What the lux?
The luxury industry is facing significant headwinds, and can't seem to catch a break. And while some of its challenges are self-inflicted, the sector is sailing in a merciless economic storm.
From froth to fizzle
Luxury saw a brag-worthy post-COVID boom, outperforming global markets and nearly tripling economic profit between 2019 and 20241. During the pandemic this was largely driven by an accumulation of savings during periods of lockdown, “revenge spend” once lockdowns were lifted, and the fact that the typical top-end luxury buyer is less likely to be affected by economic recession.
Since then, the outlook looks markedly different. The S&P Global Luxury Index shows a one-year return of -9.5%, in sharp contrast with +6.0% on the S&P 500.
A price to pay
What cannot be ignored is how much of the recent growth in the luxury industry can be attributed to price increases versus growth in volume. The price of a Medium Chanel Classic Flap Bag has more than doubled since 2016, a microcosm of the macro which makes it unsurprising that 80% of luxury growth over the past five years has been due to price rather than volume2. And while the luxury industry is in many ways an economic anomaly, exhibiting positive price elasticity (demand increases with price, unlike other goods where the relationship is inverse), there is only so much price hiking consumers will tolerate*.
The aggressive price hikes of the past five years are unsustainable, with consumers pushing back not only on price increases but perceived quality decreases - luxury cannot have it both ways (no one can). In the age of the internet consumers talk, they compare, and scandals such as Dior and Giorgio Armani’s unethical labour practices in Italy, which fuelled the discussion not only of ethics in the industry but also of the audacity of such high price hikes, will come to light.
*The exception here being Hermès, which can seemingly charge whatever it wants, and last week briefly overtook LVMH as the most valuable luxury brand in the world, no mean feat given it is a single brand versus LVMH’s ~80
Trumping luxury’s ace
With 40% of global luxury growth from 2019-2023 having coming from China and 30% from the USA3, President Trump’s recently announced tariffs have all but destroyed any hope of a better outlook for the luxury industry this year. Even though a lot of luxury goods are made in Italy and France (or Switzerland in the case of watches), any additional increases in costs now will be nigh on impossible to pass through to consumers given the evolution of prices since 2019. And economic uncertainty is poison to consumer confidence. Bruno Pavlovksy, President of Fashion at Chanel, recently told the Financial Times that the brand can use stock market performance as a predictor for its in-store traffic and sales. That picture is currently a bleak one for anyone whose revenues mirror it.
“If you watch what happens with the stock market, you can [basically]
predict the level of business in our boutiques”
All eyes on earnings
LVMH’s first quarter earnings report showed a 3% decline (analysts predicted 2% growth), and Kering revenue fell 14%, with its flagship brand Gucci seeing a 25% decline in sales. Prada is set to report next week. Hermès, seemingly indomitable, is up 7% (below expectations of 8%, but still…)
It is worth noting that many luxury fashion brands are currently in transitional phases: Versace has recently been acquired by Prada; Celine, Loewe, Proenza Schouler, Gucci, and Dior are just some of the brands seeing big changes (and sometimes voids) in key leadership roles; Burberry has been attempting a turnaround for some time now and is on its third CEO since 2021. This type of inner industry turmoil is not helped by the economic headwinds out of its control.
Onto the outlook
So where to from here for luxury? In McKinsey & Company x Business of Fashion’s State of Fashion: Luxury report (to which I was a contributor, thankyouverymuch), the USA was forecast to become more of a growth engine for luxury than China from 2025-2027. Analysts expected growth of 5% for luxury in 2025 and 2% for LVMH in Q1. But with so much volatility and uncertainty in the market, is it even worth attempting to forecast what will happen next? In some ways of course it is, but in the current conditions it’s well worth taking any predictions with a large pinch of salt, and a robust backup plan at hand. As for what that backup plan might look like, that’s a discussion for another day.
