According to “The State of Fashion 2023” report by Business of Fashion and McKinsey & Company, while 56% of fashion industry leaders are anticipating a growth slowdown in the upcoming year, the luxury sector is expected to remain resilient. The report highlights the markets and challenges that lie ahead for the luxury sector, as described by Achim Berg, Senior Partner and Global Leader of McKinsey’s Apparel, Fashion and Luxury Group.
One of the factors that explain the potential growth disparity between luxury and the global fashion industry is the current inflationary context and the resulting consumption slowdown. This affects different customer segments in various ways. With higher disposable income and savings accumulated during the pandemic, the affluent cohort of luxury consumers is expected to be more insulated than the rest of the market. Historical data also indicates that the luxury sector tends to rebound better compared to other businesses during slowdowns. However, reaching younger and more ambitious customer groups who have recently become interested in luxury brands may prove to be more challenging.
Despite economic turbulence, luxury houses have experienced strong growth in 2022. While there may eventually be some impact on the luxury sector due to the current economic context, early signs of a demand slowdown in the US based on available credit card data indicate that the luxury segment will still perform significantly better than the rest of the market next year.
In terms of territories that will drive luxury growth next year, the United States is expected to play a major role. The country has shown a strong rebound in the luxury market following the pandemic, reclaiming its position as the top luxury market globally due to high levels of savings. The US is forecasted to grow faster than Europe, driven by a larger share of wealthy individuals and better overall economic prospects. Europe, although not the main driver of market growth, may still benefit from the sustained spending of wealthy tourists from the US and the Middle East.
China presents some uncertainty for the luxury market as a whole, but it is believed that luxury will continue to absorb the repatriation of spending since the resumption of international travel is not expected in 2023. The growth in China will depend on factors such as the evolution of Covid-19 outbreaks and the broader economic context, including the real estate market. The performance of other Asian luxury regions like Japan and South Korea will be interesting to follow, as these countries have shown resilience in recovering from the health situation through domestic demand.
In addition, the Middle East is expected to have dynamic demand for luxury products, with major luxury markets like the United Arab Emirates, Saudi Arabia, and Qatar benefiting from the maintenance of high oil prices.
Looking ahead to the challenges for the luxury industry in 2023, one of the key concerns for luxury brands lies in finding new engagement models. Luxury houses are exploring ways to work with e-retailers to engage consumers, facilitate market access, and add value as the technological landscape evolves. While there is a growing trend towards direct-to-consumer strategies and e-concessions, many luxury brands still rely on wholesale partners to access new customer segments. The industry must navigate the decision on the best way to position themselves and the pace at which they need to adapt to new models compared to traditional approaches.
Brick-and-mortar stores will continue to play a crucial role in the luxury industry, as they serve as key touchpoints to convey a brand’s universe and attract early buyers. Stores are essential in reinforcing brand equity and personalizing the experience for top customers, which is particularly important in the luxury segment.
Another challenge that luxury brands may face in 2023 is related to price positioning. Premiumization strategies and price increases have been observed across the luxury market.
The luxury sector is expected to thrive despite the anticipated growth slowdown in the fashion industry. However, it will face its own set of challenges, ranging from finding new engagement models to navigating price positioning. The performance of certain territories, such as the US, Europe, China, and the Middle East, will have a significant impact on luxury growth in the coming year.
Useful Links:
1. Business of Fashion: Most of Fashion Industry Braces for Growth Slowdown in 2023
2. McKinsey & Company: The State of Fashion 2023 – Recovery with a Purpose
