'Business of Fashion' and McKinsey Release "The State of Fashion: Luxury"

Over the past five years, the luxury industry experienced a period of exceptional value creation. Between 2019 and 2023, unprecedented demand for personal luxury goods — fashion, handbags, watches and jewelry among them — combined with a deep well of supply allowed the sector to achieve a 5 percent compound annual growth rate. Luxury brands outperformed global markets and achieved new profitability records.

The pace of growth across the industry was remarkable and swift, though luxury “megabrands” with annual revenues over €5 billion ($5.3 billion) used their global presence to drive even greater visibility and desirability. Price increases accounted for more than 80 percent of growth during this period, while volume gains were more moderate.

Now, as we step into 2025, the luxury industry is facing a significant slowdown that has hit even top brands hard. For the first time since 2016 (excluding 2020), luxury value creation declined.

Several of the industry’s growth-driving engines have stalled. Macroeconomic headwinds — especially in the key China market, which grew more than 18 percent annually from 2019 to 2023 — are weighing heavily on the sector.

Meanwhile, the luxury client base is becoming more diverse, and clients have a more complex relationship with luxury goods than ever. To that end, one challenge luxury players face is how to engage younger clients without alienating older ones, both through the products brands create as well as through their marketing strategies. Additionally, customers of all ages are becoming more interested in luxury experiences, not just luxury goods. This dynamic creates new trade-offs for clients to consider, meaning personal luxury goods players must exceed higher-than-ever client expectations to win spend over luxury travel and wellness experiences, for example.

But luxury’s woes are also partly self-inflicted. The sector’s rapid expansion over the last five years has led to overexposure and weakened the industry’s promise of exclusivity, creativity and craftsmanship. As demand surged, brands increased prices but failed to sufficiently adapt their creative strategies and supply chains to meet new scale requirements, thereby weakening their core value proposition and, ultimately, failing to keep their promise to customers.

As a result of these strategic choices and economic headwinds, growth in the years ahead will be slower. We expect global luxury sales to expand between 2 and 4 percent annually from 2025 to 2027, recovering modestly from 0 to 2 percent year-on-year growth in 2024. Dynamism in emerging markets such as the Middle East, India and other Asia-Pacific regions will not compensate for single-digit growth in luxury’s core markets such as China and Europe, though we are more bullish on the US where we expect better overall perspectives. With sector recovery out of reach until late 2025 or 2026, the industry must use the slowdown as an opportunity to reflect and recalibrate. Luxury leaders must play a long game rather than relying on quick fixes to their most pressing challenges.

Now is the time to take bold risks, rebuild connections with clients and invest in the critical areas of your business — even if the returns may not be immediate. In our view, there are five strategic imperatives for luxury executives in the coming years:

1. Conduct a strategic reset

• Clarify core values and align on priority clients to sharpen the brand’s long-term strategy and differentiated value proposition, including assortment, communication, price architecture and experience.
• Review the synergies large groups may achieve by launching initiatives jointly, be it on growth acceleration or cost excellence.

2. Restore product excellence

• Continue to invest resources in creating iconic products that will resonate with target clients and uphold luxury’s promise of quality and value.
• Realign business scale with craftsmanship heritage by investing in long-term supply chain stability (through vertical integration, for example) and by implementing best-in-class sourcing and manufacturing practices.

3. Rethink customer engagement strategy

• Continue to develop unique “money-can’t-buy” experiences, both in and outside of stores, for the most loyal and most promising clients that have been underserved in recent years. These experiences must align with the brand’s ethos, and not simply chase the latest trends. Develop new client acquisition strategies.
• Invest in tech, AI and data capabilities to uncover powerful customer insights to help better personalise customer journeys.

4. Bridge the talent capability gap

• Attract, develop and retain the best talent across every critical function, not just in creative roles. Evolve corporate cultures and update operating models to align with the business’s growing scale and complexity, and potential succession planning.
• Professionalise operations across major business units — including digital, data, technology, supply chain and procurement — by emulating best practices from other sectors, while looking outside luxury to find talent to help bridge the capability gap.

5. Futureproof the portfolio

• Review exposure to different luxury categories and regions (within large groups). Define a clear role and goals for expansion to adjacent categories, including travel and hospitality, to maximise client engagement without neglecting the core business. Allocate focus and resources to these new ventures without impacting the core business.
• Seek complementary acquisitions to build resiliency and secure a competitive edge in a more consolidated market. The nature and scale of these shifts will likely continue to recompose the industry.

The luxury industry is at a critical juncture. Executives — should they lead with vision, creativity and a renewed commitment to excellence, while also focusing on long-term investments and multi-year initiatives — can ensure the continued success and growth of their brands. If they do not make these necessary changes, they risk sacrificing brand relevancy and market share for years to come.

Source: BOF