By
Bloomberg
Published
December 13, 2024
New York is obsessed with Louis Vuitton.
LVMH Moet Hennessy Louis Vuitton SE, the major brand, is remodeling its flagship on the corner of East 57th Street and Fifth Avenue in Manhattan.
He has covered the construction with a 230-foot-tall installation depicting six stacked monogrammed trunks. Towering above nearby landmarks, it has become a surprise tourist attraction and TikTok sensation.
There's a reason why LVMH, the world's largest luxury group, has spent some of its considerable resources on the exhibition. And it's not just about going viral.
With Chinese demand limited by a deep real estate crisis and South Korea embroiled in political drama, luxury brands are looking to the United States once again. Once the electoral uncertainty is over, the stock markets rising and Bitcoin surpassing $100,000, there is a good chance that Americans will take up the baton. After all, the crypto brothers saved the sector in 2021, when China was struggling with Covid lockdowns and Xi Jinping's “common prosperity” agenda.
The demand for luxury in the United States is often correlated with the performance of the stock market. With the S&P 500 index crashing, apart from a drop in August, this should have pushed US top spending higher.
While there has been some recovery, American luxury buyers may have held back ahead of the November vote, particularly out of fear of a controversial outcome. Morgan Stanley analysts also suggest that much of the recent wealth creation has fallen to older generations, while the driver of the industry's recent growth has been millennials and Generation Z. It's no surprise that Debbie Harry, 79 years old, was the face of Gucci's advertising campaign for its New Blondie bag.
Since the election, some of these fears have been put to rest. While not all consumers will be happy, the prospects of tax cuts, particularly for wealthy Americans, should help them move forward.
U.S. sales of major luxury brands remained negative in November year-over-year, deteriorating after an acceleration in September and October, according to Citigroup credit card spending data. This is partly because things were not so bad in that period in 2023. The warm weather this fall, which affected sales of high-end clothing, may also have played a role. However, jewelry spending shined, helping sales remain high compared to 2019.
The watches also show signs of improvement. Switzerland Watches Group Plc, which generated 45% of its sales in the U.S. in its fiscal first half, said it has seen more collectors snapping up exclusive or limited-edition pieces since the election.
A few days after the vote, the owner of Cartier, Cie. Financière Richemont SA said its watch business had recently returned to growth in the United States, giving it confidence for the post-election period.
In this case, the rise of Bitcoin could be particularly useful. The cryptocurrency's rally in 2021 heralded a sharp rise in second-hand watch prices.
It may take some time for crypto profits to filter into the market. But there are already signs of stability. Research platform WatchCharts' broad market index is down just 0.7% over the past three months after a recovery in October.
But luxury brands will be hoping that any Bitcoin bounce is broader than watches and also lifts younger and simply comfortable consumers, many of whom have been shut out of the market. If so, European names will be well positioned to capitalize.
Although Americans are estimated to account for 29% of global sales in 2024, ahead of Chinese consumers, according to Morningstar, the American luxury market still has room to grow.
In recent years, European brands have expanded beyond traditional enclaves such as New York, Los Angeles, San Francisco and Chicago. Now places like Austin, Atlanta, Charlotte and Scottsdale have become luxury destinations. Add to that reasonable rents and a strong dollar, which translates into more euros, and the returns on these investments look promising.
The brands, once seen as elitist, are now part of popular culture, particularly Louis Vuitton, thanks to the appointment of first the late Virgil Abloh and then musician Pharrell Williams as creative director of menswear.
LVMH is best placed to benefit from this shift, having generated 25% of its sales in the United States in its third quarter. In addition to brands such as Dior, Celine and Loewe, it also owns Tiffany & Co. Louis Vuitton has the largest store base in the United States, according to HSBC Research analysis. Kering SA's Prada SpA and Gucci have also been expanding their presence, particularly in secondary cities.
Tapping into American demand is not without challenges. The biggest is the prospect of President-elect Donald Trump imposing tariffs.
While most luxury goods groups' exposure to Chinese manufacturing is limited, with supply chains mainly in France, Italy and Switzerland, they would be affected by broad plans to impose taxes on all imported goods.
Normally, they would be able to pass these additional costs on to consumers. After all, they sell expensive items with limited elasticity. But the high level of inflation in the industry over the past five years means they have less room to maneuver.
There may be some possibilities for manufacturing in the US. Here LVMH leads once again, with Louis Vuitton making some bags and small leather goods in Texas and California. But because European heritage is such a critical part of many brands' identities, room for maneuver can be limited. Companies may have to absorb the tariffs, which will put more pressure on margins.
Although this threat seems distant. This may be why LVMH has opened a Louis Vuitton store at the site of the former Niketown on East 57th Street, while it renovates the permanent location nearby. The temporary home includes a restaurant offering “luxury snacks” and the first Louis Vuitton chocolatier in the United States. The emporium may only exist for a few years, but during that time, the American consumer will be crucial to CEO Bernard Arnault's fortunes.
