President Donald Trump’s long-awaited (read: much-dreaded) tariffs have finally been announced, unlocking a new degree of uncertainty in global business. Europe, subject to a 20% blanket tariff, will now have to brace for the aftermath of these measures—as will its most alluring sector: luxury.
Luxury has an outsized presence in Europe, with its brands accounting for at least 70% of the global luxury goods market and its exports worth €260 billion annually, the European Union estimates. That’s about 10% of all EU exports.
A hefty levy could mean different things for different luxury companies, depending on various factors, including which type of shopper the brand caters to. Regardless, it will be substantial for the sector.
“The impact from the announced tariffs might not just be on margins, but possibly also on the underlying demand, in both the short term (due to higher level of uncertainty and stock market volatility, usually both impacting consumer confidence) and medium term (due to likely rising inflation),” Chiara Battistini, JPMorgan Chase’s head of European luxury research, wrote in a note Thursday.
Trump’s qualm is that European exports to the U.S. are far higher than imports, which is hurting American jobs and industry. Tariffs are his idea for fixing that imbalance as they would discourage imports and force companies to move manufacturing to the States. Better yet, they could compel Americans to look inward for alternatives.
But replicating what European luxury companies offer won’t be a simple plug-and-play in the U.S.
Take Kering, for instance. Flavio Cereda, an investment director at GAM Investments, expects it to be among those hit hardest by tariffs. The French conglomerate faces a crisis precipitated by the luxury slowdown and its internal struggles, weakening its financial footing and limiting its pricing power against competitors.
Still, Kering’s CEO Francois-Henri Pinault has firmly opposed moving production to the U.S. because everything the company makes represents a “part of our culture.” That’s why everything from Gucci’s luxury apparel to Yves Saint Laurent’s bags is made in Europe—the company currently has no manufacturing in the U.S.
The new tariff wave is set against a backdrop of shaky luxury appetite, leaving the fate of different companies to diverge. While some, like Burberry and LVMH, have been reeling in the pain for a few years, the likes of Bruno Cucinelli and Hermès have outperformed the rest of the sector. Still, the sector’s outlook has been that it will face a drawn-out slump.
American shoppers represent the second-largest group of personal luxury buyers, accounting for a third of the sector’s demand. They make up a critical mass of the customers luxury brands serve, so alienating them is both difficult to do and to recover from.
Following the tariff news, LVMH and Kering’s shares were down about 4%, while Burberry’s shares slipped 7% as of 12 noon London time.
How will brands cope?
The bespoke nature of high-end fashion is core to its appeal—and it’s also why brands can command thousands of dollars for the most coveted bags and accessories.
Luxury players frequently hike prices because their customers are willing to pay for the perceived value of their products. In the case of some brands, a higher price tag is coupled with tighter supply, further increasing demand. This trait is what can turn a sought-after luxury article into a Veblen good.
Higher tariffs would likely prompt luxury giants to rely on this tried-and-tested method even more.
“We would expect most European luxury companies to pass on the tariffs in the form of price increases to end consumers, who tend to be less sensitive to pricing and accustomed to regional price differentials,” UBS equity analyst Zuzanna Pusz wrote in a note.
She added that, on average, brands would need to hike prices by 6% in the U.S. or face a 7% profit hit.
Hermès’ executive chair Axel Dumas has already indicated that the bag maker will use this approach to defend itself against tariffs.
The alternative is for American shoppers to wait to travel to Europe before they splurge on luxury bags and shoes.
Companies with a manufacturing presence in the U.S. might look into expanding that with the tariffs in place.
“LVMH will be hit [because of tariffs], but LV has U.S. manufacturing so could ramp that up (don’t forget three members of the Arnault family at Trump’s inauguration…it matters),” Cereda told Fortune in an email.
A less desirable consequence of all the price hikes and luxury feeling more out of reach than usual is the rise of low-cost dupes of luxury brands. They’ve recently found a following in young consumers with limited disposable income, who find identifying and owning real-looking knock-offs somewhat of a skill.
There’s no question that the luxury loyalists will continue flocking to it as they always have. But the shifts in where they shop from and how much they satisfy their luxury whims are already afoot—and it won’t stop anytime soon.
This story was originally featured on Fortune.com
