Europe’s luxury sector is showing signs of revival — but China weakness and tariff threats loom
Europe's luxury goods industry is showing early signs of a cyclical recovery following a broadly upbeat fourth-quarter earnings season, with giants like Hermès, LVMH, and even struggling Kering surpassing forecasts. Analysts suggest the worst of the sector's downturn may be over, pointing to a "normalization" expected through 2025, driven primarily by resilient U.S. and European consumers.
"The conclusion seems to be the worst is behind us," said Luca Solca of Bernstein, highlighting a recovery in progress. This optimism was bolstered by Cartier-owner Richemont posting its highest-ever quarterly sales in December and Hermès delivering blowout results. However, this fragile rebound faces significant headwinds from persistent softness in Chinese demand and the looming threat of U.S. tariffs under the Trump administration.
Dual Threats: China's Slow Return and the Tariff Shadow
A full recovery remains contingent on a meaningful rebound in Chinese consumer spending, a longtime growth engine for luxury. Fourth-quarter reports from L'Oréal and Kering's Gucci continued to highlight declining sales in the region. Simultaneously, the potential for substantial U.S. import tariffs presents a new layer of uncertainty. While luxury firms may attempt to pass these costs to consumers through price hikes—as signaled by Hermès and Kering—analysts warn that after years of aggressive increases, further hikes could be "very painful" and difficult to justify for some brands.
The sector's unique "Made in Italy" or "Made in France" production basis may offer some protection, as tariffs aim to relocate manufacturing, which is impossible for heritage-bound luxury goods. However, broader economic damage from trade tensions could still depress global consumer sentiment and spending. "Anything that would negatively impact the economy in China would be a risk," noted Zuzanna Pusz of UBS.
Widening the Gap: The Flight to Quality Intensifies
These pressures are likely to exacerbate the existing divergence between top-tier brands and the rest of the pack. In a more selective spending environment, consumers are expected to consolidate their purchases toward the most desirable labels with unquestioned heritage and quality. "When a consumer has to buy less, they become even more selective, and they will take even more to the brands they like," Pusz explained. This dynamic continues to favor absolute top players like Hermès and Richemont, while brands perceived as lacking innovation or clear brand equity, such as Burberry, face a steeper climb in justifying their value proposition. The sector's revival, therefore, appears to be shaping up as a strongly bifurcated one.
