5 Reasons Why Luxury Market Headwinds From 2024 Won’t Subside In 2025
For the first time since 2008, excluding the 2020 Covid-19 year, the personal luxury goods market declined, dropping 2% this year from an historic high of $387 billion (€369 billion) in 2023 to $381 billion (€363 billion) at current exchange rates, according to the Fall 2024 Bain-Altagamma Luxury Goods World Wide Market Study.
After this year’s shortfall, Bain said that the luxury market “can still return to solid growth,” emphasizing the industry’s “long-term solid fundamentals.”
However, some – even many – luxury brands may have undermined their fundamentals during the post-pandemic boom when the luxury goods market grew a whopping 30%, from $298 billion (€284 billion) in 2019.
Headwinds To Continue
Predicting that the luxury market may range from flat to rising 4% in 2025, Bain partner and report co-author Federica Levato shared with me, “Unless something extraordinary happens that no one is forecasting and no one is seeing, the hundreds of luxury companies we interviewed are all budgeting and forecasting revenues in that range.”
Yet the ground is shifting under luxury brands’ feet. Bain estimates that only about a third of luxury brands will grow revenues in 2024, which compares with 66% that showed positive revenue growth in 2023.
That’s why we should expect more of the same in 2025. The luxury goods market may not take as big a hit as it did during the Great Recession – the market fell 1% in 2008 and followed with an 8% drop in 2009 – but the headwinds luxury has faced this year are not likely to resolve next year.
Luxury brands may have lost touch with the shifting tides in the market and have yet to confront that reality. “The growth of this industry has seemed infinite over the last three decades,” shared Francois Rosset, managing director Chaloub Group, noting the luxury goods market nearly quintupled since1996.
“The myth of infinite and eternal has come to an end. We know that our world is finite: luxury houses must now reinvent themselves, because their current trajectory is not sustainable and unrealistic,” he added.
Here are five reasons why the luxury goods market will face continued challenges in 2025 :
1. Chinese Market Implodes
As reliable as Bain’s predictions are, they sure got China wrong a year ago. In 2023, Bain was projecting mid-single-digit growth in 2024, after a 12% rise in 2023. However, China will end this year down between 20% to 22%.
Though China makes up only about 12% of the global market, it’s been a major source of growth for many luxury brands and so enjoyed a significantly greater share of brands’ investments.
As the Chinese economy sputters, luxury brands may be blindsided by deeper shifts in Chinese consumer psychology.
“There seems to be a shift towards domestic brands, fueled by national pride,” observed Professor Alessandro Balossin Volpe, currently a visiting professor of international marketing at Univestità Cattolica, Milan.
“If this is true, international brands will face a much more challenging market and I don’t see how other emerging market, albeit growing, could compensate for a serious decline in China.”
2. Missing 50 Million Consumers
While the report highlights “pockets of luxury growth around experiences and experiential goods geared toward high-net-worth individuals,” it also reveals that some 50 million luxury customers have either opted out of the market or been forced out by rising prices over the last two years.
Even more troubling, Generation Z customers, born between 1997 and 2012, have lost their “advocacy” for luxury brands. In other words, the next-gen customers on whom luxury brands’ futures depend are more turned off than on by what the brands are selling.
“This is very alarming if you think about how all the brands over-invested in Gen Z since Covid, yet they seem to have lost appeal in this generation very quickly,” Bain’s Levato related, adding the loss of advocacy for luxury brands is particularly troubling in China. “In Asia, some consumers don’t find meaningful connection with brands.”
Bain’s Claudia D’Arpizio provided context in a statement, “This is a signal that it’s time to readjust their value propositions. To win back customers, particularly the younger ones, brands will need to lead with creativity and expand conversation topics.
“Simultaneously, they must keep their top customers front and center, surprising and delighting them while rediscovering one-to-one human interactions,” she continued.
3. Price/Value Equation Needs Recalibrating
In a nutshell, the prices of luxury goods have gotten so high and the quality remained the same or even declined since the pandemic that even high-net-worth customers are turning off.
HSBC reported that in Europe the average price of personal luxury goods increased by 52% since 2019, with similar price hikes across the globe.
“For a long time, the pricing power of these houses seemed to meet with no resistance from customers,” shared Chalhoub’s Rosset. “Now it’s back to reality.
“Ultimately, every manufactured object has a value of usage (a bag, for example) and a cost price linked to its quality of the production and the materials used. It is simply not an artwork,” though Hermès Birkin bags may be an exception.
The luxury industry’s most reliable performer, leather goods, retreated between 3% to 5% to $83 billion (€78 billion).
Professor Balossini Volpe observed:
“In the key bag category where carryovers and iconic products play a major role and where price comparisons are easy, customers easily noticed that prices in some cases have almost doubled in three-to-five years for exactly the same product with no change whatsoever. On the contrary, many are complaining about poorer quality.”
The Bain study points out that customers are “downtrading” to more affordable alternatives due to rising prices. “I suspect some customers feel smarter buying them,” he added.
4. Technology Isn’t The Magic Bullet
Bain’s Levato emphasized that technology and artificial intelligence (AI) will play a paramount role “in recalibrating the value proposition.” However, the analog value of luxury can get lost in the digital translation.
“Online customer experience driven by AI makes sense if you look at luxury as a commodity,” shared Dr. Martina Olbert, a preeminent authority on brand meaning and CEO and founder of the consultancy Meaning.Global.
“But for those who truly appreciate, understand and wear luxury, this approach won’t work because to them, luxury is a feeling. It’s about enhancing and complimenting our personal identities to elevate our lives.”
She added, “Luxury is not about optimization; luxury is about personal meaning and that can’t be automized.”
The digital revolution hasn’t passed by luxury brands as they have leaned into e-commerce, digitally-powered personalized marketing and big data since the pandemic. However, sales in luxury mono-brand stores will contract between 1% to 4% this year and online e-commerce will decline by the same percentage.
Bain observed that online e-commerce is entering a normalization period and that mono-brand stores have been hampered by slowing traffic. The answer, they suggest, is “growing conversion through human touch effectiveness,” i.e. the feelings that Dr. Olbert talked of.
“Consumers are increasingly seeking immersive, personalized and brand-curated experiences. Winning brands will drive traffic back to stores by delivering differentiated value propositions and broadening in-store engagement,” Bain reported.
5. Black Swan Rising?
A potential “black swan” is hiding in the background and possibly gaining steam: an on-going investigation by the Italian authorities into reported human rights violations and other bad practices throughout the luxury supply chain.
While to date only two brands have been cited – LVMH’s Dior and Armani Group – Reuters reports that some dozen other companies are under investigation for similar abuses.
The two previous investigations suggested that worker exploitation is not an occasional occurance but “a generalised manufacturing method” to boost profits.
“If the investigation spreads, involving more businesses and describing other serious issues, some luxury brands may seriously face the risk of permanently losing the trust and confidence of many customers,” Professor Balossini Volpe said.
And losing customer trust is something that no iconic luxury brand can afford.
Back To Luxury Basics
In closing, Bain’s Levato stressed the need for luxury brands to get back to luxury’s foundational basics.
“To secure future growth, brands will need to rethink their luxury equations, re-establishing creativity and blending old and new playbooks.
“This includes rediscovering their essence and embracing the foundational pillars of the industry: desirability fueled by craftsmanship, creativity, and distinctive brand values; meaningful, personalized, and culturally-resonant customer connections and experiences.”
However, getting back-to-luxury-basics is not a quick fix, but one that may require a year or two for brands to implement effectively.