The shadow of tariffs looms, and the pricing strategy of the luxury goods industry faces a reshuffle

In the recently reached US-EU trade agreement, although the luxury goods industry has avoided the initial 30% punitive tariffs proposed by the Trump administration, it will still face a unified tariff of 15%. Compared to the "zero tariff mutual exemption" plan that the EU originally hoped to achieve, this result undoubtedly increases the cost burden on brands. UBS estimates that to absorb this 15% tariff, luxury brands will need to raise prices by about 2% in the US and about 1% globally, otherwise it will directly impact about 3% of their earnings before interest and taxes (EBIT). But the question is, are consumers still willing to pay for this? Analysts say that in the current context of weak consumption, such price increases may be highly challenging. From the recent financial reports released by major luxury brands, overall signs of recovery remain limited, and consumer demand is weak. Weak consumer power, price increase space has been exhausted Some high-end brands have stated that they still have a certain degree of pricing power and can offset tariff costs through price increases. However, analysts and industry insiders warn that many brands, after experiencing several rounds of significant price increases, have little room left for further price adjustments. In recent years, price increases have been the secret weapon of luxury giants. According to RBC data, after the pandemic, there was a rebound in consumer spending, and luxury brands took the opportunity to raise prices. From 2019 to 2023, luxury brands have raised prices by an average of 33%. The price of Chanel's classic flap bag has increased more than three times from 2015 to 2024, while the prices of Dior handbags and Louis Vuitton Keepall travel bags have also doubled. UBS data shows that since 2019, half of the growth in the luxury goods industry has come from price increases. But now, this tactic is no longer effective. Consulting firm Bain pointed out that in 2024 alone, 50 million consumers are expected to leave the global luxury goods market, as economic pressures and "price fatigue" have led more consumers to lose interest in high-priced clothing and handbags. Consumers are no longer blindly spending, especially younger people and occasional shoppers, who have become more rational. Flavio Cereda, head of luxury brand investment strategy at GAM Asset Management, pointed out that brands with imbalanced pricing strategies are currently under the most pressure, which is a natural result of excessive growth in the earlier stages. Brand differentiation, who can maintain a high-end position? In this adjustment, the performance of different brands has begun to diverge. LVMH's sales in the second quarter of this year fell short of market expectations, mainly due to the slowdown in sales of its two core brands—Louis Vuitton and Dior. At the same time, the down jacket brand Moncler saw a year-on-year sales decline of 1%, while Gucci, under Kering Group, is also expected to remain sluggish. In contrast, Hermès, which has been "restrained in price increases," is expected to see its sales grow by 10% in the second quarter, according to analysts. Caroline Reyl, head of high-end brands at Pictet Asset Management, stated that over the past four years, there has been a phenomenon of "value misalignment" in the luxury goods industry, where the prices of certain luxury goods are severely disconnected from the quality and creativity they convey. Consumers turning to the second-hand market, high-end does not equal high price A consumer in North Carolina stated that they are willing to spend $8,000 on a Chanel bag on a second-hand platform, but would not spend $12,000 in a mall for a new one. If prices rise further due to increased tariffs, then the bag will no longer be worth it. This trend is spreading, with consumers becoming increasingly budget-conscious, and more consumers are turning to second-hand platforms like The RealReal and Fashionphile. This also means that brands not only have to face the issue of losing new customers but also have to deal with the challenge of existing customers moving to the second-hand market. Response Strategy: Change Designers, Reshape Value Perception According to Bain & Company, global luxury goods sales are expected to decline by 2% to 5% by 2025, and have already decreased by 1% in 2024, marking the largest contraction in nearly 15 years, aside from the pandemic. In the face of declining consumption, luxury brands are accelerating their transformation. Chanel, Gucci, and LVMH's Dior, Celine, Givenchy, Loewe, and Versace have all appointed new creative directors in hopes of revitalizing consumer appeal through refreshed design styles and addressing the mismatch between price and value. But as Caroline Reyl said, “You can't just snap your fingers and transform a brand in a few weeks.” Rebuilding consumer confidence, especially in the current economic environment, takes time and requires more precise brand strategies