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McKinsey: Industry Bracing for a Slowdown

The bumpy road to recovery from the Covid crisis is now leading the fashion industry toward a new set of challenges. Geopolitical conflicts and fears of a recession could prolong the sector’s journey back to normalcy, experts and executives believe.

More than half of the industry’s leaders (56 percent) are bracing for a slowdown in 2023, according to McKinsey’s State of Fashion report, released with Business of Fashion this week. A confluence of factors including the ongoing war in Ukraine, rising inflation and lingering supply chain sluggishness have painted a stark picture for the upcoming 12 months.

“Just as the fashion industry was about to recover from Covid-19,” with global sector revenue blossoming by 21 percent in 2021, and average EBITA margins up by six points, “the deteriorating macroeconomic and geopolitical conditions have weighed heavily on the industry in the second half of 2022,” McKinsey global leader of apparel, fashion and luxury Achim Berg said. “While the industry’s strong performance—with 13-percent revenue growth in the first half of 2022—provides a solid foundation, we expect 2023 to remain challenging.”

The fragility of the global economy stands to have a tangible impact; 85 percent of executives surveyed for the report believe inflation will remain a challenge in the year ahead, and 58 percent said the energy crisis will continue to erode the market, with global GDP growth expected to slow to about 2.2 percent. The vast majority (85 percent) believe market conditions will either decline or hold steady next year—notable in contrast to the optimism they felt heading into 2022, when 91 percent predicted steadiness or improvement.

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McKinsey’s market assessment underscores their grim outlook, with industry sales projected to grow at a slower rate than 2022. The group expects to see -2 percent to +3 percent growth across the industry in the year ahead, and figures stand to see distortion due to inflation, with a sizable share of sales impacted by rising business costs and MSRPs. The sector could even see a decline in sales volume, “which has not happened for many years,” analysts wrote.

Outcomes will likely vary across the globe, with certain regions hit harder than others. U.S. retail executives, feeling that their companies are more shielded from the conflict in the Ukraine and pandemic challenges, were more optimistic—61 percent said they expect that conditions will remain the same, or even improve, next year. “U.S. retail sales are expected to close 2022 on a two-decade high, building a strong foundation heading into 2023,” Anita Balchandani, senior partner and head of McKinsey’s apparel, fashion and luxury group for EMEA, said.

Leaders in Europe (64 percent) and Asia (53 percent) were decidedly less bullish, saying they foresee worsening conditions for their businesses. “Our report indicates that the current economic environment is creating a shift in regional dominance,” Balchandani added. Long considered the industry’s growth powerhouse, China is slated to see a backslide in 2023, with GDP growing by just 3.2 percent compared to an 8.1 percent rise in 2021. The country’s zero-Covid policies have stymied both commerce and supply chain recovery in the country, “leading some fashion executives to seek out opportunities elsewhere, at least over the short term.” More than three-fifths (65 percent) said they were mulling shifts in sourcing to nearshore locales to better serve their domestic markets.

Protesters against China's Zero Covid policy confront security officers in Beijing on Nov. 28.
Protesters against China’s Zero Covid policy confront security officers in Beijing on Nov. 28. Kyodo via AP Images

A “modest” recovery in China is expected in 2023, according to McKinsey, and will be tied heavily to the country’s luxury sales. Luxury stands to grow by 9 percent to 14 percent in 2023, compared with non-luxury fashion categories, which are projected to see just 2 percent to 7 percent growth next year. Characterizing Europe’s prospects as “particularly gloomy,” the group said the region’s GDP is expected to grow by just 1 percent in 2023, with inflation further undercutting consumer confidence. Like China, Europe’s luxury sales will see the bulk of sales growth (3 percent to 8 percent), backed by wealthy tourists from the U.S. and Middle East resuming travel. Non-luxury fashion could see sales growth as low as -4 percent to +1 percent, as shoppers continue to feel stretched by gas prices and lapsing government assistance programs.

The report’s “superwinners” largely reflect the data trends. Nike held on to the No. 1 spot globally, but is now followed by LVMH, which beat out Zara owner Inditex. Luxury firms Kering and Hermès rounded out the top five, ousting Marshalls, TJMaxx and Homegoods owner TJX. Lululemon, China’s Anta Sport, JD Sports, Deckers and first-time listmakers Dick’s Sporting Goods and VF Corp underscored the continued resonance of activewear in a landscape where the new normal is defined by more time outside of the office.

Changes in the way consumers interact with brands also contributed to a shuffle of the superwinners, with online retailers Zalando and Next falling off the top 20 list—a likely result of physical retail’s rebound. According to analysts, the market capitalization of web-based players plummeted in the second half of 2021 despite a meteoric rise during the early days of Covid.

“By the first quarter of 2022, they were valued well below the rest of the industry and have since suffered while the index otherwise stabilized,” analysts said (though notably, digitally native fast fashion juggernaut Shein—said to be valued at $100 billion earlier this year—was excluded from the research). One-third of executives pointed to direct-to-consumer channels as one of the top issues in need of attention in 2023, whether due to stagnating growth or the heightened cost of digital marketing and consumer acquisition, which has tripled in cost since 2013.

Executives said that sustainability—and communicating their ESG efforts effectively to shoppers—represents the biggest opportunity for brands in 2023. The sector continues to contend with its damaging impacts to people and the planet, with many brands investing heavily in material innovation, smarter sourcing, energy efficiency and recycling. Still, leaders know their sustainability credentials are facing increased scrutiny as shoppers sniff out greenwashers, and 79 percent said the greatest hurdle to improving consumer confidence was the lack of industry-wide standards to level the playing field across the space.

Emerging and upcoming governmental regulation stands to push more players into compliance. France is expected to pass legislation requiring brands to label their products with a standardized environmental score to help consumers make more informed purchases. The U.K.’s Competition and Markets Authority launched a review of fashion sector sustainability claims this year, calling out fast fashion brands that it said were using misleading verbiage to describe their efforts, leading to an industry-wide call to end greenwashing.

Meeting consumer demand and government regulation will involve transparency from the industry, which is increasingly investing in tools to promote transparency across their operations. “Before brands can accurately talk about their credentials, they should dig deep into their own operations and supply chains to gather data that they can benchmark effectively,” analysts said.

“Fashion leaders have an opportunity in 2023 to forge new rules of engagement when it comes to sustainability,” they added, “from aligning companywide marketing as well as regulatory and other disclosures to working with policymakers, industry bodies and other brands to address pain points.”