Summary of "Luxury Sector Tightens Its Belt" – Morgan Stanley's Thoughts on the Market

Podcast Information:

• Title: Thoughts on the Market
• Host/Author: Morgan Stanley
• Episode: Luxury Sector Tightens Its Belt
• Release Date: May 27, 2025

In the May 27, 2025 episode of Morgan Stanley’s Thoughts on the Market, hosts Aruna Masinha and Edouard Robin delve into the evolving dynamics of the luxury goods sector. Recorded at the annual Morgan Stanley Luxury Conference in Paris, the episode provides a comprehensive analysis of current trends, challenges, and future projections within the luxury industry.

1. Post-Pandemic Growth Moderation

The luxury sector experienced a significant boom post-pandemic, with top brands witnessing over 80% sales growth between 2019 and 2024. However, the episode highlights a notable shift:

Edouard Robin (00:45): "No, it has already started to moderate clearly last year. So the growth rates of some of the leading luxury goods brands... have already started to contract."

Robin explains that the luxury goods market, which enjoyed a double-digit Compound Annual Growth Rate (CAGR) over the past few years, began contracting in 2024 at a moderate rate of 2-3%. This contraction is particularly unusual given that such declines in the luxury market have been rare over the past three decades.

Factors Contributing to Growth Moderation:

• Shift in Consumer Spending: A transition from purchasing luxury goods to allocating more income toward experiences like travel and dining.
• Post-Pandemic Purchasing Saturation: Consumers had increased disposable income and made substantial luxury purchases during the pandemic, leading to reduced current demand.
• Pricing Strategies: Luxury brands may have elevated prices excessively during the pandemic, potentially alienating middle-income consumers.

2. Key Debates at the Luxury Conference

The conference illuminated several critical discussions shaping the luxury sector's trajectory:

a. Dominance of China and the US in Luxury Spending

China and the United States remain the foremost nationalities driving luxury consumption, accounting for over 50% of total market spend.

Edouard Robin (02:22): "Chinese nationals account for about a third of total demand... the Americans... account for about 21, 22% of the spend."

The focus is on understanding the wealth dynamics in these countries and the financial health of their middle-income consumers.

b. Decline in International Luxury Spending

There has been a noticeable decrease in international travel among key luxury consumers, impacting sales in traditional markets.

Edouard Robin (04:30): "There are certainly less Americans now coming to Europe in this quarter... less Chinese going to Japan..."

This reduction in cross-border shopping, especially from Chinese consumers who historically spent significantly in Japan and Europe, is exerting downward pressure on Q2 sales.

c. Challenges with Middle-Income Consumers

Luxury brands have historically relied on the aspirational purchases of the middle class. However, recent price hikes may be excluding this critical demographic.

Edouard Robin (04:55): "It [pricing out the middle-income consumer] has come at a time where the discretionary spend of the middle income consumer... has been under pressure."

The inability to lower prices in the luxury sector necessitates finding alternative ways to appeal to middle-income shoppers or relying solely on the wealthiest consumers, which poses sustainability challenges.

3. Macroeconomic Impacts on Luxury Consumption

Transitioning from sector-specific issues to broader economic factors, the hosts discuss how global economic uncertainties are poised to influence luxury spending.

a. Tariffs and Economic Growth

Tariffs and their associated uncertainties are expected to dampen global economic growth and, by extension, consumer spending power.

Aruna Masinha (05:49): "Our basic view is that tariffs, both the levels, the uncertainty around them are going to weigh on growth around the world."

Higher prices resulting from tariffs reduce consumers' real spending capacity, leading to moderated consumption forecasts.

b. Wealth Effects and Financial Health

Between 2020 and 2024, U.S. household net worth saw a substantial increase, with $51 trillion added, predominantly benefiting the top 20% income bracket.

Aruna Masinha (07:15): "From this 51 trillion pool, about 70% went to the top 20% of the income cohort."

However, ongoing uncertainties in equity markets and the potential stagnation of wealth growth could limit future luxury consumption, as the propensity to spend among affluent consumers may wane without continued financial gains.

c. Policy Uncertainties

Additional factors such as fiscal policy resolutions, immigration reforms, and other domestic policies contribute to consumer uncertainty, further restraining discretionary spending on luxury items.

Aruna Masinha (08:10): "There are other factors in the US that are weighing on policy uncertainty... how immigration is going to sort out."

4. Future Outlook and Industry Adaptation

The episode concludes with reflections on how luxury brands might navigate these challenges. With pricing rigidity inherent to luxury branding, companies face the dilemma of either adjusting their product mixes or waiting for economic conditions to improve to restore affordability for a broader consumer base.

Edouard Robin (06:30): "You cannot lower your prices. So what you can do is play a bit with the mix or wait for the discretionary spend to increase and make your product more affordable."

Adapting to these market conditions will be crucial for sustaining growth and maintaining relevance in an evolving economic landscape.

Conclusion

Morgan Stanley's discussion on the "Luxury Sector Tightens Its Belt" provides an insightful analysis into the current deceleration of growth within the luxury goods market. Factors such as shifting consumer preferences, reduced international spending, and macroeconomic uncertainties are reshaping the industry's landscape. Moving forward, luxury brands must strategically navigate these challenges to sustain their market position and capitalize on future growth opportunities.