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With Christmas just a few days away, it's a good time to stock up for the shopping season. I think that's a good thing about the retail market, because where the rich lead, the market – and 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 are still spending as if they were in a different gravity mode, the aspirational consumers who make up the most important part of the “luxury heavyweight” market are pulling back. That goes a long way to explaining why many of the world's biggest companies have been underperforming lately. There are, after all, only so many watches and bags that the one percent can buy.
And the number of people who can't afford these kinds of things is decreasing. Bain's latest market report, released in November, found that the luxury market has shrunk by about 50mn consumers over the past two years, partly because younger consumers are abandoning traditional clothing. I suspect this is one of the reasons you are (finally) seeing older people, especially older women, in advertisements and fashion trends. They are the only people who buy things.
But there are other reasons why luxury has lost its luster, notable among them the prevailing feeling that economic uncertainty may be around the corner, even if the markets are doing well.
If you discount the V-shaped Covid blip, we are six years away from recession. Meanwhile, in the strange world of US equity markets, which values perfection, everyone at a New York dinner party is talking about whether (and if) they plan to take at least some of their portfolio money.
Despite this, or perhaps because of it, the super rich can spend. Those in the ultra-wealthy segment of the luxury market – meaning people who spend more on yachts and jets (both sectors that are doing well) – have seen their net worth boosted by double-digit asset market growth. There is an increase in large ships in the high-end cruise industry, and growth in luxury cars and hotels is still strong.
But less wealthy people who were once ready to splash out on a $500 handbag are more cautious. That's because, unlike the super rich, they still have to worry about working. Earnings for prospective buyers are low, affected by reduced job openings and rising unemployment rates, according to a Bain study. That's why overall luxury sales are expected to decline by about 2 percent in 2024, and remain flat next year.
So what does all this tell us about what's to come for the wider economy in 2025? There are three main courses.
First, a correction of the US equity market will come, maybe this year, maybe next. But few of the wealthy people I talk to would doubt that it is on its way. The fact that even the wealthy are increasing their purchases of fine wine, jewelry, watches, and art means that many wealthy buyers of assets are expecting a slowdown and some kind of market correction, even if we don't fully see it – it fueled a trade war.
Second, if the latter happens, the luxury sector, dominated by European luxury goods, will fall even faster than other areas. Europe doesn't have tech giants, but it does have luxury conglomerates – two of the top five European firms by market capitalization are LVMH and Hermès.
One can easily imagine that the products these companies are making are the target of tariffs if Trump turns a critical eye on the continent. Remember when the EU retaliated against Trump's steel and aluminum tariffs by placing tariffs on motorcycles, adding $2,200 to the price of a Harley-Davidson? European luxury brands—including German automakers and French fashion houses—can be easy political picks.
Finally, there is a growing sense in the luxury industry that some of the price increases we have seen over the past several years may not last. Already, only the top names in any given personal luxury category can hold their prices, as aspiring buyers move down to cheap watches or spirits.
Ditto travel and entertainment. I recently spoke with two private investors in the hotel industry in the US who predict that while high-end markets such as Jackson Hole, Nantucket and Martha's Vineyard will probably be good for a reduction, the prices of nose rooms in a four-star hotel. in Houston on Tuesday night it would go down with the first sign of a market correction.
For those of us who have noticed that $500 seems to be the new $300 in hotel rooms in major American cities, that news is welcome. But as we wait for prices to drop, there's always a little splurge on high-end beauty products.
The “lipstick index,” a term coined by Leonard Lauder of beauty, says that when the purchase of small items such as a new cosmetic increases, a recession is coming. By 2024, beauty was one of the few luxury categories with good growth, as consumers wanted less.
If my husband is reading this, I hope he has a tube of Celine's Rouge Triomphe in stock.