By Andrea Figueras

The luxury sector faces a significant slowdown this year as its growth-driving engines have stalled, especially in China, according to according to The State of Luxury report by McKinsey & Co and The Business of Fashion.

From 2019 to 2023, the industry experienced a boom in demand. After the peak of the Covid-19 pandemic passed, high-end shoppers spent their disposable income and savings on pricey goods. The sector also benefited from a surge in luxury consumption in China, which fueled around 40% of global luxury goods growth during those years, according to the report. However, in light of the country's ongoing economic malaise, Chinese consumers have tightened their luxury budgets.

In 2024, luxury names entered a period of slowing demand, which is expected to continue this year. "The times of hyper growth that the industry has experienced in the past few years are not coming back anytime soon," Gemma D'Auria, senior partner at McKinsey & Co and leader of the firm's global apparel, fashion and luxury sector, said in an interview.

The situation in key market China is key for understanding the current context of the industry. "At the earliest, we think there will be a pickup by last quarter of 2025," she said, helped by government initiatives as well as a very high savings rate.

While the recovery in China might take time, luxury brands have other growth opportunities. "There is a bright spot in the U.S.," D'Auria said.

"The U.S. is going to be a much more important market for luxury than perhaps it has been in the past," she commented. This is thanks to decreasing inflation, wealth creation, more disposable income and less uncertainty. "For the past year and a half there was all this uncertainty linked to the election, which is at least now behind us, and I think that will also propel consumption and luxury spend."

Berenberg analysts Nick Anderson and Harrison Woodin-Lygo said in a note that Trump's broader policy agenda, which is viewed as positive for equities and wealth creation, will ultimately boost American luxury spend.

Seizing the opportunity in the U.S. and approaching emerging markets such as the Middle East, India and Japan could allow brands to weather the storm on much more solid ground, D'Auria said. However, companies will have to come up with a tailored approach for these markets.

The main concern with the U.S. is the potential implementation of tariffs. "Normally brands may have been able to pass on import duties onto their consumers. This time that is not going to be possible because consumers are sick and tired of the price increases of the past few years," she said. This will put pressure on margins, as companies will have less room to maneuver.

During the four years of strong growth, high-end brands fed their pockets by hiking prices. The biggest increases were seen in leather goods, with some brands raising prices of selected pieces as much as 50% to 100% over the period, according to the report.

To regain consumer trust, brands will have to innovate with their products and with the ways they engage with customers, D'Auria said. "There is a search for experiences that money can't buy."

Jewelry brand Cartier, owned by Swiss group Richemont, extended invitations to its masquerade ball at the Belvedere palace in Vienna to some of its clients, the report says.

"These exclusive experiences are not just for the top spenders. The expectation of white-glove service is something that should be done at much larger scale," she said, adding that data and analytics--information about consumers--can help companies deliver a more personalized experience, which will be a key differentiator going forward.

Write to Andrea Figueras at andrea.figueras@wsj.com

(END) Dow Jones Newswires

January 13, 2025 09:58 ET (14:58 GMT)

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