Luxury
Explainer:
How Trump’s Tariffs Threaten Luxury Fashion
The Trump
administration’s radical changes to US trade policy won’t push retail prices up
enough to directly dampen sales, but the effects on the global economy and
consumer sentiment could seriously dent an industry still struggling to bounce
back from a sharp downturn in demand.
Donald
Trump's trade policies will have a sweeping impact on fashion.
By Joan
Kennedy, Simone Stern Carbone
04 April
2025
https://www.businessoffashion.com/articles/luxury/luxury-industry-trump-tariffs-impact/
At a press
conference in January, fresh off a promising earnings report and a stop at US
President Donald Trump’s inauguration, LVMH chief Bernard Arnault — who had
pegged hopes of a luxury recovery on growth in the US market — was singing
America’s praises.
“I have
witnessed the winds of optimism in the US,” he said. “In the US, you get the
feeling that you’re welcomed with open arms.”
But from the
Rose Garden yesterday, as Trump announced the implementation of the most severe
set of tariffs in over 100 years, the president took a different tone: “Foreign
leaders have stolen our jobs, foreign cheaters have ransacked our factories and
foreign scavengers have torn apart our once beautiful American dream.”
In one
swoop, Trump created an unprecedented level of ambiguity and complexity for a
luxury industry already beleaguered by widespread sales slowdowns and tempered
consumer demand. The levies are set to directly impact some of the sector’s
biggest manufacturing hubs, including a 20 percent tariff on the EU, 10 percent
on the UK, 31 percent on Switzerland and 34 percent on China.
Luxury
stops dropped
The US had
become increasingly important to luxury’s post-pandemic recovery, especially as
sales in China and other key geographies still lag. In turn, brands have
invested more in the market, opening stores in untapped regions beyond the
coasts and directly catering to American shoppers.
But Trump’s
trade policies — and the knock-on effects of an era of American uncertainty —
could complicate luxury’s recovery plans. A straight path to cyclical recovery
for luxury is looking less likely than ever, according to analysts.
BoF unpacks
what Trump’s tariffs mean for luxury.
Why is
the US so important for luxury?
The US, with
its wealthy, consumption-forward population and outsize share of billionaires,
has always been a vital market for luxury. Lately, it has become crucial in
pulling the industry out of a years-long slump as malaise in other growth
regions, namely China, persists.
Over the
past five years, American shoppers — known for their resilience and appetite to
spend even in troubled times — have become an increasingly important part of
global luxury demand. As fears of a downturn bubbled up throughout 2024, a
tumultuous election year, retail spending bucked expectations and didn’t fall
off. Last October, HSBC analyst Erwan Rambourg noted Americans were the only
consumers “with a bit of signs of life.”
luxury
tariffs
All this has
made the US look like a land of unbridled opportunity for luxury — and fashion
has even pushed westward, opening stores in regions once considered luxury
deserts: Louis Vuitton in Indianapolis and Hermès in Austin, with another to
come in Nashville. Gucci and Moncler are soon to open shops in Minneapolis.
Trump’s
re-election in November was largely welcomed by the industry, with investors
noting the correlation between tax cuts, a strong stock market and luxury
spending. Not to mention, the cultural shift: Trump’s high-octane lifestyle and
unabashed flaunting of wealth and power were seen as having the potential to
provide a boost.
But since
his return to office — and particularly in the lead-up to his trade policy
announcement — markets have been volatile. The S&P 500 plunged 5 percent on
Thursday, the biggest daily drop since June 2020, at the peak of the pandemic.
What’s
the immediate impact of the tariffs?
Wednesday’s
more drastic-than-anticipated tariff announcement rocked the industry. With
Trump, predicting what’s next is difficult. Circumstances still may change,
particularly after negotiations between affected regions and industries ensue —
but just about every fashion item sold in the country will be hit with
additional duties, as the US imports more than 98 percent of its clothing and
about 99 percent of shoes.
The
immediate impact won’t be as dramatic for luxury, which operates at a higher
gross margin than other categories, allowing it to more easily pass costs on to
shoppers. Plus, its wealthier consumer base tends to fare better under economic
pressure, and could potentially plot out summer trips in order to move their
spend to shopping hubs abroad should prices rise at home.
Luxury
players have paid tariffs (around 15 percent) for decades when exporting to the
US. If the new 20 percent tariffs are non-incremental, the impact would be
minimal, requiring only a 1 percent retail price increase to offset costs. If
the tariffs are incremental, brands would need to raise prices by around 4
percent, Bernstein analyst Luca Solca said in a note today.
Still, some
brands will feel the pain more than others: The impact of tariffs depends on a
company’s exposure to the market and where its products are made. Moncler has
lower revenue exposure to the US market, for example. Burberry — which just saw
momentum in the US start to pick up — has a slightly higher mix of Asia-based
manufacturers than other European labels, meaning it’s particularly vulnerable,
said RBC in a note.
The
situation also presents a unique challenge for Swiss watches, Citi analyst
Thomas Chauvet said in a note Thursday. Richemont, a bright spot in the
downturn thanks to its strong perception and focus on hard luxury, faces a
higher, Switzerland-specific tariff of 31 percent.
LVMH started
hedging its bets on American manufacturing during Trump’s first term, building
three Louis Vuitton facilities in California and Texas, which account for
around 50 percent of volumes and 1/3 of the value of its US business, according
to a note from RBC. In January, Arnault indicated his interest in bolstering US
production again.
For others,
including Kering, manufacturing stateside “makes no sense,” said François-Henri
Pinault on its Q4 2024 earnings call in February. “We’re producing in Italy and
in France … we’re selling a part of our culture." Cachet aside, shifting a
supply chain represents a logistical juggernaut. Finding a new manufacturer
with scale and luxury know-how is challenging; moving to a region that felt
less of an impact is futile, with circumstances in flux. The US does not have
much local infrastructure or workers skilled in apparel manufacturing beyond
Los Angeles, where the focus is on knits and denim.
“You can’t
move the fashion supply chain on a dime,” said Brian Ehrig, partner in
Kearney’s consumer practice. “Where are you going to go?”
Regardless
of approach and positioning, a degree of change is inevitable. As costs rise,
brands and their suppliers will take a margin hit, pass increases onto
consumers or find other workarounds. For many — including Kering and Hermès —
price hikes, should duties increase, were already on the table.
But luxury
is in a unique predicament: years of so-called “greed-flation” (where luxury
brands hiked prices to drive margin-based sales growth, resulting in costs 54
percent higher on average than in 2019, according to HSBC) and price increases
have already put a damper on spending, particularly among aspirational
shoppers. Many brands have just started to face consumer fatigue with more
entry level products and creative shifts.
The
industry’s pricing power will be tested again. Brands favoured by higher-income
shoppers — Hermès, for example — will naturally find it easier to trade on
cachet. It could be more of an uphill battle for Kering, which has more
exposure among aspirational shoppers (likely to feel the brunt of inflation)
and is in the midst of repositioning its flagship Gucci.
But it’s not
just the European giants who will feel the pinch of new trade policies: the
vast majority of American brands — The Row, for example — manufacture overseas,
tapping prowess in regions like Italy.
“These
tariffs are going to touch everyone … We are in for a rough time. The economy
was chugging along. Now it seems it will be out of steam,” Gary Wassner,
founder of financing and factoring firm Hildun Corp, told BoF in an email. “How
many many small and large companies will fail due to cash flow issues, lower
margins and lower sales due to higher prices at retail, remains to be seen.”
For
up-and-coming independent brands already embattled by ongoing wholesale
upheaval, rising costs and margin erosion, a solid path forward feels elusive.
“It’s
incredibly scary. I thought because I manufacture in so many places, including
New York, I was going to be okay,” said Rachel Scott, the designer behind New
York-based Diotima, who also produces in China, Italy and India. “Fashion is
such an important industry for the States and [this is] going to completely
cripple us.”
What’s to
come?
Trump’s
tariffs represent a broader challenge for luxury than just the additional fees.
The
trickle-down effect of inflation and souring stock-market returns has the
potential to hamper spending and put consumers in a distinctly bad mood. US
consumer confidence has already taken a beating, falling to its lowest point in
years in March, according to The Conference Board. Goldman Sachs and JP Morgan
have both raised the probability of a US recession from 20 and 30 percent to 35
and 40 percent, respectively.
Plus, what
happens in the US doesn’t stay in the US. Stock markets are already reeling
from Trump’s announcement; the downstream impact of this policy could spell
drastic implications for other economies.
“What we
should worry about, in case, are the second and third level impacts of the new
American policies, if they precipitate a sharp global recession and stock
market correction,” said Solca in a note.
Simone Stern
Carbone is Luxury Correspondent at the Business of Fashion. She is based in
Zurich and Paris and covers fashion and beauty, with a focus on the dynamic
luxury sector.
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