Will the US-EU Tariff Exacerbate the Luxury Slowdown?

The 15% tariff on items destined for the United States exacerbates the already precarious situation for brands such as Louis Vuitton, Gucci, Chanel, and Hermes.

Image: Reuters

On Sunday, US President Donald Trump and the European Union finalized a trade agreement, decreasing Trump's proposed 30% tariff to 15%. Nevertheless, the accord significantly deviates from the zero-for-zero tariff arrangement advocated by the EU, further exacerbating pressures on Europe’s luxury apparel sector.

In the wake of a year marked by unsatisfactory earnings from prominent luxury conglomerates such as LVMH and Kering, the levy would exacerbate the strain on the price increases that firms have depended on to mitigate losses.

RBC's analysis indicates that luxury brands raised prices by around 33% from 2019 to 2023, a favorable era that led to greater revenues. Since 2024, a deceleration in luxury expenditure has been prompted by global economic instability and evolving geopolitical dynamics.

By September 2024, the deceleration became evident as Gucci, previously Kering’s primary revenue source, had a 20% decline in revenues during H1 2024, while LVMH, the owner of Louis Vuitton, reported a 22% decrease in net profits across all its brands during the same timeframe. This week, with the release of H1 2025 results, Kering announces a 46% decline in net profit, attributed to Gucci's underperformance, while LVMH reveals a 22% decrease in net profit. Recent data suggests that the luxury sector remains in a precarious position, with potential challenges ahead.

Certain manufacturers, such as Louis Vuitton, Chanel, and Hermès, increased prices on sought-after handbags this year to mitigate economic challenges. In April, Louis Vuitton's Neverfull GM bag had a 4.8% price hike, raising its cost to $2,200 USD. Additionally, Hermes announced plans to counter the anticipated US levies by raising selling prices in the US by May 2025. Nevertheless, early price increases are a precarious endeavor.

According to Reuters, the prices of Chanel's popular quilted flap bag increased more than threefold from 2015 to 2025. By May of this year, the French house, now directed by Matthieu Blazy, retracted its price rises following a 4.3% decline in sales, marking the first decrease since 2020.

With the impending 15% duty on European goods, brands may be compelled to further elevate prices to offset the increased costs. UBS indicates that the levy on exports to the United States may compel luxury brands to increase prices by 2% domestically and approximately 1% internationally. Otherwise, brands may experience a potential 3% effect on profits before interest and tax.

Among all luxury executives, LVMH CEO Bernard Arnault has made the most significant contributions to discussions with Trump. In a recent interview with the Wall Street Journal, Arnault stated, “I am advocating vigorously for an agreement with the Americans to avoid entanglement in a trade war, which would be profoundly detrimental to European enterprises.”

The executive has recently endeavored to persuade important European nations, including Italy, Germany, and France, as well as Europe collectively, advocating for leaders such as Italian Prime Minister Giorgia Meloni and German Chancellor Friedrich Merz to negotiate an agreement with the US President.

Presently the fifth wealthiest individual globally, Arnault has been deliberate in fostering a personal relationship with Trump, becoming one of the initial business executives to visit the President at Trump Tower after the 2016 election, and also occupying a front-row seat during his 2025 inauguration.

In 2019, during Trump's initial term, Arnault inaugurated a Louis Vuitton plant in Texas, and last Thursday, he pledged to establish another facility in Texas, aligning with the President's aspirations to enhance domestic production. The initial factory has emerged as the focal point of another scandal, subsequent to a Reuters investigation that uncovered significant underperformance attributed to inadequate personnel training, retention, and productivity.

LVMH's ambitious strategy in response to the luxury market's deceleration and evolving trade dynamics may serve as a warning example for other conglomerates and fashion brands. Assuming a central position in heated geopolitical negotiations poses significant risks for a luxury firm focused on Old World authenticity and brand allure.

LVMH has restructured its creative strategy by selling Off-White to Bluestar Alliance last year and is now contemplating a potential sale of Marc Jacobs for approximately $1 billion USD. The group has initiated a comprehensive overhaul of Creative Directors across the sector to rejuvenate interest, relocating Jonathan Anderson to Dior, appointing Proenza Schouler's founders at Loewe, and assigning Michael Rider to Celine.

Industry leaders are observing attentively, as Arnault's initiatives present a precedent for other executives aiming to safeguard their brands. Will other European fashion retailers such as Prada Group, Kering, and OTB Group emulate this approach? The strategies employed by the luxury sector to address crises, including price hikes, on-shoring production, and innovative disruption methods, are growing increasingly complex.