In 2023, the global fashion industry will need to weather inflation while finding opportunities in shifting consumer patterns, channel and digital marketing strategies, and manufacturing approaches. Download The State of Fashion 2023
After experiencing 18 months of robust growth (early 2021 through mid-2022), the fashion industry is again facing a challenging climate. Hyperinflation and depressed customer sentiments have already resulted in declining growth rates in the second half of 2022. We expect that the slowdown is likely to continue through 2023.
Many industry players are in a stronger position than they were a year ago, however. The fashion industry delivered a 21 percent increase in revenues in 2020–21, and EBITA margins doubled by 6 percentage points to 12.3 percent.
Looking forward, we anticipate that the luxury sector will outperform the rest of the industry, as wealthy shoppers continue to travel and spend, and thus remain more insulated from the effects of hyperinflation. Based on McKinsey’s analysis of fashion forecasts, the luxury sector is expected to grow between 5 and 10 percent in 2023, driven by strong momentum in China (projected to grow between 9 and 14 percent) and in the United States (projected to grow between 5 and 10 percent). Europe, on the other hand, is under high pressure from currency rates and a growing energy crisis, which are likely to result in modest sales growth for the luxury sector (projected to grow between 3 and 8 percent).
The fashion market, excluding the luxury sector, will struggle to deliver significant growth in 2023. McKinsey analysis of fashion forecasts projects relatively slow sales growth of between –2 and +3 percent, weighed down by a contraction in the European market (expected to shrink between 1 and 4 percent) (exhibit). China and the United States are expected to fare better, growing between 2 and 7 percent and between 1 and 6 percent, respectively. These forecasts are reflective of inflation and are calculated in local currencies, meaning that the real impact for the sector could be more negative than the figures suggest.
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These are just some of the findings from The State of Fashion 2023, a joint report from the Business of Fashion and McKinsey. The report, the seventh in the annual series, discusses the major themes shaping the fashion economy and assesses a range of possible responses. Reflecting in-depth research and numerous conversations with industry leaders, it reveals the key trends likely to shape the fashion landscape in the year ahead.
Inflation is at the top of executives’ minds for the coming year, according to results from the annual Business of Fashion and McKinsey State of Fashion Survey. They expect that inflation will undercut consumer demand, pushing shoppers to curtail fashion spending or trade down for less expensive products as their energy and grocery bills spike. Fashion companies are also anticipating that inflation will spike their costs, with 97 percent of executives forecasting that their cost of goods sold and SG&A expenses will rise in 2023. Cotton and cashmere prices, for example, have increased 45 percent and 30 percent year on year, respectively.1
Fashion leaders are also watching global headlines closely in the year ahead, as macroeconomic and political uncertainties continue to obstruct business operations and escalate reputational risk. The war in Ukraine is of high concern to the industry, having already disrupted trade routes and triggered an energy crisis that will continue to have impact. In China, further COVID-19 outbreaks and the real estate crisis have undermined the region’s growth trajectory, as well as disrupted supply chains. Meanwhile, extreme weather is negatively affecting supply chains and raw materials across Asia.
This global economic gloom is increasingly reflected in consumers’ shopping habits, and the fashion industry is expecting that demand will be weakened or unpredictable in the year ahead. We foresee that the differences between the shopping habits of low- and high-income households will become more pronounced, as cost-conscious customers are likely to cut back or trade down. Meanwhile, shoppers for luxury items will likely continue to spend largely as they have been, insulated from the impact of the economic slowdown.
Ten issues for 2023
This year’s report presents a difficult outlook ahead, as fashion companies face challenges and revise forecasts downward after an exceptionally strong 2021, per McKinsey analysis of global data in the fashion industry. Inflation and geopolitical concerns dominate the agenda for 2023, negatively affecting both consumer demand and brands’ operating costs. Consumers are adjusting their behaviors, as many trade down to cheaper or discounted items to reduce their spending, though the luxury sector will remain strong, with affluent consumers less heavily affected by inflation.
Fashion companies that can adapt to the increasing complexity by updating their operating models and adjusting their strategies for supply chain, sales channels, and digital marketing will be best placed to weather the upcoming storm. They can lean into the following ten emerging consumer trends:
- Global economy:
- Global fragility. Amid the highest inflation in a generation, rising geopolitical tensions, climate crises, and sinking consumer confidence in anticipation of an economic downturn, the global economy is in a volatile state. Fashion brands will need careful planning to navigate the many uncertainties and recessionary risks that lie ahead in 2023.
- Regional realities. Understanding where to invest around the world has never been easy, but rising geopolitical uncertainty and uneven economic recoveries related to the COVID-19 pandemic, among other factors, will likely make it even more challenging in 2023. Brands can reevaluate regional growth priorities and hone their strategies so that they are more tailored to the geographies in which they operate.
- Consumer shifts:
- Two-track spending. Consumers may be affected differently by the potential economic turbulence in 2023. Depending on factors such as disposable income level, some will postpone or curtail discretionary purchases; others will seek out bargains, increasing the demand for resale, rental, and off-price products. Fashion executives should adapt their business models to protect customer loyalty and avoid diluting their brands.
- Fluid fashion. Gender-fluid fashion is gaining greater traction amid changing consumer attitudes toward gender identity and expression. For many brands and retailers, the blurring of the lines between men’s wear and women’s wear will require rethinking their product design, marketing, and in-store and digital shopping experiences.
- Formal wear reinvented. Formal attire is taking on new definitions as shoppers rethink how they dress for work, weddings, and other occasions. While offices and events will likely become more casual, special occasions may be dominated by statement-making outfits that consumers rent or buy to stand out when they do decide to dress up.
- Fashion system:
- Direct-to-consumer reckoning. Although brands across price segments and categories have embraced digital direct-to-consumer channels, mounting digital marketing costs and e-commerce readjustments have put the viability of the model into question. To grow, brands will likely need to diversify their channel mix, including wholesale and third-party marketplaces, alongside direct-to-consumer models.
- Tackling greenwashing. As the industry continues to grapple with its damaging environmental and social impact, consumers, regulators, and other stakeholders may increasingly scrutinize how brands communicate about their sustainability credentials. If brands are to avoid greenwashing, they must show that they are making meaningful and credible change while abiding by emerging regulatory requirements.
- Future-proofing manufacturing. Continued disruptions in supply chains are a catalyst for a reconfiguration of global production. Textile manufacturers can create new supply chain models based around vertical integration, nearshoring, and small-batch production, enabled by enhanced digitization.
- Digital marketing reloaded. Recent data rules are spurring a new chapter for digital marketing as customer targeting becomes less effective and more costly. Brands will need to embrace creative campaigns and new channels, such as retail media networks and the metaverse, to achieve greater ROI on marketing spend and to gather valuable first-party data that can be leveraged to deepen customer relationships.
- Organization overhaul. Successful execution of strategies in 2023 will in part hinge on a company’s alignment around key functions. Fashion executives need a new vision for what the organization of the future will require, focusing on attracting and retaining top talent, as well as on elevating teams and critical C-suite roles to execute on priorities such as sustainability and digital acceleration.
Looking ahead
Bereft by global risks and uncertainties, leaders in the fashion industry will need to pay careful attention to macroeconomic and political issues in the regions where they produce and sell their products in the year ahead. They will need to develop risk mitigation strategies that can be implemented quickly as conflicts, fiscal policies, and government regulations evolve. Additionally, they will need to think critically about where they operate, looking beyond top-line growth potential when evaluating new and existing foreign markets. Brands can no longer plan on complete political neutrality as their global customer bases become more connected and outspoken.
In 2023, consumers will be unpredictable and fickle. Brands will need to consider carefully the factors that affect shopping behaviors and respond accordingly. Even as many customers reduce spending, brands have an opportunity to keep customers engaged through, for example, rental channels and off-price retailers. But these strategies will require careful execution to ensure that margins and brand reputations are protected. At the same time, brands will need to update their merchandising and design approaches to reflect shifting ideas around gender lines in fashion and dress codes. Daily office attire will become more casual, and special-occasion dress will become bolder.
Despite the economic headwinds ahead, fashion leaders are in a unique position to reevaluate the ways that their brands produce, distribute, and market their collections. Supply chains remain disrupted from the COVID-19 pandemic, elevating the need to invest in faster and geographically closer manufacturing systems. While direct-to-consumer, digital channels remain a top priority, fashion industry leaders will need to diversify their sales channels to maintain efficiency and market relevance. And finally, brands will need to be more creative in marketing to attract customers through bold, differentiated content that cuts through a crowded digital environment in which data targeting is no longer effective. To execute these changes and respond better to forthcoming regulations around sustainability marketing, the fashion industry should rethink how it allocates talent, promotes, and establishes executive roles and teams—reflecting the key challenges facing the industry in the years ahead.
The outlook for the global fashion industry in 2023 is uncertain and tenuous. Many customers are reigning in their budgets after months of discretionary spending. Growth has slowed in China, and major questions loom about the market’s future trajectory. An energy crisis is disrupting European economies. While the luxury and sportswear sectors have dominated the industry’s list of super successes in recent years, macroeconomic context might change that in the upcoming year. Heading into 2023, the industry’s decision makers will need to prepare to make strategic sacrifices while investing in agility and creativity to succeed when the market eventually recovers.
