This is an audio transcript of the FT News Briefing podcast episode: ‘How tariffs are affecting luxury goods’
Mischa Frankl-Duval
Good morning from the Financial Times. Today is Monday, April 21st, and this is your FT News Briefing.
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I’m Mischa Frankl-Duval, and today we’re doing something a little bit different on the briefing. We’re going to be focusing on one big topic — the state of the luxury industry. Things are looking pretty rough for the sector right now, and to help us understand why, we’ve invited the FT’s fashion editor, Lauren Indvik. So Lauren, let’s start this conversation a few years back, maybe 2021, 2022, luxury goods were doing really well at that point. Why was that?
Lauren Indvik
2020 was supposed to be, in 2021 were supposed to be a disastrous year for luxury with the pandemic. And people weren’t supposed to be going and weren’t going to stores, which 95 per cent of luxury goods are still sold in stores, not online. And instead people stayed home. A lot of people save money on their paychecks and they treated themselves to luxury goods. And then when things started opening up again, they went out and bought wardrobes again and handbags and had all these savings and there was sort of like FOMO and yeah, they treated themselves. First you had the comeback in the US and in China you had two different lockdown lift periods and that market came back both times quite strongly as well. But luxury had a great couple of years just because of that sort of post-Covid effect.
Mischa Frankl-Duval
Right. So, what happened then?
Lauren Indvik
So once that sort of fizz came off of the post-Covid champagne, we also had, as you know, very heavy inflation. A lot of the growth that came from luxury in those two years, by the way, was not just from people selling tonnes of handbags, but actually from price increases. Almost half the growth came from price increases in that period. So you’re now looking at a scenario in which a Chanel bag now costs about double the price that it cost before Covid. You know, the products didn’t necessarily get any better. So after that period of people treating themselves, a lot of people are like, oh, maybe luxury. Sorry, can I say luxury is taking the piss? Am I allowed to say that? Luxury is taking piss a bit. And they’re like, I just don’t see the point of spending that much money on goods.
So we’re now coming off of two years where we’ve been through a pretty strong slowdown. The China post-Covid recovery has not been as strong. People are not spending the same amount on luxury goods in China. There are definitely some people still travelling to Japan and taking advantage of the weak yen, but it’s nothing like it was before Covid. So this was supposed to be a recovery year for luxury, and then we had Trump and that’s changed everything.
Mischa Frankl-Duval
Right. So you mentioned President Trump. What is it about President Trump’s policies that has maybe caused a bit of a rethink amongst luxury buyers?
Lauren Indvik
No one needs luxury, but people tend to buy luxury goods when they feel really good about the economy, when the stock market is up, when property prices are high. When I was speaking to Bruno Pavlovsky, who’s the president of Chanel last month, he said, you know, we can almost predict the level of store traffic in our US boutiques based on how well the stock market is doing that week. The stock market is not doing very well lately.
Of course, a lot of people are looking at the impacts of tariffs. That is definitely a problem for luxury companies. They’re going to either have to take a hit on margins or increase their prices by a few percentage points in the US to make up for that. But consumers are not liking the volatility, and they are definitely looking at their stock portfolios and thinking, yeah, I might just wait a few minutes and think about that handbag purchase. So analysts at Bernstein were expecting that luxury sales would actually increase 5 per cent this year and now they’re forecasting that they will decline 2 per cent this year.
Mischa Frankl-Duval
Just to be clear, Lauren, the problem with tariffs is not that luxury goods themselves are getting huge mark-ups, right? I mean, Rolex is made in Switzerland. A lot of the leather goods we’re talking about come from Italy. Tariffs on those countries are just 10 per cent, they’re nowhere near as high as China, for example.
Lauren Indvik
Well, we don’t know yet which products are going to get mark-ups, if any. You know, a lot of these brands say they’re taking a wait-and-see approach because Trump could roll back that 10 per cent tariff any day, or he could increase it. It’s making it, the life of a financial model is very difficult right now. But the problem is more your luxury consumer who’s looking at their stock portfolio has seen that it’s fallen by maybe $5mn and is like, no, I’m not going to go buy that Rolex.
Mischa Frankl-Duval
And in terms of specific firms, which are the companies that look like they might get hit hardest?
Lauren Indvik
Yeah, so we have a few companies that are in the midst of turnarounds or trying to turn around. Also, companies that tend to sell to those, I would say, the sort of lower-end or accessible luxury consumer. We’ve seen LVMH stock took a huge hit this week, but it’s far worse for a company like Kering, which is the owner of Gucci, which is between designers right now. While the rest of the luxury industry had a slowdown in the last couple of years, they’ve actually had pretty sharply falling sales. Prada stock has taken a hit because it’s not considered as luxurious as a company like Hermès. And then Burberry is another company that’s just been trying to turn around for a long time and can’t catch a break. And again, their products are more excessively priced. And then you’ve got Ralph Lauren in the US and Michael Kors and anyone who’s more exposed to that consumer who’s a little bit more price conscious. Investors are not going to look as favourably on that right now.
Mischa Frankl-Duval
You’ve mentioned a couple of times, but there is one company doing well in all of this and that’s Hermès, which just last week overtook LVMH as the most valuable luxury company in the world. How are they able to keep growing through this?
Lauren Indvik
Yeah, it’s pretty incredible. Also, if you think like Hermès is a mono brand company, essentially, and LVMH has got about 80 brands, but we’ve seen through like past recessions and periods of economic uncertainty that the super wealthy are really insulated from these sort of temporary shocks. And Hermès caters to a much higher-end consumer than LVMH’s top two brands, which is Vuitton, which is responsible for half of its profits and its number two brand Dior. But the difference is shocking. I think Hermès is today is trading in a multiple of about 53 forward earnings and LVMH is doing around 19. So that’s a pretty big premium that Hermès is enjoying right now.
Mischa Frankl-Duval
So Lauren, what will you be keeping an eye on as this story develops?
Lauren Indvik
Well, we’ve got earnings from the big luxury houses coming up over the next few weeks. LVMH just reported. The fashion and leather goods for this quarter, as of sort of like mid-March was their last update, was expected to grow 1 per cent, instead it dropped 5 per cent. And they think a lot of that drop actually occurred in the last few weeks with the tariffs. So there’s an expectation that this is gonna get worse. I think another interesting spin-off of this story is what’s happening with supply chains for these very high-end luxury companies that do the vast majority of their production in Italy or France or Switzerland. We’re not going to see an overhaul of supply chains, but I have also talked to a number of brands in that sort of second and third tier of luxury who are looking hard at their supply chains and have already moved production out of China and into Turkey just in the last two weeks.
Mischa Frankl-Duval
Lauren Indvik is the FT’s fashion editor. Thanks, Lauren.
Lauren Indvik
Thank you.
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Mischa Frankl-Duval
You can read more on all of these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.