Europe’s luxury sector is finally showing signs of revival after a difficult 2024, bolstered by an upbeat earnings season. High-end brands like Hermes, LVMH, and Gucci-owner Kering exceeded expectations, signaling a potential turnaround. However, uncertainties in Chinese consumer demand and looming U.S. tariffs threaten to complicate the road to recovery.
Upbeat Earnings Spark Hope for Recovery
Luxury brands delivered strong fourth-quarter performances, sparking optimism for a sector that struggled throughout 2024. Hermes led the pack with impressive sales figures, continuing its market outperformance. Even beleaguered giants like LVMH and Kering posted better-than-expected earnings, suggesting a cyclical recovery may be underway.
“The conclusion seems to be the worst is behind us – that was most likely the third quarter of 2024 – and we’re seeing a cyclical recovery in progress, driven by the U.S. consumers and European consumers, for the most part,” said Luca Solca, senior analyst for global luxury goods at Bernstein.
The positive earnings reports align with Cartier-owner Richemont’s earlier announcement of its “highest ever” quarterly sales in late 2024. According to Simone Ragazzi, portfolio manager at Algebris Investments, “2024 has been one of the worst years for the sector. We believe there will be a sort of normalization going through 2025, particularly in the second half.”
Challenges in China and U.S. Tariff Threats
Despite the positive momentum, the luxury sector faces significant headwinds from continued weakness in China and the looming threat of U.S. tariffs. Chinese consumer demand, a critical pillar for luxury sales, remains sluggish, impacting brands heavily reliant on this market, such as L’Oreal and Gucci.
Analysts are also cautious about potential tariffs on European goods under U.S. President Donald Trump’s administration. If implemented, these levies could lead luxury brands to raise prices, risking a decline in demand. “We’re already coming off of heavy price increases. If firms were to have 25% tariffs, it will be hard to offset these,” said Ragazzi, adding that the impact could be “very painful” for some companies.
Europe’s luxury industry is uniquely vulnerable to trade disruptions, as many brands rely on exclusive manufacturing practices tied to specific regions, such as the “Made in Italy” label. While this may protect them from the harshest tariffs, any economic slowdown in China due to trade conflicts would pose a significant risk.
Market Divergence: Winners and Losers
The challenging economic landscape is likely to widen the gap between top-performing luxury brands and those struggling to maintain relevance. “Whether tariffs or any other shocks, when a consumer has to buy less, they become even more selective, and they will take even more to the brands they like,” said Zuzanna Pusz, head of European luxury goods at UBS.
Carole Madjo, head of European luxury goods research at Barclays, pointed out that some brands are suffering from “a lack of innovation [and] high pricing,” making them more vulnerable in a tightening economy. She added, “The sector is now aware of all these issues and is trying to start to have some solutions.”
Higher-end brands with strong heritage and quality reputations are expected to outperform in this selective market. Luca Solca of Bernstein noted, “Quality names may shine brighter amidst the industry’s idiosyncratic challenges,” citing Richemont, Hermes, Moncler, and Burberry as likely winners.
Redefining Luxury in a Changing Market
As the luxury market evolves, brands are grappling with changing consumer expectations and heightened economic challenges. “The big question is what luxury means nowadays,” remarked Ragazzi. “What is becoming even more evident is the goodwill or the heritage that brands had in the past has sort of disappeared.”
To stay competitive, luxury firms are re-evaluating their strategies, investing in innovation, and focusing on high-end consumers who remain resilient despite economic fluctuations. Analysts agree that premium brands with strong brand identity and quality offerings will continue to lead the market.
Cautious Optimism for Luxury’s Future
Europe’s luxury sector is navigating a complex recovery path, buoyed by strong earnings but challenged by weak Chinese demand and potential U.S. tariffs. While premium brands show resilience, market divergence is likely to grow as consumers become more selective.
With the economic landscape in flux, luxury firms must balance strategic pricing with innovative product offerings to capture demand. As 2025 unfolds, the sector’s performance will depend on its ability to adapt to evolving consumer behaviors and global economic shifts.
