Luxury brands still face a dilemma despite escaping the worst case scenario in the EU-US trade agreement on Sunday, July 27. The weakening consumer demand is putting their ability to further raise prices to the test.
Brands like Chanel, Louis Vuitton, and Dior have relied on significant price increases in recent years to drive some profit growth.
Jacques Roizen, the general manager of Digital Luxury Group in China, said that although the agreement reached by the EU and the US imposes a 15% tariff on EU goods, bringing much-needed certainty to the luxury market in the US, brands must tread carefully in further price increases to avoid discouraging young and occasional shoppers.
While the baseline tariffs are lower than the 30% tariffs threatened by the Trump administration a few weeks ago, they are far from the zero-tariff agreement that Brussels hoped to achieve.
With a sluggish Chinese economy and declining global sales, the luxury industry is pinning its hopes on the US market.
To ease tensions with the Trump administration, Bernard Arnault, the chairman and CEO of LVMH, engaged in intense lobbying activities with EU leaders and announced plans to build a new Louis Vuitton factory in Texas last week. However, for most European brands, such a move is too complicated and costly, requiring years to complete just the transfer of technology.
Some high-end brands hope to offset tariff costs through pricing strategies, but analysts and industry insiders warn that after a series of significant price increases, some companies may have limited room to maneuver.
Large luxury companies have profited from the rebound in consumer demand after the pandemic. According to estimates by RBC, luxury prices increased by an average of 33% from 2019 to 2023.
UBS analysts noted that the price of Chanel’s classic quilted flap bags tripled from 2015 to 2024, while Dior’s ladies’ handbags and Louis Vuitton’s Keepall travel bags doubled in price.
Luxury industry sales growth in the past four years was driven half by price increases starting in 2019, and only one-third between 2016 and 2023.
However, Bain reports that as economic pressures intensify and fatigue towards high-priced goods grows, consumers’ willingness to purchase designer brand clothing and handbags is waning, resulting in the loss of 50 million customers in the industry last year.
Flavio Cereda, managing GAM Luxury Brands’ investment strategy, said brands that misstep in price balancing are now facing greater difficulties. “Despite uneven growth momentum, the drive is significantly weakening, a natural result of a period of excessive growth.”
Hermes, which apparently did not significantly raise prices during the post-pandemic sales boom, now surpasses its competitors in sales volume. Analysts predict a 10% increase in the company’s second-quarter sales.
Shelling out a 15% tariff on European products exported to the US is expected to necessitate an average of about 2% price increase for luxury brands in the US market, requiring a global price increase of about 1% to avoid widening regional price disparities, or they may face around a 3% decline in earnings before interest and taxes (EBIT).
As luxury industry players see almost no rebound in profits in the latest round, raising prices may face challenges.
Due to sluggish sales of flagship brands Louis Vuitton and Dior, LVMH’s second-quarter sales fell short of expectations; Moncler, specializing in outerwear, saw a 1% decline in sales; Gucci under Kering is expected to continue facing challenges.
Caroline Reyl, senior brand manager at Pictet Asset Management, noted a “disconnect” between the prices of certain luxury goods and their perceived quality and creativity over the past four years.
Bain predicts a 2%-5% decline in global luxury sales in 2025, compared to a 1% decline last year, marking the biggest contraction in 15 years apart from the COVID outbreak.
To reverse the downward trend, the luxury industry has started recruiting new designers. Brands like Chanel, Gucci, Dior under LVMH, Celine, Givenchy, Loewe, and Versace have all welcomed new designers. However, achieving a better balance between price and product value in updated styles will take time. Reyl said, “You can’t snap your fingers and make it happen in a few weeks.”
(This article references reporting from Reuters)