Despite the dark clouds, recent experience shows how the fashion industry will weather the challenges ahead. In 2022, the fashion industry again proved resilient, nearly matching the record economic profits of 2021, according to the McKinsey Global Fashion Index. Following the pattern of the previous year, the luxury sector performed well, with economic profits increasing by 36%, offsetting weakness in other sectors. But even non-luxury sectors outperformed their long-term averages. Strong margins meant that the fashion industry achieved more than double the economic profits in 2022 compared to all but one year between 2011 and 2020.
In 2023, the industry faced persistent and deepening challenges. Regionally, Europe and the United States experienced slowing growth throughout the year, while China’s initial strength faded in the second half of the year. The luxury sector initially performed well but began to feel the effects of weaker demand in the second half of the year, leading to slowing sales and uneven performance.
Looking ahead to 2024, the most prominent sentiment among fashion industry leaders is uncertainty, reflecting the outlook for slowing economic growth, continued inflation and weak consumer confidence. Against this backdrop, companies will be challenged to identify sources of value and unlock new drivers of performance.
Globally, the fashion industry is expected to record sales growth of 2-4% in 2024, according to McKinsey’s Fashion Forecast analysis (Display), with variations across regions and countries. The luxury segment is again expected to generate the largest share of economic profits. But even there, companies will face the challenge of a tough economic environment. The segment is expected to grow 3-5% globally, compared with 5-7% in 2023, as consumers curb spending after the post-pandemic surge. Growth in Europe and China is expected to slow, while U.S. growth is expected to recover after a relatively sluggish 2023, reflecting a slightly more optimistic outlook.
Non-luxury goods are forecast to grow by 2-4% over the coming year, in line with the outlook for 2023. The European market is likely to expand by just 1-3%, compared to 5% in the first half of 2023 and 1-3% in the second half. Weakening consumer confidence and declining household savings are seen as the most likely causes of the spending restraint. In the United States, the non-luxury sector is forecast to grow by 0-2%. China is expected to face similar challenges with growth of 4-6%, a slight increase from the end of 2023 but still modest growth by historical standards.
These are some of the findings of the “State of Fashion 2024” report published by Business of Fashion (BoF) and McKinsey. The eighth in the annual series, the report discusses the key themes shaping the fashion economy and assesses the industry’s potential response. Reflecting in-depth research and numerous conversations with industry leaders, it uncovers the key trends that are likely to shape the fashion industry in the year ahead.
Uncertainty in the face of headwinds
With conflicts in Europe and the Middle East and international tensions elsewhere, geopolitics is the top concern for fashion executives heading into 2024, followed by economic instability and inflation. Some 62% of executives cited geopolitical instability as the biggest risk to growth in this year’s survey, conducted in September. Economic instability was cited by 55%, and inflation by 51% (up from 78% last year). Global headline inflation, while still historically high, is forecast to ease to 5.8% from 6.9% in 2023.
Against the backdrop of a challenging economic environment, executives’ views on the industry outlook are more divided than in any year since the BoF-McKinsey C-Suite Survey began in 2017. While 26% of survey respondents expect conditions to improve compared to last year, 37% see the situation as unchanged and 38% believe it will worsen.
Uncertainty within the industry reflects the overall economic situation, with regional variations. Going into 2024, pressures on household incomes are expected to dampen apparel demand and drive trade price declines across categories. Still, there are reassuring geographic exceptions, including India, where consumer confidence hit a four-year high in September 2023. India-based executives are more optimistic than their Western counterparts, with 85% of respondents to McKinsey’s Global Economic Intelligence survey saying conditions have improved in the past six months. Despite challenges to the Chinese economy, Chinese consumers have higher fashion purchase intentions in 2024 than their U.S. and European counterparts.
10 themes for 2024
To prepare for challenges and seize opportunities, leading fashion companies will likely prioritize contingency planning for the coming year. A key theme is for companies to maintain tight control over costs and inventory while precisely managing pricing to drive growth. Brands and suppliers can expect an increasingly competitive environment; however, there will also be opportunities as consumers discover new styles, tastes and priorities, providing a path to value creation. As in previous years, this year’s report highlights 10 emerging themes that are key to leadership.
Global economy:
A fragmented future. The global economic outlook for 2024 will remain volatile as financial, geopolitical and other challenges weigh on consumer confidence. Fashion markets in China, Europe and the US are likely to experience headwinds that reflect regional trends. Suppliers, brands and retailers may need to strengthen contingency plans and address uncertainty. Climate urgency. The frequency and intensity of extreme weather-related events in 2023 means the climate crisis is an even more urgent priority than in past years. With physical and transition risks rising across continents, the industry must not delay reducing emissions and building supply chain resilience.
Consumer Changes:
Vacation mode. Consumers are gearing up for their biggest year of travel since pre-pandemic. But shifting values mean that even though shopping remains a priority, expectations are shifting. Brands and retailers will need to revamp their distribution and category strategies to reflect the new reality. The new faces of influence. As new creative personalities gain fans, it’s time for brand marketers to update their influencer playbook. Working with thought leaders in 2024 will require different types of partnerships, an emphasis on video, and a willingness to loosen the reins of creative control. Reinventing the outdoors. As consumers embrace healthier lifestyles, demand for technical outdoor wear and “goopcore” is growing. In 2024, we expect more outdoor brands to launch lifestyle collections. At the same time, lifestyle brands are likely to incorporate technical elements into their collections, blurring the line between functionality and style.
Fashion System:
A creative crossroads for generative AI. As generative AI (gen AI) breaks out in 2023 and beyond, more use cases will emerge across the industry. To capture value, the fashion industry must look beyond automation and explore the potential for gen AI to augment the work of human creators. A power play in fast fashion. The fast fashion race is set to be more intense than ever. Challengers led by Shein and Temu bring new tactics around price, customer experience, and speed. The success of disruptors and incumbents will depend on their ability to adapt to new consumer preferences while navigating regulatory challenges. Spotlight on brands. As the fashion industry successfully pivots away from performance marketing, brand marketing is expected to return to the spotlight. As marketers rewrite the playbook to emphasize long-term brand building, brands could benefit from building an emotional connection with consumers. Rules for sustainability. The era of self-regulation in the fashion industry is coming to an end. Across jurisdictions, new rules will have significant implications for both consumers and the fashion industry. Brands and manufacturers may consider rethinking their business models to accommodate the upcoming changes. The Bullwhip Recoils: Shifts in consumer demand create a “bullwhip effect,” where order volatility ripples unpredictably throughout the supply chain. Suppliers may come under pressure as brands and retailers focus on transparency and strategic partnerships.
Looking to the future
As the industry continues to face geopolitical and economic headwinds, fashion leaders in 2024 will aim to strike a careful balance between managing uncertainty and seizing opportunities. With cost-cutting measures nearly exhausted, companies are likely to focus on increasing sales, supported by new pricing and promotional strategies. According to the BoF-McKinsey Executive Survey, the net intention to increase prices is over 50% across the industry. At the same time, reduced cost pressures could lead to improved performance.
As climate change leads to more extreme weather and rising global temperatures, the coming year is poised to see increased industry attention on environmental, social and governance issues. Our research shows that this issue is seen as both a top priority and biggest challenge for industry executives. The most successful companies will be those that balance sustainability efforts, risk management and commercial imperatives.
In an uncertain world, consumer discretionary spending will skew toward trusted categories and brands. Luxury items such as jewelry, watches and leather will likely see increased demand, reflecting their potential investment value in tough economic times. Consumers are expected to continue to travel more and spend more time outdoors, and they will favor emotional connections and authenticity over celebrity endorsements.
Ultimately, executives are preparing for a strategically complex year. As they navigate uncertainty, leading companies will prepare for a range of outcomes. The most successful companies will emerge more resilient, better equipped to meet challenges, and ready to accelerate when the storm clouds begin to clear.
