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With just a couple of days until Christmas, it’s a good time to take stock of the shopping season. I think about the luxury retail market quite a bit, because where the rich lead, the market (and even the economy as a whole) tends to follow. Last year was the worst for the luxury industry since the great recession of 2007-09.
While the super-rich continue to spend as if they exist in a separate gravitational orbit, the aspirational consumers who make up the important part of the “mass luxury” market are retreating. This goes a long way to explaining why many of the world’s largest luxury companies have underperformed recently. After all, there are only so many watches and bags the one percent can buy.
And the number of people who can afford this kind of thing is decreasing. Bain’s latest luxury market report, released in November, found that the luxury market shrank by about 50 million consumers over the past two years, in part because younger consumers are moving away from traditional luxury products. . I suspect this is one of the reasons why older people, particularly older women, are (finally) seen in advertising and even on fashion runways. They are the only ones who buy things.
But there are other reasons why luxury has lost its luster, including the widespread feeling that economic insecurity may be around the corner, despite buoyant markets.
If you discount the V-shaped Covid problem, we are six years behind a recession. Meanwhile, the strange world of the perfectly priced U.S. stock markets has everyone at New York dinner parties talking about when (and if) they plan to convert at least some of their portfolios into cash.
Despite this, or perhaps because of it, the super-rich can still spend. Those in the ultra-wealthy segment of the luxury market – that is, people who spend their excess cash on yachts and planes (both sectors that are doing quite well) – have seen their net worth bolstered by double-digit growth in the asset market. There is major fleet expansion in the super-high-end cruise business, and growth in luxury cars and hotels remains strong.
But less wealthy people who were once willing to splurge on that $500 purse are being much more cautious. This is because, unlike the super-rich, they still have to worry about working. According to the Bain study, aspiring consumers’ disposable incomes have decreased as they have been affected by reduced job openings and increased voluntary turnover rates. That’s why overall luxury sales are expected to fall by about 2 percent in 2024 and remain stable next year.
So what does all this tell us about what’s to come for the broader economy in 2025? There are three key lessons.
First, there will be a US stock market correction, perhaps this year, perhaps next. But few wealthy people I speak to have any doubt that it is on the way. The fact that even the wealthy are reducing their purchases of fine wine, jewelry, watches and art means that many asset-rich consumers are expecting a slowdown and some type of market correction, even if we don’t see a full recovery. trade war broke out.
Secondly, if the latter were to happen, the luxury sector, dominated by high-value European products, would fall much faster and harder than other areas. Europe does not have technology giants, but it does have luxury conglomerates: two of the five largest European companies by market capitalization are LVMH and Hermès.
One could easily imagine the products these companies make becoming targets for tariffs if Trump looks critically at the continent. Remember when the EU retaliated against Trump’s steel and aluminum tariffs by imposing tariffs on motorcycles, adding $2,200 to the price of a Harley-Davidson? European luxury brands, including German automakers and French fashion houses, would be easy political picks.
Finally, there is a growing sense in the luxury business that some of the price inflation we have seen in recent years simply cannot last. Currently, only the biggest brands in a given personal luxury category can maintain their prices, as aspirational customers opt for cheaper watches or spirits.
The same goes for travel and leisure. I recently spoke with two private equity investors in the U.S. hotel business who predicted that while blue-chip markets like Jackson Hole, Nantucket, and Martha’s Vineyard would likely be fine in a crisis, room prices in a four star hotel would skyrocket. in Houston on a Tuesday night would decline at the first sign of a market correction.
For those of us who have noticed that $500 seems to be the new $300 for hotel rooms in major American cities, that’s good news. But while we wait for rates to drop, there’s always that little splurge on a high-end beauty item.
The “lipstick index,” a term coined by beauty titan Leonard Lauder, posits that when purchases of small luxury items increase, like a new cosmetic, a recession is imminent. In 2024, beauty was one of the few luxury categories with positive growth as consumers looked for that little splurge.
If my husband is reading this, I hope I have a tube of Celine’s Rouge Triomphe in my stocking.
