Luxury sales are in a tough spot. It is tempting to think that there is something wrong with the price/value balance in the industry. But I have been through several recessions over the past 25 years, and from my vantage point, my view is that what we are seeing now is primarily macroeconomic, and that the fundamentals of luxury are largely intact. That is not to say that there are no challenges for some players, even big names like LVMH. Equally, it is not to say that luxury has not changed in the past decade, with a much stronger focus on the ultra-rich and a corresponding rise in prices. But in my opinion, luxury’s current predicament stems primarily from a slowdown in the global economic cycle, exacerbated by China’s structural difficulties.
The central bank’s efforts are having the desired effect of cooling consumer demand. This is evident in the recent revenue growth rates of all consumer sectors, including both discretionary and essential goods. Luxury goods are no exception. Demand in the West has slowed, given the decline in consumer confidence caused by the real estate market downturn, which is only partially offset by a recovery in luxury demand in China from “zero COVID”. And as always, the slowdown is starting at the bottom of the social pyramid, with luxury consumers still in consumption mode.
The question is what happens next: Will the slowdown continue or will a recovery begin? Should we extrapolate current trends? Or is a macroeconomic recovery on the way, with central banks taking action to cut interest rates and a change in leadership in Washington? The US Federal Reserve just cut interest rates by 50 basis points, which looks like a good start.
Our current forecast is that the luxury market downturn will be short-lived, with demand improving in 2025, leading to mid-single-digit sales growth in our base case. This forecast is based primarily on four factors: (1) inflation and interest rates, (2) U.S. economic risks, (3) U.S.-China relations, and (4) Chinese economic policies.
Two further factors support our hypothesis: (1) historically, periods of weak demand have lasted 4-6 quarters followed by rapid recovery, and (2) if our 2024 projections are correct (or overly optimistic), then in 2025 the luxury industry will be facing its most comparable period (excluding 2020) since 2017, which was a year of rapid growth.
Luca Solca is head of luxury research at Bernstein.