Luxury Sector Tightens Its Belt

Summary

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.

Transcript

[A]

Welcome to Thoughts in the Market. I'm Aruna Masinha from Morgan Stanley's global and US Economics teams.

[B]

And I'm Edouard Robin, head of the luxury goods team.

[A]

This episode was recorded last week when we were at the annual Morgan Stanley Luxury conference in Paris. In it we bring you an overview of what we heard from companies and investors about the hottest trends in the luxury industry. It's Tuesday, May 27 and at 8am in Paris. For several years now the luxury industry has been riding a post pandemic boom and the top luxury brands experience 80% or greater sales growth between 2019 and 24. So Ed, is this trend going to continue or has it started to moderate and why?

[B]

No, it has already started to moderate clearly last year. So the growth rates of some of the leading luxury good brands, you know, over the past four or five years was clearly double digit CAGR growth. What we've seen in 2024 is the market, luxury goods market worldwide has already started to contract. It was very moderate at 2 to 3% but it's very unusual because over the past 30 years the market has contracted only once or twice. So it started last year already but we think it's going to accelerate. The decline could be even a bit more significant this year to low to mid single digit. And there are a number as to of reasons as to why the luxury goods market moderated. First of all, there's been post the COVID post pandemic there's been a wallet shift away from ownership of goods to more spent on experiences such as travel, restaurants, dining out, etc. The other thing is that you had a lot of closets which were full post the pandemic. People were at home, disposable income was high and there was certainly a lot of purchase which was done during the pandemic and we'll talk about it in a second. There is also this view that maybe luxury goods companies have increased prices maybe a bit excessively during the pandemic and potentially pricing out the middle income consumer.

[A]

This is an incredible conference and we've been talking to a lot of corporates and we've been talking to a lot of investors. What are some of the key debates that you've been hearing about?

[B]

So I mean front and center, it's what's going on in terms of the from a macro standpoint in terms of the two key markets for the luxury goods sector, which are China and the US to put things in perspective. And we look at it on a nationality standpoint here rather than a geographic Standpoint, the reason is that there is a lot of cross border shopping which is done when it comes to luxury. The Chinese nationals account for about a third of total demand, total spend on the luxury goods market, 30 to 33%. So they are the number one nationality today. Clearly the number two is the, the Americans which account for about 21, 22% of the spend. So combined that's more than 50% of the spend and certainly more than supposedly 50% of the growth over the next three to five years. So clearly a lot of focus on these two nationality. What's going on in terms of the wealth effect in China and in the US what's going on in terms of the health of the middle income consumer in China and in the US the other debate related to that is what's going on in terms of international travel. What we've heard from companies during the conference is that there are certainly less Americans now coming to Europe in this quarter, in the second quarter. And this had been a key driver of the spend over the past few months, partially related to the currency. There is also, there are also less Chinese going to Japan, which was also a key factor of growth for the industry. Chinese spend about 30% of their total spend outside of China and Japan was the number one market in terms of spend for them in recent years ahead of Europe. And what we've seen and what we heard from the companies attending the conference is that these two nationalities are spending less abroad, which is why we think the second quarter sales could be a bit under pressure more than in the, in the first quarter. The other debate is about the middle income consumer. As we talked about, luxury brands have raised prices quite a bit for some of them. They've doubled the sales price of items during the pandemic. And again there is a debate about the fact that they might have been pricing out the middle income consumer. And obviously that has come at a time where the discretionary spend of the middle income consumer, the aspirational customer, has been under pressure. So it's kind of a double whammy in terms of the propensity of these cohort to spend on luxury goods and for the sector to grow in the medium to long term, it cannot just rely on millionaires and billionaires. It has to recruit from the middle class. That has been one of the growth engine of this industry over the past 10, 20, 30 years. And so that's certainly one of the key debates is when will the products become affordable? Again, the challenge for the luxury goods company is that you can, there is a Cardinal rule in luxury, you can never lower your prices. So what you can do is you can play a bit with the mix or you can wait for the discretionary spend to increase and make your product more affordable. But obviously that takes some time. So these are some of the key debates, you know, that have been discussed at the, at the conference. So, Arun Imam, let's shift our focus from micro to macro concerns. So we've about talked, been talking a lot about the economic outlook, uncertainty around tariffs and currency markets on this podcast. Will these factors hurt luxury consumption?

[A]

So this is great timing ant, because we just published our economics outlooks, the global, the US and for other regions. And our basic view is that tariffs, both the levels, the uncertainty around them are going to weigh on growth around the world. They're going to weigh on US Consumers quite specifically, because here now you have a couple of different, different ways that tariffs will matter. One, for the general consumer, it's going to be higher prices. So you drive up prices, you're going to drive down real spending. And so we do have our real spending moderating across the forecast horizon. We go down Almost a full 2 percentage points by the end of 25 relative to where we were in 2024. With respect to how we think about consumers spending on discretionary items, we think of labor income being an important factor. We think of wealth, supportive wealth effects, and that you already mentioned. And then we also think about just how consumers are feeling uncertain about their prospects for the economy and so on. So with respect to luxury consumption, we think that it is the last two factors, the supportive wealth effects and how uncertainty was playing out, that's going to matter. So between 2020 and 24, the United States saw some of the largest increases in net worth for U.S. households. So U.S. households saw $51 trillion in additional net worth being created over this period. That was more than what they saw over the prior decade. And from this 51 trillion pool, about 70% went to the top 20% of the income cohort. So that's $35 trillion. So these guys were feeling very positively supported. And the other factor in this is that it was really tied to financial wealth because that's where we saw some of the largest increases as well. And so how do we think it's going to weigh on luxury consumers to the extent that we may not see these very large increases in wealth going forward, given where equity markets, the ride that they've seen over this past year so far, if we don't have these very large increases in financial wealth, we may not have very large increases in planned consumption for this particular cohort. And so that's driving some of our forecast about the moderation in overall consumption, but it will also translate into just growth for luxury consumption. And the other aspect, of course, is uncertainty. So we do think that there's going to be some resolution of tariff uncertainty this year. But there are other factors in the US that are weighing on policy uncertainty. So where is the fiscal bill going to go? How is immigration going to solve out? So all of these factors are weighing on the consumer, and they may also be weighing very well on luxury consumption. Great talking with you, Ed. We could all find little ways of incorporating luxury in our lives, and this conference has really just been an incredible experience. So thank you and thank you for taking the time to talk with me today. Great speaking with you, Aronima, and thanks for listening. If you enjoy thoughts on the market, please leave us a review when you listen and share the podcast with a friend or colleague today.

[C]

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