It’s a tough time to be running a luxury brand.
The industry is facing its steepest sales decline since the 2008 financial crisis, aside from the sharp shock brought on by the pandemic. Executives at major brands point to slowdowns in major economies, volatile financial markets, trade wars and actual wars, all of which together have dampened the consumer confidence and the “feel good” factor on which the luxury industry depends.
HSBC luxury analyst Erwan Rambourg doesn’t buy it.
“If you’re blaming it on the macro, you’re being disingenuous,” he said.
Rambourg isn’t the only one who believes luxury’s biggest problems are self-inflicted following a period of “greedflation” that saw brands hike prices to levels out of reach for aspirational customers without corresponding product innovation. On the contrary, in recent years, many brands simply churned out more of the same safe designs amid reports of diminished manufacturing quality, leaving many shoppers uninspired and unsure why they should spend more on luxury goods.
But economic trends certainly haven’t helped the situation.
“It’s a sector-specific down cycle — with an overlay of macro that is not helpful,” said Zuzanna Pusz, luxury analyst at UBS.
Recently, some of the biggest luxury players have made efforts to reignite consumer demand, installing new designers and, in the case of Kering, bringing in a turnaround expert from outside the sector to run the company. But as LVMH, Kering and Chanel all prepare to unveil major creative reboots this month, they’re also hoping for some macroeconomic relief that might ease the way for a commercial recovery.
On that point the outlook is mixed. In June, Bain & Company forecast that the industry will contract between 2 percent and 5 percent this year if current trends continue. Analysts and industry executives believe some of the challenges in key markets such as China and the US will persist through at least the end of the year, making a quick turnaround for the industry more difficult.
But Rambourg also predicted in a note to clients Tuesday that the luxury sector could revert to “decent, profitable growth” next year as trends improve in the US and Chinese consumers start to re-engage with luxury. There are also clear areas of opportunity: Shoppers from the Middle East are still buying, both at home and abroad, while destinations in Southeast Asia like Singapore and Indonesia are heating up.
“Especially when things have been challenging right now for two years, it’s very easy to suddenly turn dramatically negative and say, ‘Oh, there’s no opportunity for growth and luxury,’” said Pusz. “We don’t share that view.”
The industry can’t count on economic trends to save it in 2026, but there are green shoots to find if brands know where to look for them.
What Luxury Can Expect From China
The Chinese market has been the main engine of luxury’s growth for more than a decade, growing at a compound annual rate of 12 percent between 2010 and 2024, according to Bain. But that engine has slowed. Domestic luxury spending in the country fell between 18 percent and 20 percent last year.
In China, spending is closely linked to the property market, where the bulk of consumers’ wealth lies, and that market has been in a years-long crisis. The country is also dealing with high youth unemployment and now the new US tariffs, which are hurting exports. These factors have resulted in lower consumer confidence that has shoppers delaying luxury splurges.
It’s unclear exactly when the situation will change. Earlier this year, Hermès chief executive Axel Dumas seemed optimistic, saying on a February earnings call that there were “positive signs.” By July, however, that glimmer of hope had faded.
“Now I personally can’t see a significant uptick in China,” Dumas said. “I think they are still in the kind of wait-and-see attitude.”
Hermès has it better than many of its competitors. Chinese consumers do have money. But with weak property prices creating a feeling of lingering uncertainty, they are extra selective about the categories and brands they choose to shop.
Companies such as Kering, with trend-driven brands like Gucci and Balenciaga whose recent collections have failed to connect, have struggled in the country. Others with a more timeless assortment, including Hermès and Moncler, have reported better results.
Chinese shoppers are also buying outside of China, as they did before the pandemic. Last year, when the Japanese yen weakened, Chinese tourists flocked to the country to scoop up luxury goods at a discount. (Last year’s boom in Japanese luxury sales caused many brands to record declines by comparison this year, but local demand remains strong and the comparisons should ease in the second half of 2025 and start to look better next year.)
The hope is that the Chinese market is close to or at its bottom. Rambourg said results have been improving and indicated in his research note this week that he believes Chinese shoppers are turning a corner psychologically.
“Now we’re in the zone where possibly you will stabilise, and possibly, in the not-too-distant future, you will grow,” Rambourg said. “Not because [Chinese consumers] are suddenly optimistic … It’s more that, ‘Hey, I’ve accumulated a lot of money. Things are tough, but not worsening actually.’”
US Luxury and the Aspirational Shopper
Luxury’s other key growth market in recent years has been the US. Between 2019 and 2023, it grew at a compound annual rate of 6 percent, according to McKinsey, outpacing all regions but China. Even as the Chinese market slowed in recent years, the US remained resilient, maintaining momentum into 2024. But the picture has since become less rosy.
After Covid lockdowns were lifted, luxury spending in the country benefited from aspirational shoppers flush with savings and stimulus cash making their first luxury purchases. But that spend has dried up. Years of high interest rates and inflation have squeezed shoppers’ budgets and their psyches, leaving them feeling strapped even after inflation fell. This year, US consumer confidence fell to its lowest point since the pandemic. Many shoppers have been cutting back or trading down, switching to secondhand purchases or looking for brands they think offer better value. And Trump’s new barrage of tariffs is now pushing prices back up.
Wealthy shoppers have been less affected. Their outlook is more closely tied to the stock market, which has been volatile at moments but strong overall. The S&P 500 dove after Trump’s April 2 tariff announcement but quickly recovered and has soared since, though some analysts worry exuberance over AI is inflating a bubble.
A weaker US dollar has reduced their purchasing power on trips abroad, however. The dollar’s value declined 11 percent in the first half of the year measured against the currencies of the US’ major trading partners, according to Morgan Stanley, marking its largest loss since 1973. That weakness is already impacting luxury sales in Europe, where wealthy American tourists flock over the summer. Morgan Stanley forecasts the dollar could fall another 10 percent by the end of next year.
This split in the US market is playing out in the differing results seen by luxury brands according to how exposed they are to aspirational shoppers. In Kering’s most recent quarter, which saw sales in North America drop 10 percent compared to last year, less elevated brands such as Gucci suffered most, while higher-end Bottega Veneta was more resilient.
“Polarisation based on positioning persisted,” CFO Armelle Poulou said on the company’s July 29 earnings call.
Rambourg pointed out that even luxury’s top tier relies on these shoppers though. Hermès’ Dumas, for example, said on the company’s July call that the brand’s “volume” divisions, which sell items like scarves and ties, have seen an impact from the pullback of aspirational US customers.
Opportunity in the Middle East
Even if tourists have reduced spending in Europe, local demand has remained strong, with Hermès, Richemont and LVMH all calling out solid ongoing sales from local shoppers.
The bright spot in luxury’s global outlook, however, belongs to the Middle East, where shopping in the Gulf states has continued apace despite the nearby war in Gaza. Brands like Zegna have been hosting shows and events in cities such as Dubai, home to its top-performing store. In May, retail giant Chalhoub Group forecast luxury sales in the countries of the Gulf Cooperation Council, which includes the United Arab Emirates and Saudi Arabia, would grow 6 percent on average through 2027.
There is opportunity in parts of Asia, too. Leading the pack are Singapore and Indonesia, but the Philippines and Vietnam are growing as well. Thailand has become a favourite location for luxury, given its growing number of wealthy residents and rising popularity as a vacation destination for Chinese and Indian nationals after it waived visa requirements for travellers.
Pusz said her team is also keeping an eye on South Korea after it emerged that Chinese tourist groups are temporarily being allowed to enter visa-free. Right now, currency dynamics mean luxury goods are cheaper in Korea than in China.
There are pockets of growth to be found elsewhere as well. Bain & Company noted in June that there’s growing local demand in Latin America, with Mexico outperforming.
But none offer the same capacity to help offset the slowdowns in China and the US like the Gulf states. “People ask a lot about Brazil, Indonesia, parts of Africa, India,” said Rambourg. “The only one that I really see as moving the needle is the Middle East.”
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