The situation: The luxury sector is facing a “challenging” and “somewhat unprecedented” environment, Prada Group chairman Patrizio Bertelli said—causing even once-hot brands like the company’s namesake label to lose momentum.

• Prada brand sales fell 3.6% in Q2, although the company’s net sales were boosted by Miu Miu’s 40% surge.
• While Prada remains one of the few luxury companies to be growing across all geographies, sales in Europe, Asia-Pacific, and Japan were all softer than expected.

The headwinds: Most luxury companies—with the notable exceptions of Hermès and Richemont—are struggling to convince increasingly pessimistic consumers to open their wallets, whether at home or abroad.

• Prada, Kering, and LVMH all cited a slowdown in tourism spending as a significant headwind in the first half of the year—particularly in Europe and Japan, where unfavorable exchange rates are diminishing US and Chinese consumers’ desire to purchase designer products.
• Geopolitical and economic uncertainty are dimming luxury’s allure to all but the wealthiest shoppers. Fewer aspirational shoppers are visiting Hermès due to a “global trend to save money rather than to spend it,” CEO Axel Dumas said during the company’s Q2 earnings call. But that weakness was more than offset in Q2 by strength from loyal Hermès customers, whose healthy spending drove a 9% increase in sales at constant exchange rates.
• China remains a significant challenge. Confidence is weak due to the country’s economic challenges, while the government’s stimulus measures have yet to unlock meaningful increases in luxury spending.

The tariff question: The Trump administration’s trade agreement with the EU is both a relief and a challenge for luxury brands. While the tariff rate of 15% is higher than the 10% companies are paying now, it’s significantly less than the 30% President Donald Trump previously threatened.

• Zegna is “not worried about the tariffs,” chairman and CEO Gildo Zegna told WWD, because they’re at “a level that we can absorb.”
• Virtually every luxury brand plans to pass on some or all of the tariff costs to their customers, who are generally less price sensitive—although that strategy will test the pricing power of brands like Gucci, Yves Saint Laurent, and Chanel, which are struggling to get shoppers interested in their products following years of price hikes.
• While companies in other sectors boost their US manufacturing to minimize tariff exposure, that’s not an option for most luxury brands, who see their European pedigree as important to maintaining their cachet.

Our take: Luxury companies for the most part view the current downturn as a cyclical blip in an otherwise robust industry. But the prolonged slump is revealing structural challenges—namely, heavier reliance on American and Chinese consumers, as well as a tendency to lean on price hikes rather than innovation to drive sales.

While there’s no getting around the fact that the US and China are the two largest markets for luxury goods, companies should deepen their presence in fast-growing regions like the Middle East, India, and Southeast Asia, where there is strong interest and a rising number of affluent customers.

Brands also can’t afford to play it safe with design. Those willing to push the envelope, like Miu Miu and Loewe, are outperforming the rest of the industry and winning over younger generations of shoppers.