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What Will a Recession Mean for the Luxury Market?

An impending economic downturn is top of mind for the sector right now. BoF breaks down the key implications for the industry.
A luxury shopper holding a Louis Vuitton shopping bag and a Burberry pouch, next to an image of a declining stock market.
An impending economic downturn is top of mind for the luxury sector right now. ((L-R) Getty Images, Shutterstock)

Key insights

  • Luxury tends to fare better than other sectors during a downturn because of its exposure to high-income consumers, but it's not recession proof.
  • A downturn will squeeze middle class shoppers and make high-spending clients more discerning, an opportunity for those with strong brand DNA and a challenge for smaller players.
  • Changes brought about by the pandemic, like a greater focus on supply chain agility and tighter control over distribution, may make companies more resilient than during previous downturns.

The luxury industry has enjoyed a stellar, “V-shaped” rebound from the pandemic, with sales recovering to $301 billion in 2021, climbing 7 percent above 2019′s pre-crisis levels in constant exchange rates, according to consulting firm Bain & Co. Some of the largest players like Chanel and Hermès surged ahead by as much as 20 to 30 percent.

But there are signs of trouble ahead, with the prospect of an economic recession increasingly appearing to be a question of when, not if.

Inflation and interest rates are soaring in Europe and North America, with rising prices for fuel and food squeezing household budgets. In the US, which has been driving sales for the luxury industry since the pandemic, the economy shrank 1.6 percent quarter on quarter between January and March, the Bureau of Economic Analysis said last week. This is in stark contrast to the fourth quarter last year, when the economy grew almost 7 percent. In Europe, inflation is estimated to have hit 8.6 percent in June, according to EU statistics agency Eurostat — the highest level since records began in 1997.

So far, luxury spending seems to be insulated from the deteriorating economic conditions: sales in the first quarter were up by 17 to 19 percent compared to pre-pandemic levels, according to Bain, despite the outbreak of war in Ukraine and a fresh wave of Covid restrictions in parts of mainland China. This is likely a hangover from post-pandemic “revenge spending,’’ with the resumption of travel, events and socialising fuelling a desire to splurge, especially among those who accumulated a nest egg over lockdowns.


“For now, getting out of the Covid-19 pandemic is working like a massive feel good boost: a global YOLO attitude is creating an outsized luxury demand wave,” Bernstein analyst Luca Solca wrote in a recent note.

But even if this dynamic continues to buoy sales through the summer, eventually the share of people wanting to splash out on a $3,000 bag or $400 sunglasses seems set to decline. Luxury items are the ultimate discretionary purchase and there’s historic correlation between the luxury industry’s performance and GDP growth. A recession is sure to impact sales — the question is how soon, and how badly.

BoF spoke to experts to break down key predictions for how an economic downturn will impact the industry.

Aspirational Spend Under Threat

Luxury tends to fare better than other sectors during a downturn because of its exposure to high-income consumers. Wealthy shoppers do pay attention to their net worth, and are less likely to spend when the market is down, but the impact is often less dramatic than for other groups. Personal luxuries like designer handbags or expensive skin care are often the last things they give up.

Some expect luxury to be even more resilient than during previous crises like the Great Recession in 2008: the current wave of inflation is hitting lower-income and middle-class consumers particularly hard compared to higher earners who have padding in their budgets.

“In previous recessions, the impact on the consumer was more evenly spread amongst income groups, which meant that luxury was more exposed than is likely this time,” said Adam Cochrane, an analyst at Deutsche Bank.

Still, luxury brands don’t just depend on ultra-rich clients: middle-class and “aspirational” shoppers make up a significant share of sales. In recent years, brands have ramped up their business in more accessible categories like streetwear, sneakers, eyewear and small accessories in a bid to appeal to those groups.

“All brands now have a very stretched value proposition and a very stretched product offer towards different price points,” said Federica Levato, partner at Bain & Co.


In 2008, there was a clearer distinction between absolute luxury and more accessible brands. Now, “the segmentation is much more blurred, because all brands try to be relevant to different target [groups] and to different spending powers,” Levato said.

Brands that have strong appeal among high-income clients and can activate the top end of their business will likely fare the best during the recession, while those who rely most on aspirational consumers to drive growth will be hit the hardest.

Pandemic Polarisation Set to Continue

Over the pandemic, the largest companies with the strongest brand DNA excelled, while smaller players that weren’t as differentiated in the market tended to struggle. Should a recession hit, experts expect the discrepancy between winners and losers in the industry to become even more pronounced.

Analysts at UBS pointed to Hermès as “one of the only companies likely to still report positive organic sales growth in a severe recession” in a recent note. LVMH is also well-positioned to thrive, the analysts wrote. By contrast, they called out Tod’s and Ferragamo as the companies whose forecasts were most at risk.

Scale affords big players a strategic advantage. Deep pockets mean they can continue to invest in brand building, even when the macroeconomic environment is challenging. This is crucial, as value becomes more important when times are tough, even for big spenders, said Daniel Langer, chief executive at luxury strategy firm Equité and executive professor of luxury strategy at Pepperdine University in Malibu.

“In times of crisis, the role of luxury brands as a cultural influence becomes even more important, because people want some kind of emotional payout and emotional connection from a brand. But if you want to be emotional, you have to communicate, you have to connect, you have to be inspiring,” he said. “The brands that can do that will do well in a recession.”

Luxury’s biggest players were already leaning into this strategy during the pandemic. Chanel, for example, upped its marketing spend by 32 percent to $1.8 billion in 2021. At the same time, its revenue rose 23 percent over pre-pandemic levels to $15 billion last year. Another downturn could present industry leaders with further chance to solidify their advantage.

“The opportunity will be for the biggest brands to take even more share during a period of industry weakness, as they continue to invest and trust that if consumers limit luxury spend, the biggest brands will retain a greater share of spend,” said Deutsche Bank’s Cochrane.


A Better Business Model?

It’s impossible to predict just how bad a recession could be or how long it might last. Similarly, it’s hard to say what the impact on luxury will be: Bain expects the luxury industry to grow anywhere between 5 and 15 percent this year, depending on how fast the China market recovers and when — and how severely — inflationary pressure in the West starts to really bite.

But there are some signs the industry is in a better shape to weather the coming storm than during the last major downturn in 2008, in part because of adjustments made in the last two years in response to the pandemic.

For instance, brands are much better positioned to respond to unpredictable demand, after the last two years of crisis forced them to work to optimise their supply chains and lead times to be more agile and responsive to current events.

Many brands have also made a concerted effort to ramp up control over their distribution, bolstering direct-to-consumer channels and strategically shrinking wholesale exposure. That’s in contrast to the financial crisis of 2008, when brands were heavily reliant on department stores that resorted to steep markdowns to move product.

For listed luxury companies, 75 percent of sales came from direct distribution last year, compared with 57 percent in 2007, according to UBS.

This gives companies a higher margin on each sale, padding their bottom lines, as well as a better chance of being able to control discounting that can damage brand equity, encourage comparison shopping and make it harder to close full-price sales.

At times of lumpy demand, a strategic approach to inventory focusing on classic items that can be carried over from season to season can also help avoid costly markdowns. This is especially true for hero categories like bags, shoes and fine jewellery from the strongest brands: in the eyes of consumers, these kinds of products make for better investments longer term, as they will retain value and cultural fashion relevance. As seen over the pandemic, even amid price increases, demand for Chanel flap bags and Cartier love bangles soared.

“A recession scenario is going to separate the best brands from the rest,” said Langer.

Further Reading

Is Luxury Recession-Proof?

With the risk of global downturn rising by the day, the fate of luxury brands depends heavily on their positioning, writes Pierre Mallevays.

In This Article

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