Farfetch and YNAP have run into the arms of new corporate owners. Saks Fifth Avenue and Neiman Marcus, along with Tapestry and Capri Holdings, looked to merge as their sales and profits lag. All of this leads one to wonder, how long will this last and what comes next?

The Air Comes Out of the Luxury Balloon

A few weeks back, industry leader LVMH started things off with a surprising sales drop. Rival luxe conglomerate Kering Group, owner of Gucci, followed up a week later with a 16% sales decrease and a profit warning. Estee Lauder also disappointed investors with a 4% sales decrease, while also withdrawing earnings guidance.

Tapestry managed to beat quarterly earning expectations, but sales were flat overall and down 7% for their Kate Spade division. Results from accessible luxury rival Capri Holdings were far worse, with sales plummeting over 16%.

It’s Not All Bad News

Amid this high-end malaise, Hermes bucked the trend posting an 11% sales increase for the quarter. Prada Group also delivered out-sized results as its Miu Miu brand doubled its revenues. While these are not small businesses, both companies benefit from having a more tightly defined set of wealthy target consumers, a more focused go-to-market strategy, and generally better execution against their value proposition.

The China Syndrome?

A lot of the blame for this deceleration is directed at China (and Asia more broadly), a market that has become hugely important for most of the iconic luxury brands. To be sure, many players have seen relatively weaker sales in China all year as the country’s economy sputtered and consumer confidence waned. More than a decade of disproportionate investment in China has created an over-reliance on the region and the resulting strong headwinds for these brands will make a rebound challenging.

Luxury’s Dirty Little Secret

Luxury issues run deeper than weakness in any one part of the world. The degree to which both brands and retailers serving high-end clientele have become way too dependent on raising prices to drive same-stores sales is often overlooked.

According to HSBC, the average price of luxury goods has increased by 60% since 2019. As just one example, Hermes reported that embedded in its 11% sales growth were price increases of 9%. I know from my own advisory work of brands that have experienced years where nearly all of their organic sales growth was attributable to higher average unit retail prices.

This strategy can be eminently sensible when most of your customers have nearly endless spending capacity and your products are highly differentiated and quite scarce (see Hermes).

But the more your customer base is comprised of the merely affluent—rather than the uber wealthy—and you sell products that are not nearly so strongly coveted (see virtually every accessible luxury brand and high-end department store), the more vulnerable you become to the basic dynamics of price elasticity.

Moreover, raising the cost of entry to a brand makes it harder to acquire new customers. As a result, we’ve seen long-term issues with legacy brands’ ability to attract, grow, and retain younger customers in established geographies. But in recent years this reality was masked as consumers across all demographics had greater discretionary spending power due to Covid stimulus. That tail wind is now gone.

Time to Hit Reset?

Clearly there are macro-economic factors that are out of any given company’s control. Whether the current dynamics are merely a pause or more of a sea change remains debatable. But with stocks and many high-end real estate markets at or near all-time highs (factors that historically correlate with strong luxury demand) one has to wonder if something more fundamental is at play.

Luxury brand houses that invested heavily in their own stores across Asia can’t easily hit the reset button. High-end department stores that have lost share as their vendors have aggressively expanded their direct-to-customer efforts—both through owned stores and online—may well need a complete re-think of their operating model. Coveted younger consumers aren’t likely to become high-spending, intensely loyal luxury clients through the same playbook that worked for their parents.

Regardless of what the immediate future holds, it’s hard to imagine that what worked in the past is likely to serve the industry terribly well going forward. In fact, some level of bold action is almost certainly required.

As they say in Alcoholics Anonymous: “half measures availed us nothing.”

 

A version of this story appeared on Forbes.com, where I am a senior retail contributor.