Gucci Luxury Goods Store is located in Galleria Vittorio Emanuele Shopping Mall in Milan, Italy.
Bloomberg | Bloomberg | Getty Images
The troubled luxury sector in Europe shows signs of revival after a bright revenue season. However, China’s continued weakness, and the US tariff outlook, could leave even the most exclusive brands competing for pockets.
“2024 was one of the worst years for the sector. I think there will be a kind of normalization in the second half, especially after 2025,” says Simonera Gazzi, senior equity analyst in algebraic investments. told CNBC on a video call last week. .
Birkin bag maker Hermes We posted fourth quarter sales earlier this month, extending outperformance at the end of the broadly bright revenue season. LVMH and Gucci owners Kering Defeat quarterly forecasts.
The results added weight to previous forecasts for the sector’s long-awaited turnaround after Cartier owners Richmont Last month we posted the “highest ever” quarterly sales in the three months leading up to December.
“The conclusion seems to be the worst — this was probably the third quarter of 2024 — and there is a cyclical recovery that is mostly ongoing, driven by US and European consumers.” Luka Solka, a senior analyst in global luxury goods at Bernstein, said in an email.
The threat of US tariffs looms
Nevertheless, the question mark remains centered around a recovery in China’s consumption (a long-standing pillar of luxury markets) and the US tariff outlook hampering the sector.
Still weak China sales remained a recurring theme in the fourth quarter report. L’Oreal And Kering’s Gucci – two groups particularly exposed to the market – highlights the decline in the country’s sales. Meanwhile, the possibility of collection of European companies under US President Donald Trump, coupled with wider macroeconomic uncertainty, was a key feature of the revenue call.
Zuzanna Pusz, head of European luxury goods at UBS, told CNBC that if additional obligations are placed, businesses aim to pass them to consumers via price increases. However, she noted that some companies will have more trouble justifying additional price increases than others.
“We’ve already been ruled out from a significant price increase. If companies have 25% tariffs, it’s going to be difficult to offset them,” Ragazzi agreed, adding that for some companies, ” It could be very painful.”
The European luxury sector is unusual in that it cannot replicate much of its operation in foreign markets like the US. This is an important intent of Trump’s import crime. For example, giving a “Made in Italy” label to a leather jacket is subject to the products produced there.
That suggests luxury businesses could be exempt from the most punitive measures, Pusz said. But as long as trade collection hurts target economies like China – by raising overall prices and hindering consumer sentiment – it can become a concern for the sector.
“Anything that has a negative impact on China’s economy will be risky,” Pusz said in a video call earlier this month.
Divergence between the best and the rest
It could exacerbate existing differences between companies in the best and worst performance of the luxury market, analysts agreed.
“When consumers have to shop less, whether it’s tariffs or other shocks, they’ll become even more selective and they’ll work on the brands they like,” Pusz says. I did.
Carol Madojo, head of Barclays’ European luxury goods research, said that some luxury brands have been punished recently for “lack of innovation (and) high pricing” and are obliged to justify prices. I pointed it out.
Gray leather Hermes Birkin bag at a street style fashion photo session held in Paris on May 16, 2024.
Edward Barcelott | Getty Images Entertainment | Getty Images
“Since macros are becoming more challenging for the consumer base… they’re buying less, but they’re doing better,” Madojo told CNBC’s Squawk Box Europe earlier this month. Ta. “The sector is now aware of all these issues and is about to start having some solutions.”
Analysts agreed that high-quality brands and brands exposed to luxury consumer bases are likely to stay ahead, at least in the short term.
“A quality name may shine brighter amidst the industry’s peculiar challenges,” Bernstein’s Solca said last week, pointing to the continued strength of outstanding brands such as Richmont and Hermes. He lists Moncler and Burberry as growth outlooks.
“The big question is what luxury means today,” Ragazzi pointed out. “What’s even more obvious is the disappearance of the goodwill and legacy that brands had in the past.”
