Luxury Goods Market Faces 2% to 5% Decline Amid Tariffs and Geopolitical Tensions

Global sales of personal luxury goods are experiencing a slowdown, with projections indicating a further decline of 2% to 5% this year. This downturn is attributed to threats of U.S. tariffs and geopolitical tensions, which have triggered economic slowdowns worldwide. Despite these challenges, the market is not collapsing, according to a recent study by a consultancy firm. The study highlights that while the luxury goods market is slowing down, it is not in a state of collapse. This resilience is notable given the current global landscape, which includes three ongoing wars, slowing economies, and record levels of inequality.

Luxury brands are facing additional internal challenges, including a creativity crisis and sharp price increases, which have alienated consumers. Recent investigations in Italy have also revealed sweatshop conditions in subcontractors making luxury handbags, further damaging the industry's reputation. These issues, combined with external headwinds, have led to a significant decline in sales in key markets such as the United States and China. In the U.S., market volatility due to tariffs has discouraged consumer confidence, while China has recorded six quarters of contraction due to low consumer confidence. In contrast, regions like the Middle East, Latin America, and Southeast Asia are experiencing growth, and Europe remains mostly flat.

This divergence is evident in the performance of different luxury brands. While some brands, such as the Prada Group, continue to show strong creative and earnings growth, others like Gucci are struggling. Gucci's revenue declined by 24% to 1.6 billion euros in the first quarter of this year. In response to these challenges, Gucci's owner, Kering, has hired Italian automotive executive Luca De Meo to lead a turnaround effort. This decision comes as three of Kering's brands—Gucci, Balenciaga, and Bottega Veneta—launch new creative directors. De Meo's track record of returning French carmaker Renault to profitability and his previous roles in marketing at Volkswagen and Fiat make him a strong candidate for this role.

Luxury brands are also making strategic changes to minimize the impact of possible U.S. tariffs. These changes include shipping directly from production sites instead of warehouses and reducing stock in stores. This approach is aimed at making the brands more nimble in terms of costs and adapting to the current market conditions. However, many of the headwinds buffering the sector are out of companies' control, including geopolitical tensions and economic instability. These factors are not expected to change soon, but there is hope for more clarity on tariffs in the near future.

Despite the current challenges, the luxury goods sector has historically shown resilience and a quick rebound from global turmoil. The 2008-2009 financial crisis and the pandemic are examples of how the market has recovered from significant downturns. The sector recorded overall growth of 28% from 2019 to 2024, placing it well above pre-pandemic levels. This historical resilience suggests that the luxury goods market has the potential to recover and grow, driven by new markets and pent-up demand. As the global economy continues to evolve, luxury brands will need to adapt their strategies to navigate the current challenges and capitalize on new opportunities.