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With Christmas just two days away, it's a good time to take stock of the shopping season. I think a little about the luxury retail market, because where the rich lead, the market — and even the economy as a whole — tends to follow. Last year was the worst for the luxury goods industry since the Great Recession of 2007-2009.
While the ultra-rich still spend as if they were in a separate gravitational orbit, the aspirational consumers who make up the most important part of the “mass luxury” market are declining. This goes a long way to explaining why many of the world's largest luxury companies have performed poorly recently. After all, there are only a limited number of watches and handbags that the one percent can afford.
The number of people who can afford this kind of thing is declining. Bain's latest luxury market report, released in November, concluded that the luxury goods market has shrunk by about 50 million consumers over the past two years, partly due to younger consumers turning away from traditional luxury goods. I think this is one of the reasons you're (finally) seeing older people, especially older women, in ads and even in fashion runaways. They are the only people who buy things.
But there are other reasons that have led to luxury losing its lustre, the most prominent of which is the prevailing feeling that economic insecurity may be just around the corner, despite the prosperity of the markets.
If you ignore the V-shaped picture of Covid, we will be six years behind the recession. On the other hand, the strange, perfectly priced world of US stock markets has everyone at dinner parties in New York talking about when (and if) they plan to convert at least some of their portfolios into cash.
Despite this, or perhaps because of it, the wealthy can still spend. Those in the ultra-wealthy segment of the luxury market – that is, people who spend their excess cash on yachts and planes (both sectors are doing very well) – have seen their net worth boosted by double-digit asset market growth. There is significant fleet expansion in the luxury cruise space, and growth in luxury cars and hotels remains strong.
But less affluent people who were previously willing to spend money on a $500 handbag are becoming much more cautious. This is because, unlike the wealthy, they still have to worry about work. The disposable income of aspiring consumers has declined, impacted by decreased job opportunities and increased rates of voluntary turnover, according to a study by Bain. For this reason, overall luxury goods sales are expected to decline by about 2 percent in 2024, and to remain flat next year.
So what does all this tell us about what's to come in the broader economy in 2025? There are three main lessons.
First, a correction will come in the US stock market, perhaps this year, perhaps next year. But few wealthy people I talk to have any doubt that this is on the way. The fact that even the wealthy are cutting back on their purchases of fine wines, jewelry, watches, and art means that many affluent consumers are anticipating a slowdown and some sort of market correction, even if we don't see a full correction. The blown trade war.
Second, if the latter happens, the luxury sector, which is dominated by high-value European goods, will decline more quickly and more severely than other areas. Europe has no tech giants, but it does have luxury conglomerates – two of the five largest European companies by market capitalization are LVMH and Hermès.
One can easily imagine the products made by these companies becoming targets of tariffs if Trump turns his critical eye to the continent. Remember when the European Union responded to Trump's tariffs on steel and aluminum by imposing tariffs on motorcycles, adding $2,200 to the price of a Harley Davidson? European luxury brands – including German carmakers and French fashion houses – will make easy political picks.
Finally, there is a growing feeling in the luxury business that some of the price inflation we have seen over the past few years cannot continue. Indeed, it is the big name brands in any given category of personal luxury that can hold their price points, as aspirational customers turn to watches or cheaper spirits.
Ditto for travel and entertainment. I recently spoke to a couple of US hotel private equity investors who predicted that while major markets like Jackson Hole, Nantucket and Martha's Vineyard will likely do well in a downturn, nosebleed rates for rooms at a four-star hotel in Houston on Tuesday night will go down at the first sign of a market correction.
For those of us who have noticed that $500 seems to be the new $300 for hotel rooms in major American cities, this is welcome news. But while we wait for prices to drop, there's always a little splurging on luxury beauty products.
The “lipstick index,” a term coined by beauty mogul Leonard Lauder, indicates that when purchases of small luxury items such as new cosmetics rise, a recession is imminent. In 2024, beauty was one of the few luxury categories to see positive growth, as consumers sought out that small splurge.
If my husband is reading this, I'm hoping for a tube of Celine Rouge Triumph in his stocking.
