At a press conference in January, fresh off a promising earnings report and a stop at US President Donald Trump’s inauguration, LVMH chief Bernard Arnault — who had pegged hopes of a luxury recovery on growth in the US market — was singing America’s praises.
“I have witnessed the winds of optimism in the US,” he said. “In the US, you get the feeling that you’re welcomed with open arms.”
But from the Rose Garden yesterday, as Trump announced the implementation of the most severe set of tariffs in over 100 years, the president took a different tone: “Foreign leaders have stolen our jobs, foreign cheaters have ransacked our factories and foreign scavengers have torn apart our once beautiful American dream.”
In one swoop, Trump created an unprecedented level of ambiguity and complexity for a luxury industry already beleaguered by widespread sales slowdowns and tempered consumer demand. The levies are set to directly impact some of the sector’s biggest manufacturing hubs, including a 20 percent tariff on the EU, 10 percent on the UK, 31 percent on Switzerland and 34 percent on China.
The US had become increasingly important to luxury’s post-pandemic recovery, especially as sales in China and other key geographies still lag. In turn, brands have invested more in the market, opening stores in untapped regions beyond the coasts and directly catering to American shoppers.
But Trump’s trade policies — and the knockdown effects of an era of American uncertainty — could complicate luxury’s recovery plans. A straight path to cyclical recovery for luxury is looking less likely than ever, according to analysts.
BoF unpacks what Trump’s tariffs mean for luxury.
Why is the US so important for luxury?
The US, with its wealthy, consumption-forward population and outsize share of billionaires, has always been a vital market for luxury. Lately, it has become crucial in pulling the industry out of a years-long slump as malaise in other growth regions, namely China, persists.
Over the past five years, American shoppers — known for their resilience and appetite to spend even in troubled times — have become an increasingly important part of global luxury demand. As fears of a downturn bubbled up throughout 2024, a tumultuous election year, retail spending bucked expectations and didn’t fall off. Last October, HSBC analyst Erwan Rambourg noted Americans were the only consumers “with a bit of signs of life.”
All this has made the US look like a land of unbridled opportunity for luxury — and fashion has even pushed westward, opening stores in regions once considered luxury deserts: Louis Vuitton in Indianapolis and Hermès in Austin, with another to come in Nashville. Gucci and Moncler are soon to open shops in Minneapolis.
Trump’s re-election in November was largely welcomed by the industry, with investors noting the correlation between tax cuts, a strong stock market and luxury spending. Not to mention, the cultural shift: Trump’s high-octane lifestyle and unabashed flaunting of wealth and power were seen as having the potential to provide a boost.
But since his return to office — and particularly in the lead-up to his trade policy announcement — markets have been volatile. The S&P 500 plunged 5 percent on Thursday, the biggest daily drop since June 2020, at the peak of the pandemic.
What’s the immediate impact?
Wednesday’s more drastic-than-anticipated tariff announcement rocked the industry. With Trump, predicting what’s next is difficult. Circumstances still may change, particularly after negotiations between affected regions and industries ensue — but just about every fashion item sold in the country will be hit with additional duties, as the US imports more than 98 percent of its clothing and about 99 percent of shoes.
The immediate impact won’t be as dramatic for luxury, which operates at a higher gross margin than other categories, allowing it to more easily pass costs on to shoppers. Plus, its wealthier consumer base tends to fare better under economic pressure, and could potentially plot out summer trips in order to move their spend to shopping hubs abroad should prices rise at home.
Luxury players have paid tariffs (around 15 percent) for decades when exporting to the US, and if the new 20 percent tariffs are incremental, the impact will be negligible, covered by retail price increases of just 1 to 4 percent, Bernstein analyst Luca Solca said in a note today.
Still, some brands will feel the pain more than others: The impact of tariffs depends on a company’s exposure to the market and where its products are made. Moncler has lower revenue exposure to the US market, for example. Burberry — which just saw momentum in the US start to pick up — has a slightly higher mix of Asia-based manufacturers than other European labels, meaning it’s particularly vulnerable, said RBC in a note.
The situation also presents a unique challenge for Swiss watches, Citi analyst Thomas Chauvet said in a note Thursday. Richemont, a bright spot in the downturn thanks to its strong perception and focus on hard luxury, faces a higher, Switzerland-specific tariff of 31 percent.
LVMH started hedging its bets on American manufacturing during Trump’s first term, building factories (albeit, still very limited in scale, with just three Louis Vuitton facilities in California and Texas) in the US. In January, Arnault indicated his interest in bolstering US production again.
For others, including Kering, manufacturing stateside “makes no sense,” said Pinault on its Q4 2024 earnings call in February. “We’re producing in Italy and in France … we’re selling a part of our culture.” Cachet aside, shifting a supply chain represents a logistical juggernaut. Finding a new manufacturer with scale and luxury know-how is challenging; moving to a region that felt less of an impact is futile, with circumstances in flux. The US does not have much local infrastructure or workers skilled in apparel manufacturing beyond Los Angeles, where the focus is on knits and denim.
“You can’t move the fashion supply chain on a dime,” said Brian Ehrig, partner in Kearney’s consumer practice. “Where are you going to go?”
Regardless of approach and positioning, a degree of change is inevitable. As costs rise, brands and their suppliers will take a margin hit, pass increases onto consumers or find other workarounds. For many — including Kering and Hermès — price hikes, should duties increase, were already on the table.
But luxury is in a unique predicament: years of so-called “greed-flation” (where luxury brands hiked prices to drive margin-based sales growth, resulting in costs 54 percent higher on average than in 2019, according to HSBC) and price increases have already put a damper on spending, particularly among aspirational shoppers. Many brands have just started to face consumer fatigue with more entry level products and creative shifts.
The industry’s pricing power will be tested again. Brands favoured by higher-income shoppers — Hermès, for example — will naturally find it easier to trade on cachet. It could be more of an uphill battle for Kering, which has more exposure among aspirational shoppers (likely to feel the brunt of inflation) and is in the midst of repositioning its flagship Gucci.
But it’s not just the European giants who will feel the pinch of new trade policies: the vast majority of American brands — The Row, for example — manufacture overseas, tapping production prowess in regions like Italy.
“These tariffs are going to touch everyone … We are in for a rough time. The economy was chugging along. Now it seems it will be out of steam,” Gary Wassner, founder of financing and factoring firm Hildun Corp, told BoF in an email. “How many many small and large companies will fail due to cash flow issues, lower margins and lower sales due to higher prices at retail, remains to be seen.”
For up-and-coming independent brands already embattled by ongoing wholesale upheaval, rising costs and margin erosion, a solid path forward feels elusive.
“It’s incredibly scary. I thought because I manufacture in so many places, including New York, I was going to be okay,” said Rachel Scott, the designer behind New York-based Diotima, who also produces in China, Italy and India. “Fashion is such an important industry for the States and [this is] going to completely cripple us.”
What’s to come?
Trump’s tariffs represent a broader challenge for luxury than just the additional fees.
The trickle-down effect of inflation and souring stock-market returns has the potential to hamper spending and put consumers in a distinctly bad mood. US consumer confidence has already taken a beating, falling to its lowest point in years in March, according to The Conference Board. Goldman Sachs and JP Morgan have both raised the probability of a US recession from 20 and 30 percent to 35 and 40 percent, respectively.
Plus, what happens in the US doesn’t stay in the US. Stock markets are already reeling from Trump’s announcement; the downstream impact of this policy could spell drastic implications for other economies.
“What we should worry about, in case, are the second and third level impacts of the new American policies, if they precipitate a sharp global recession and stock market correction,” said Solca in a note.
