Many of Europe's biggest luxury goods makers have had a torrid year as consumers kept purse strings tight despite inflation and interest rates easing in most markets.
HSBC captured the mood of the industry when it released a report on the eight leading luxury goods makers titled Cruel Summer, a nod to the Taylor Swift hit. That report radically reduced growth to 2.8 per cent for this year, down from a previous 5.5 per cent forecast.
As Donald Trump moves back into the White House, the winter is shaping up to deliver more bleak news. Will the magnate follow through on his threat to slap tariffs of up to 20 per cent on all goods entering the US, including the high-end labels?
Envious glances have been cast at one of the few brands to thrive in 2024. Italian stalwart Prada fared better than most, notching up an 18 per cent rise in sales in the nine months to the end of September, compared to the same period in 2023. Some of the strength in Prada's figures was provided by 97 per cent growth in its Miu Miu brand. But, in contrast, much of the rest of the luxury market continued to struggle.
For example, the handbag maker Mulberry saw a 19 per cent fall in revenues to £56.1 million in the six months to the end of September. The British brand told its shareholders of a “difficult trading environment and uncertain macroeconomic trends”.
So what separated the two performances? Was Prada doing anything different to the rest of the pack? “Our brands remain desirable and relevant, thanks to the strength and consistency of their identity, creativity and sharp positioning,” Prada's group chief executive Andrea Guerra said at the time.
In part, Prada's and Mulberry's experiences illustrate the mixed fortunes of the luxury goods market in 2024, where much depended on who are you are, what you make and to whom you sell it. For Jelena Sokolova, analyst with Morningstar, it is quite hard to pinpoint anything specific that Prada is doing that is radically different from the other luxury goods makers.
“They have cleaned up distribution channels, removed discounts in mainline stores and improved supply chain. However, it's common among peers and not unique to them,” she told The National. “I think Prada, and specifically Miu Miu, is benefitting from very strong fashion cycle. Their styling is well executed, their marketing campaigns are well thought-out and creative.
“Several products went viral, for example the micro-skirt, and many are widely adopted by influencers. The brand is very popular with Gen Z, like Gucci was very popular with millennials in 2016. I wouldn’t say they are inventing the wheel, but I think they execute very well and benefit from some luck, which is always the case with consumer appeal.”
Shrinking market
Bain and Company's recent study of the personal luxury goods sector concluded the market in 2024 is likely to have shrunk by two per cent to €363 billion ($381 billion), but individual company performances have been much more nuanced. Beauty and eyewear have performed well and jewellery has held up strongly, but shoes and watches struggled. “The tighter conditions are polarising the market,” the study said. “We estimate that only about a third of luxury brands will emerge from 2024 with positive growth, down from two-thirds a year earlier. Many brands are set to suffer a drop in their revenue.”
Much, but certainly not all, of the blame for the luxury market's woes lies at the doorstep of the Chinese consumer. Shoppers kept wallets and purses firmly shut this year as the fallout from the country's property crisis continued to keep a lid on luxury spending. A study of 2,000 high-end Chinese consumers by the investment company TD Cowen found luxury goods were among “the categories consumers intend to spend less on”. What worried many analysts was a finding in the report that in upper-middle-class Chinese households with an average income of $70,000 a year – what might be termed “aspirational consumers” – only 13 per cent indicated that they would be increasing their spending on luxury goods.
However, as Ms Sokolova noted, the slowdown in China is just part of the problem in the luxury goods sector. “American and European demand that fuelled the sector’s post-pandemic strong growth softened in 2023 and 2024 from unsustainable highs,” she told The National. “European and American luxury buying was up 20 to 25 per cent annually from 2019 to 2022, versus a low to mid-single-digit growth trajectory before Covid, thanks to pandemic savings, payment cheques in the US and strong markets. Chinese consumers still should have pandemic-time savings, but their sentiment is subdued due to a weak real estate market. We saw a weak Chinese real estate market preceding luxury downturns in 2015 and 2016 too.”
Generally speaking, the highest of the high-end luxury brands fared better than what might be called the aspiration brands in 2024. Hermes brought in an 11 per cent rise in sales to €3.7 billion in its third quarter, with Bernstein luxury analyst Luca Solca calling the French bag-maker's shares the “best current opportunity” for investors to protect their luxury sector portfolios from “a difficult second half of 2024”. In contrast, British firm Mulberry, having seen its pre-tax loss widened to £15.7 million ($19.9 million) in the six months to the end of September, announced it was aiming to cut the prices of most of its luxury handbags to less than £1,095 ($1,383) in an effort to boost sales and broaden the brand's appeal.
Likewise, analysts felt that Burberry stumbled in recent years as it made a bid for the “higher ground” in the luxury space by raising its prices in a bid to attract more well-heeled consumers. The UK brand's fortunes turned when that strategy did not work. Its new chief executive Joshua Schulman has spent the last five months trying to turn the Burberry ship around by taking it back to basics – selling to aspirational consumers at prices they can afford. “A recovery in Burberry’s performance is far from assured with headwinds likely to persist,” said Keith Bowman at Interactive Investor. “That said, the new group head looks to have made an encouraging start with existing shareholders now likely to stay cautiously patient.”
Investors seem to be encouraging the luxury goods maker to stick with what they know for the time being; do not try anything radical, just try to weather those economic headwinds. Analysts at Bank of America predict the fourth quarter will be better than the third for most luxury goods makers, as mainland China demand slowly steadies and the US market sees some recovery in spending. The improvement seems to be coming from Americans and non-Chinese Asian consumers, the bank said in a research note.
However, according to Bain and Company, not only is the personal luxury market set for a 2 per cent erosion this year, consumers are disappearing, especially in the younger age brackets.
“Luxury spending has shown remarkable stability this year, despite macroeconomic uncertainty, largely driven by consumers’ appetite for luxury experiences,” said Claudia D'Arpizio, partner at Bain and Company. “And yet, 50 million luxury consumers have either opted out of the luxury goods market or been forced out of it in the last two years. This is a signal for brands that it’s time to readjust their value propositions. To win back customers, particularly the younger ones, brands will need to lead with creativity and expand conversation topics.”
The Trump factor
Aside from the recovery of Chinese consumer sentiment, there is another big question hanging over the prospects for the global luxury goods market in 2025. Will Mr Trump follow through with tariffs in 2025? If he does, Ms D'Arpizio said, it would be “nightmare”, leading to a situation where “European brands could end up being super expensive in an already expensive environment’'. After all, the US is the second-largest luxury goods market and accounts for nearly one-third of all global high-end sales of apparel, leather goods and shoes.
But there is a flipside to how the second Trump presidency will affect luxury goods makers, many of whom are based in Europe. Planned tax cuts by the Trump administration, accompanied by a potential stock market rally would boost the wealth of luxury goods consumers. According analysts at UBS, that could “drive improving consumer sentiment in the US”. However, American consumers enriched by the Trump effect and armed with strengthened dollars, may choose to move their spending offshore to Europe “in order to take advantage of any potential regional price gap”, which was as much as 11 per cent in September. Plus, of course, in the EU (but still not in the UK) tourists can get a 20 per cent VAT refund.
Market misconceptions
Nonetheless, if the threatened tariffs did spark a wider trade war between the US and China, any recovery in consumer sentiment in China could be short-lived, the broader effect of which would lie heavily on the personal luxury goods market. However, number-crunching UBS analysts claim the contribution of demand in China for global luxury goods in recent years has been “one of the biggest misconceptions in the market”. UBS contends that Chinese demand is lower than previously thought and “the Americans have had the same contribution to growth as that of the Chinese, around 25 per cent”.
As such, according to the UBS analysts, investors in luxury goods companies pay too little attention to consumers outside China and the US. “On our estimates, the key drivers of sales growth since 2015 have been other major nationalities such as the Americans, the Europeans (around 20 per cent of growth), and other major clusters including Middle Easterners, South Koreans and Japanese (together around 40 per cent of growth). That's why we believe the trends among those consumers should be the focus heading into 2025,” they said.
Indeed, figures from Bank of America show that in terms of tax refunds, which tourists take advantage of to buy luxury goods when travelling, only international travellers from the Middle East increased the value of their tax refunds between the third quarter of this year and the fourth quarter (to date).
Many luxury goods analysts feel the market should be stronger next year. Deutsche Bank is forecasting growth of 5 per cent, as Chinese consumer sentiment improves significantly. But some of the big luxury companies are hedging their bets and looking for ways to diversify. The luxury colossus LVMH has moved into the top-end tourism sector with the purchase of a stake in Les Domaines de Fontenille, a small high-end hotel chain with properties in Tuscany and Minorca. For others, the path back to profitability will be laser-focused on brands and “back to basics” strategies. “To secure future growth, brands will need to rethink their luxury equations, re-establishing creativity and blending old and new playbooks,” said Federica Levato, a partner at Bain and Company.
While some luxury brands, such as Hermes, seem to be more insulated from the tempests of the world economy than others, the fortunes of most are still reliant on the ability and willingness of consumers to splash the cash. The past is often an indicator of the future, Ms Sokolova told The National. “Over the last 30 years, luxury downturns lasted from one to two years and were followed by strong recovery. So, if history is any guide, recovery could happen next year or in 2026.”
