hnnhcronin Consumers from the United States and China are the largest consumers of European luxury brands–both hard luxury (watches and jewelry) and soft luxury (leather goods and other accessories) — and actually account for a majority of sales worldwide. Unfortunately for the booming luxury sector, it will likely be caught in the crossfire of the escalating trade war between the U.S. and China. The United States government enacted tariffs earlier this year on steel and aluminum in order to deter American consumers from buying from China and to promote U.S. industry growth. China retaliated, and the number of goods requiring tariffs continues to grow, as do the countries involved. Although the luxury goods sector will not be immediately or directly affected by the rising tariffs on steel and aluminum since most luxury companies are based in Europe, declining consumer confidence and decreased purchasing power will likely decrease demand for luxury goods in the long run, especially considering the relatively high valuations of these stocks.
While there are concerns about a blow to luxury stocks, luxury consumers tend to be more immune to the heightened prices of imported goods due to luxury goods’ high price points and price inelasticity at this level. High end luxury brands, such as Louis Vuitton, Gucci, and Yves Saint Laurent should be able to navigate the early stages of this potential trade war. However, smaller luxury brands may not be as safe: Burberry (BRBY) , Salvatore Ferragamo (SFER), and Swatch are considered much more vulnerable to lose sales in the tariff battle between America and China. Both Ferragamo and Burberry are in the midst of turnaround strategies intended to capture the attention of the millennial and Generation-Z shoppers which are much more sensitive to price. When brands rethink their marketing and business strategies, it can take years to gain momentum, and Salvatore Ferragamo or Burberry will have potential headwinds of tariffs. In fact, the tariffs could slow the rebranding process. In the case of Swatch, consumers simply cut down on jewelry and watches in times of potential economic turmoil.
American fashion companies have much more to lose if this trade war continues. The tariffs that European and Asian countries have implemented on American exports could lead to rising production costs, and thus, higher retail prices for companies like Coach (TPS), Ralph Lauren(RL), and Tiffany & Co. (TIFF). American luxury companies are much more accessible to shoppers of all income groups rather than just those with unlimited disposable income. This means that rising prices will deter consumers of American brands away from purchasing their products much more drastically than the demographic who tend to buy true luxury.
All in all, luxury’s recent strong success could dwindle because of the economic concerns of shoppers, but the companies that have a strong global position should be able to weather the storm without any large dips in profit. Investors must consider the implications of the trade war when considering the purchase of luxury retail stocks, especially the smaller companies missing a large enough consumer base. That being said, absent a full blown trade war and economic recession, luxury goods do not carry the same weight as more sensitive economic industries such as beverages, general industrial companies, and those industries dependent on steel and aluminum.
