Rania V. Sedhom is managing partner at Sedhom Law Group
By Rania V. Sedhom
For the first time in a long time, luxury brand sales are down, due to price fatigue and a poor economy.
Since COVID, several luxury brands have enjoyed price hikes of over 30 percent. With tariffs hovering at 15 percent, many luxury brands will need to increase prices by at least 2 percent to offset the tariff costs.
LVMH reported that Q2 earnings were down by 1 percent – can it, resultantly, increase costs to offset tariffs without suffering more of a decline?
Earning potential
For the top 1-2 percent of earners, the tariffs will have little effect on their spending but may affect where they spend.
For example, the ultra-rich may travel to Paris to purchase luxury French goods and to Italy to purchase luxury Italian products rather than pay the 15 percent tariff that is passed on to consumers.
For others, an additional, significant cost may cause consumers to find alternative products that suit their needs or turn to the secondhand market.
Some brands already have factories in the U.S. For example, LVMH owns several production factories in America, and they produce approximately half of the products sold in the U.S.
Other brands may consider manufacturing a portion of their goods locally. The brands will need to examine brand loyalty and consumer appetite for increased costs to properly decide on their best next steps.
Passing costs to consumers
Hermès announced that it will increase its prices if tariffs increase. However, Hermès is not known for significant price hikes.
It has stayed true to itself and its pricing model while other brands have increased costs to consumers exorbitantly. Reasonable, incremental increases allow brands to make additional price changes to address government action.
Other brands like Burberry, which cater to aspirational clientele and HENRYs, will have limited ability to increase costs as a reaction to governmental regulation without using market share.
Now with the erasing of the de minimis exemption, all items from abroad are subject to a tariff, even those valued at less than $800.
For review
There are various luxury items that are available for less than $800, such as Hermès change trays, Cartier drinking cups, Dior picture frames and various small leather goods (SLGs).
Previously, many buyers would treat themselves to SLGs or purchase home goods and starter jewelry as gifts.
If these luxury items top $1,000, many consumers may spend their money differently. Luxury brands must, therefore, examine the following factors:
- Who are the customers who give them the highest market share, and what is their buying power? How will a price hike affect spending?
- If production factories already exist in the U.S., are they being properly and fully utilized? What does that mean to the bottom line?
- If production is not in the U.S., what costs are associated with bringing production stateside, and how long will it take to recoup that investment?
- By what percentage did the brand increase its cost since 2019, and how does that increase fare with their competitors’ price increases?
- Is the company losing market spend?
Long-term and thoughtful planning will preserve the brand’s reputation and customer loyalty.
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