Why the US-China Trade War is Actually an Opportunity for Some Luxury Brands

    In the light of the ongoing U.S.- China trade war, declines in weaker luxury brands will be balanced by gains for stronger brands.
    The current U.S.- China trade war will create winners and losers in the luxury industry. Photo: Shutterstock
      Published   in Hard Luxury

    In 2008, at the height of the global economic crisis, markets around the world were devastated and consumer confidence was shattered. Commentators and media publications around the world forecasted the end of luxury as we know it. I remember being asked: “Why do you believe in luxury? It’s ending!”

    My answer was simple: Luxury markets are actually more recession-proof than non-luxury markets. First, in times of economic contraction, consumers with lower incomes are affected, but wealthy consumers feel it much less. Second, luxuries are an extension of personality, and because of this, consumers tend to hang on to luxury purchases longer than you’d expect — they won’t scale back until they absolutely have to.

    Indeed, when we look back at what happened after 2008, all the pessimists were wrong. Instead of sharply declining or becoming irrelevant, the global luxury market remained flat. In contrast, non-luxury markets suffered greatly. And the parts of the luxury market that were affected bounced back faster than other markets, and since then, luxury has seen some of its most substantial growth volume periods ever.

    Cut to about two years ago, when the Chinese government started to crack down on corruption, and once again many started predicting the end of luxury growth in China, since expensive watches and handbags were favorites, as illegal “gifts.” Yes, there was a short-term effect, but no significant lasting impact on the luxury industry in that market as a whole.

    Now, with the slowdown of Chinese economic growth, the next wave of pessimists has come out to predict the downfall of luxury once again. Some brands used the downturn to defend weak results over recent quarters. But with brands like Louis Vuitton and Gucci showing strong sales results in China, bad financial showings seem like more of a reflection of poor branding, innovation, creativity, and consumer connection. What we actually see, however, is that during economic contractions — when consumers make more discerning choices — weak brands are usually hit hardest.

    I see the current discussion about luxury fallout because of the U.S.-China trade war in a similar light. There will be short-term effects for weaker luxury brands, as well as luxury brands that stretched too far into more entry-level segments. Chinese consumers may also scale back short-term on purchasing American luxury products. However, as in previous economic crises, I do not expect any significant long-term effect on the market overall. Declines in weaker luxury brands will be balanced by gains for stronger brands.

    One reason strong brands resist shocks like tariff-increases is that they’ve created significant value for consumers. Real luxury is nothing other than extreme value creation. The so-called “added luxury value” of luxury brands is driven by prestige, the perception of enhanced attractiveness, and the perception of social protection and financial means, among other factors. For the most luxurious brands, added luxury value exceeds all other value components (like function or design) by a factor of a thousand, ten thousand, or even in some cases, a millionfold.

    True luxuries create so much value that even a double-digit tariff increase will only have a marginal impact on sales, if any. Consumers will always perceive the value as “worth it.” Therefore, a true luxury handbag costing 9,400 instead of 8,100 probably won’t have a significant effect on the luxury consumer’s desire to buy it. But it’s good to remember that this is different than the “accessible” luxury market, such as cheaper wallets, bracelets, belts, scarfs, or lower priced lines. Consumers in this entry segment are definitely more price sensitive, and tariffs will usually affect them.

    Real luxury brands that have precise brand positioning connect closely with digital and millennial target groups, and rigorously feed their communities with relevant content won’t see a significant or lasting negative impact. On the contrary: For them, it can be an opportunity to further differentiate from the rest of the pack. In other words, for the better brands, the trade war is an opportunity. This is why, in my opinion, now is actually the best time to be in the luxury segment.

    Daniel Langer is CEO of the luxury, lifestyle and consumer brand strategy firmÉquité. He consults some of the leading luxury brands in the world, is the author of several luxury management books, a regular keynote speaker, and holds management seminars in Europe, the USA, and Asia. Follow @drlanger

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