How Bad Will the US Luxury Slowdown Be?

High energy prices and inflation, geo-political turmoil and the tightening of monetary policy have taken their toll on consumer sentiment, dampening the “YOLO” attitude that drove unprecedented growth for luxury fashion brands since the pandemic.

But after slumping last year, shares in most listed luxury groups are now trading around multi-year-highs, suggesting that investors are increasingly confident that demand for high-end products will defy the general gloom.

To be sure, improved valuations are mostly being driven by hopes for a rapid rebound in Chinese spending following the lifting of strict anti-coronavirus measures. But the rosier outlook is also informed by a growing sense that in spite of macroeconomic gloom and a financial panic, the slowdown in the US market — luxury’s growth engine since the pandemic — may be less severe than expected, and relatively short-lived.

Even amid interest rate hikes, layoffs and a banking panic sparked by the collapse of two regional banks in March (Silicon Valley and Signature), the US market is expected to grow 7 percent this year, analysts at HSBC said. Bernstein expects sales to American clients to grow between 5 and 7 percent — a sharp slowdown compared to the last two years, but far from a collapse.

American luxury sales have exploded since the pandemic, rising 35 percent over 2019 levels to reach €113 billion last year, according to consultancy Bain. Last year alone luxury brands’ sales rose 25 percent in the region even as a deteriorating economic picture pounded the stock and housing markets.

But cracks finally started to show in November, with sales of entry-level luxury products slowing sharply in the holiday season. The US market is “taking a breather,” Gucci- and Saint Laurent-owner Kering’s chief financial officer Jean-Marc Duplaix said in a February press conference. “Aspirational clients in particular are sort-of taking a break.”

Growth slowed more sharply from the start of the year, dropping to a low single-digit rate, market sources and analysts estimate. Credit and debit card data from Mastercard showed a 4 percent year-on-year increase in apparel spending for February, with consumers putting an “emphasis on pricing and value” in their choice of retailer, the payments company said.

Still, luxury brands are determined to hold onto the flood of new customers they’ve attracted since the pandemic — a breakthrough in a market where fashion buyers have long been hooked on discounts, and even wealthy households tend to prioritise other categories like houses and cars (not to mention experiences like restaurants and travel).

Brands have been staging big-budget marketing events like Versace’s March show in Los Angeles, accelerating the pace of targeted clienteling initiatives like dinners with celebrity guests and couture pop-ups in places like Napa Valley and the Hamptons.

And, even as growth slows, brands have forged ahead with plans to roll out new stores in fast-growing second- and third-tier cities, where pockets of wealthy consumers have long been overlooked, and whose expansion has accelerated since the pandemic. Think Hermès in Naples, Florida; or Saint Laurent in Charlotte, North Carolina.

“Brands are not pulling back on their plans [for store openings],” New York-based luxury consultant Robert Burke said. “We’re able to gather more data than ever about local markets, and realised the strength of cities like Denver, Colorado or Nashville, Tennessee. There’s a pocket of customers in these cities that just love to shop.”

“The growth in cities like Nashville or Charlotte, it’s structural. It’s not going to disappear,” Kering CEO François-Henri Pinault said.

Refurbished and expanded stores in the most visible shopping capitals are also underway: Tiffany’s “Landmark” project — a complete overhaul of its iconic flagship store on 5th Avenue — is set to open in May. Valentino is set to open an expanded Madison Avenue location later this year.

Analysts expect that store openings, as well as revamped collections, will help to re-energise sales, with growth picking back up (albeit at a more modest pace) from the second half of the year. The industry will also face easier comparisons as it annualises Americans’ rebound in travel, which conspired with a strong dollar to drive a sharp increase in tax-free shopping in Europe in the second half of last year (to the detriment of US stores).

“There’s been an exodus of wealthy shoppers to Europe and you’re following two years of exuberance,” HSBC analyst Erwan Rambourg said. “Right now we see the US demand for luxury as being in a bit of an air pocket, but we think it’ll pick back up.”

An aesthetic shift toward more timeless, elevated styles could also help brands keep growing in the US: attracting more mature clients who weren’t as interested in luxury’s recent logomania, and who are more likely to be insulated from inflation and layoffs. “Timeless luxury is very relevant right now,” Burke said.

But that same aesthetic shift could also ratchet up the pressure on luxury’s aspirational customers: many lower-income consumers and HENRYs (High Earners Not Rich Yet) who splurged on $900 sneakers in recent years would balk at paying $4,000 for a suit. More some, keeping up with changing tastes may require trading down to less expensive brands.

Still, “luxury goods are seen to be addictive: the boost in self-esteem they provide is hard to give up,” Bernstein analyst Luca Solca wrote in a recent note to clients. “The expectation is that European and US consumers will prove sticky and won’t give up on buying luxury goods products.”

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Compiled by Sarah Elson.