Trump Tariffs: A Test for Europe's Luxury Goods Makers

As the U.S. luxury market braces for potential tariffs, European luxury brands are assessing their pricing strategies and considering various mitigation tactics to offset the impact. President Trump's proposed tariffs on European imports could significantly affect the U.S. luxury market, particularly for European brands, and potentially have global repercussions.

The U.S. is the second-largest luxury market, following Europe, worth about 100 billion euros ($106 billion), or nearly one-third of all global high-end sales of apparel, leather goods, and footwear. Trump's proposed tariffs could make European luxury goods more expensive in the U.S. market, leading to a decrease in demand and reduced sales for European brands.

European luxury brands have indicated that they could leverage their brands' cachet to absorb any additional duties. However, years of aggressive price hikes could make it harder for some brands to pass on higher import costs to consumers. Most brands lifted prices by their most ever in recent years, with Chanel's classic quilted flap bag more than tripling in price since 2010, while the Lady Dior bag and Louis Vuitton Keepall travel bag more than doubling, according to UBS.

A significant price rise would counter a recent trend for more cautious pricing policy, especially in the U.S. market. Dior, for example, kept U.S. prices flat last year, while Louis Vuitton increased them by a little more than 2%, according to Paris-based market intelligence firm Data & Data. Chanel raised prices by 5.4%, a moderate move compared with previous years, while jewellers Tiffany and Richemont-owned Cartier and Van Cleef & Arpels slowed the pace of U.S. increases to 4% to 6%, from over 8% in the previous year.

"I think that the major brands' room for manoeuvre in terms of price increases in the United States will be fairly limited in 2025," Data & Data CEO Zouheir Guedri said. "This would risk accentuating price differences between different regions and jeopardise costly efforts undertaken over the years to harmonise prices on a global scale."

Morningstar analysts said in a recent note: "A 10% to 20% tariff on European luxury goods could depress luxury sales in the U.S., especially for companies like Burberry and Kering that focus more on an affluent and aspirational clientele as opposed to the ultra-rich patrons."

To mitigate the effects of tariffs, European luxury brands may consider moving production to the U.S. or increasing sales to U.S. tourists in Europe. Moving production to the U.S. could help brands avoid additional duties and maintain their competitiveness in the U.S. market. However, this may not be feasible for all brands, as it could dilute their 'Made in Europe' image and may not make economic sense. Increasing sales to U.S. tourists in Europe could help offset any potential losses in the U.S. market due to tariffs.

In conclusion, Trump's tariffs on European imports could have a significant impact on the U.S. luxury market, particularly for European brands. The increased prices could lead to a decrease in demand, reduced sales, and potential production shifts. The global luxury goods industry could also be affected, as the U.S. market is a significant contributor to overall sales and profits. However, the extent of the impact will depend on how the tariffs are implemented and whether certain brands are exempted. European luxury brands may mitigate the effects of tariffs by moving production to the U.S. or increasing sales to U.S. tourists in Europe.