Trump’s tariffs and the luxury industry (Part 1)

President Donald Trump’s tariffs have finally been announced, unlocking a new degree of uncertainty in global business. Europe, subject to a 20% blanket tariff. 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.

“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 argument 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.

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.

Flavio Cereda, an investment director at GAM Investments, expects Kering 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.

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 Saint Laurent’s bags is made in Europe—the company currently has no manufacturing in the U.S.

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. 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 Louis Vuitton 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 added.

A less desirable consequence of all the price hikes and luxury feeling more out of reach than usual is the rise of low-cost copies 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 trendy. Hermes Birkin bag dupes have been available on Amazon during the past months.

Switzerland is one of the world’s worst-hit countries by Trump’s tariffs. Its 31% levy will exert pressure on manufactures, as well as American retailers and consumers. As it battles strong headwinds wrought by persistent economic challenges, the overall Swiss watches market shrank to CHF 25.993 billion in 2024 from CHF 26.748 billion in 2023. These numbers project a pessimistic view of the 2025 watch year.

“It is a catastrophe for the Swiss watchmaking industry overall. The very high-end brands will be impacted less. But for most of the other brands, it is not good news.” according to Oliver R Müller, Founder of LuxeConsult. Based on estimates done by RBC Capital Markets, additional US tariffs of 20% would negatively impact Swatch Group, LVMH and Richemont at varying degrees.

BOF indicates a steep decline in net income for the Swatch Group should there be no change in company strategy following the new tax levy. Meanwhile, LVMH and Richemont stand to lose just less than 10% in comparison. Trump’s 31% tariff applies to all imported Swiss products. Ostensibly this refers to watches trading on the primary market. As to how it affects the secondary market becomes a little more ambiguous.

“Manufactures have a variety of tools at their disposal to blunt the effects of tariffs. From diverting product from USA to other regions, absorbing some of the tariff internally, to cutting dealer margins. Secondary dealers on the other hand conduct business with much thinner margins and will have to pass the cost on to consumers. The prices of second-hand or grey market watches goes up much more than the prices of primary market watches.” says Eric Ku of Loupe This.

adapted from BOF, Fortune, Reuters, Revolution Watch