Why did French luxury brand Hermes cut its prices?

After the announcement of a free trade agreement between Korea and the European Union, major European luxury brands started to raise prices. Hermes of France, however, announced a price cut Thursday, something which has embarrassed the luxury sector.

The luxury industry has raised prices every year as part of their strategy to keep their premium image, and Hermes did the same whenever cause for a raise arose.

Hermes announced an average price cut of 5.6 percent and a high of 10 percent Friday, saying, “Hermes goods are produced mostly in EU countries such as France, Italy and the U.K., so it benefits most from the Korea-EU FTA. We decided to lower prices to return some of the benefits to our customers.”

Other luxury brands warned that the price cut could deal a blow to their images since they could be seen as "less honest companies" compared with Hermes. Sources in the luxury industry said, however, that the point of their fear is that luxury brands have become a subject of rational judgment as price has grown into a hot debates.

Michel Chevalier, the author of “Luxury Brand Management,” said, “Luxury brand customers do not want to be reasonable when they buy goods because when they become reasonable, the pleasure of shopping diminishes.”

The major fear of the luxury industry is that if the rational standard becomes an issue, core customers who are willing to open their wallets for the “value of dreams” such as psychological superiority will be disappointed, losing their dreams. For this reason, many luxury brands maintain a “no comment strategy” on the price issue.

Lee Jang-hyeok, a business management professor at Korea University in Seoul, said, “The price policy of luxury goods involves much more complicated strategic decisions than that of general consumer goods.”

He said Hermes doubts that its price cut will deal a blow to its image because it enjoys strong recognition as the most expensive brand, and this is why the brand unusually decided to return the benefits of the free trade deal to customers.

Hermes is one of the world`s most expensive brands with its major product line “Birkin 35” costing an average of 12.8 million won (12,080 U.S. dollars), which is 5 million won (4,720 dollars) higher than other designer bags.

A Hermes source said, “We cautiously lowered prices after closely monitoring customer response.”

Other luxury brands plan to continue their premium pricing strategy, however. Chanel has strengthened its premium strategy in lowering its target age group over the past several years.

Louis Vuitton also plans to go to high-end luxury by making stores twice or three times larger, and other brands are following suit.

Sources in the luxury industry say the sector is under fire for raising prices just because of the free trade agreement. An industry expert said, “Lowering the price of luxury goods will be determined not by public opinion or a change in revenues but by the brands’ strategies.”

bright@donga.com