Decoding Luxury Cycles: Is the Downturn a Buying Opportunity?

After a period of exceptional growth, the luxury market has entered a slowdown, leaving many investors and brands wondering what’s next. Is this a temporary dip or a sign of deeper trouble? Our report, "Luxury Downturn Appears Cyclical, Not Structural," offers a compelling analysis, suggesting that the current market behavior is part of a natural cycle, presenting unique opportunities for advisors who want to be in the best position to help their clients. 

Luxury has always been a cyclical industry. It grows faster than the global economy during upswings but is also more sensitive to downturns. The post-pandemic boom saw unprecedented growth, but as of 2024, the market has cooled. Our analysts believe this isn't a collapse but a normalization. 

Historically, luxury sales have grown at a 6% annualized rate since 1996, outpacing the 3% real GDP growth but with clear cyclical dips. The current downturn aligns with past patterns, which typically see a rebound after about two years of weakness. 

Two major consumer groups, Americans and Chinese, are expected to fuel the industry's recovery and long-term growth. While both have seen recent slowdowns, the underlying fundamentals point toward a strong resurgence. 

The resilient US market 

American consumer demand weakened from unsustainable post-pandemic highs, but the foundation for spending remains solid. The incomes of affluent consumers are resilient, supported by a strong job market for educated workers. 

Furthermore, luxury spending in the US has a surprisingly high correlation with stock market performance. The report notes an 87% correlation between luxury demand and the S&P 500, suggesting that as long as equity markets remain strong, consumer confidence and spending should follow.  

China’s pent-up potential 

Chinese consumers are currently sitting on record-high household savings accumulated during the pandemic. Their reluctance to spend is tied to weak consumer confidence, largely driven by a downturn in the real estate market. 

However, as government stimulus measures begin to stabilize property prices, this confidence is expected to return. The report forecasts that Chinese luxury demand will rebound to its pre-pandemic growth trajectory, reaching its 2019 peak by 2027. In the long term, China’s growing high-wage employment in sectors like technology and science will continue to create new affluent consumers. 

The current cycle isn't without its obstacles. Brands have faced criticism for aggressive pricing, and the competitive landscape is constantly shifting. 

The pricing predicament 

From 2019 to 2023, around 80% of the industry's growth was driven by price increases. Iconic handbags, for example, saw prices jump by 40% to 100% in just a few years. This strategy, while profitable in the short term, led to a decline in aspirational consumers—those who spend less than €5,000 annually on luxury goods. 

Recognizing this, the industry is expected to moderate its pricing strategy. Growth will likely come from increased sales volumes and a focus on product mix rather than steep price hikes, similar to the period after the 2015-16 downturn. 

A moat for established players 

While new brands emerge, the barriers to entry in the luxury sector have actually increased. The decline of multi-brand online retailers and the prohibitively high cost of prime retail space—up to €20,000 per square meter per year in some locations—make it difficult for newcomers to compete. 

This environment benefits established players like LVMH, Richemont, and Kering, which have the financial resources for massive marketing spends and global distribution. In China, this dominance is even more pronounced, with the top 10 foreign luxury groups accounting for over 60% of the market. 

Brands are not just passively waiting for the cycle to turn. Many are taking proactive steps to re-engage consumers and drive growth. 

Some are changing creative leadership to bring fresh energy, while others are refocusing on their core strengths. Burberry, for example, has seen early success by re-emphasizing its iconic outerwear and scarves. Another strategy is the introduction of entry-level products—like new fragrances or more accessible handbag lines—to bring aspirational consumers back into the fold. 

For a deeper look at how brands are innovating, our Luxury Pulse blog post offers additional insights into broader industry trends.

Cyclical downturns often create attractive entry points for long-term investors. The report identifies several high-quality luxury companies that appear undervalued. 

• LVMH: As a diversified market leader, LVMH's strength and scale advantages position it to outperform during the recovery. The market appears overly pessimistic, creating a potential buying opportunity. 

• Richemont: With its strong position in the resilient luxury jewelry (Cartier, Van Cleef & Arpels), Richemont has performed well during the downturn and is exposed to a more affluent, less price-sensitive clientele 

• Kering: Despite significant challenges with its flagship Gucci brand, the report suggests that the brand's global recognition and resources should enable a long-term recovery. For patient investors, Kering offers deep value at its current discount. 

The luxury market is navigating a familiar cycle of boom and correction. The evidence strongly suggests that the current slowdown is not a structural crisis but a temporary phase. The fundamental desire for luxury remains, and powerful demand drivers in the US and China are set to fuel the next upswing. 

For brands, the path forward involves smart pricing, innovation, and a focus on core strengths. For investors, this period of market pessimism may be the ideal time to identify value in high-quality companies poised to lead the recovery. By understanding these cycles, both can position themselves for future success. 

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