Luxury fashion needs to reiterate its value proposition for aspirational, affluent and wealthy consumers
Luxury fashion will continue to face a major slowdown, with the lowest growth figures in the past five years.
The State of Fashion: Luxury, a new report from The Business of Fashion and McKinsey & Company, reveals that luxury sector growth has stalled for the first time since 2016, with just 2-4 percent growth predicted per year between 2025 and 2027. The report explores how the industry can navigate the slowdown ahead.
“The luxury slowdown is here to stay, and sector recovery is not expected until late 2026,” said Imran Amed, founder/CEO of The Business of Fashion, in a statement.
“It is clear that the strategies that helped to drive significant growth over the last five years will not suffice moving forward,” he said. “Luxury executives need to use this time to refocus on creativity, value and innovation to navigate the challenging market ahead.”
The State of Fashion: Luxury is based on research and proprietary data, including 250 interviews conducted with luxury clients across six markets, a survey of 6,000-plus luxury customers and analysis of more than 10,000 social posts.
Critical inflection point
Between 2019 to 2023, the luxury fashion industry grew rapidly, reaching record profitability and outpacing GDP growth.
However, 2025 marks an inflection point for the sector as this growth trajectory has begun to stall, ushering in a major slowdown that will force brands to rethink previously successful strategies and tried-and-tested formulas.
Sector growth slowed in 2024 to just 0-2 percent.
For the first time since 2016 – excluding 2020 – luxury value creation declined.
The report predicts muted growth of just 2-4 percent per year between 2025 and 2027, considerably more modest than previous years.
The report suggests the sector will not recover until at least late 2026.
Slowing growth causes concern in industry
Macroeconomic and geopolitical pressures are dampening the sector, deepening pessimism among executives.
Forty-three percent believe conditions will worsen in the year ahead, while only 21 percent anticipate improvement.
Amid slower sales growth, luxury brands are prioritizing cost efficiencies and curtailing spend in other areas to safeguard profitability.
Economic instability in China, typically one of the most reliable markets for luxury, triggered a dip in consumer spending and led to a decline in the Chinese luxury market.
Pressures on luxury consumers will drive behavior change
Despite previously relying on price increases to drive growth, brands can no longer count on this strategy.
Customers across luxury price segments are fed up with rising prices, with 80 percent of UHNW luxury clients expressing dissatisfaction with continued price hikes.
This suggests luxury clients are scrutinizing the value of luxury goods, questioning product innovation and craftsmanship which is at the cornerstone of luxury’s competitive advantage.
Frustrated by rising prices, customers are pressuring brands to look for alternative profit drivers, with the majority of brands aiming to increase product volumes instead of prices: 66 percent of executives plan to increase product volume to drive growth over the next year, compared to 55 percent who plan to increase prices.
Increasing volumes often conflicts with the values of exclusivity and sustainability that define luxury, requiring brands to carefully balance sales growth with maintaining their premium appeal.
Eighty percent of HNW customers plan to reallocate part of their spend towards travel and wellness instead of luxury goods, creating challenges for brands without diversified luxury portfolios.
Furthermore, half of global luxury consumers (50 percent) say sustainability is extremely important to them.
Recent controversies in luxury manufacturing and growing skepticism about greenwashing have intensified customer scrutiny of ethical craftsmanship.
Areas of opportunity
The United States will emerge as luxury’s growth engine, outstripping growth in Europe and China.
The report predicts the U.S. luxury market will grow by 4-6 percent per year through to 2027.
Additionally, the U.S. is expected to benefit from decreasing inflation rates and an increase in the ultra-high net worth (UHNW) population, which is projected to grow 5 percent annually between 2023 and 2028.
Smaller luxury markets will also play a more central role.
For example, the report projects Japan’s luxury sector will grow 6-10 percent in 2025, solidifying its reputation as a valuable luxury market with a healthy balance of domestic and tourism spend.
Wealthy clients with a high propensity to spend will remain a priority for luxury brands.
The report predicts top-spending clients will create up to 80 percent of global market growth through 2027.
The focus on top-spending clients will intensify competition between brands, prompting new strategies to attract UHNWIs while nurturing aspirational shoppers as the next generation of loyal clients.
The report outlines five priorities for leaders to address at this critical time for the sector.
- Conduct a strategic reset to clarify core values and align on priority clients to sharpen the brand’s long-term strategy.
- Restore product excellence and create products that will uphold luxury’s promise of quality and value.
- Rethink customer engagement with strategies that create unique experiences for the most valuable clients, and invest in tech to uncover powerful customer insights.
- Bridge the talent capability gap by looking outside of luxury to find new talent, while evolving corporate cultures to align with the growing scale and complexity of the business.
- Futureproof the portfolio by defining clear goals for expansion into adjacent categories, such as travel and hospitality, to maximize client engagement with the brand.
THE LUXURY INDUSTRY is at an important inflection point, said Gemma D’Auria, senior partner and global leader of McKinsey’s apparel, fashion and luxury sector, in a statement.
“Executives will need to pivot their strategies, address some of their existing challenges, and play the long game,” she said.
“While returns might not be immediate, there is an opportunity for luxury brands to reflect and recalibrate, focusing on a few strategic imperatives as a guide for sustained growth.”