The State of Fashion 2023: Resilience in the Face of Uncertainty

We have released The State of Fashion 2024 by The Business of Fashion and McKinsey & Company. Download The State of Fashion 2024 now to explore the 10 themes that will define the industry in the year ahead.

Just as the fashion industry was beginning to find its feet after Covid-19′s turmoil, the later months of 2022 seem determined to throw brands and retailers off course again. Deteriorating macroeconomic and geopolitical conditions have weighed heavily on the industry in the second half of the year and continue to leave fashion executives on edge as they look towards 2023.

However, much of the industry is entering this difficult period with strong foundations, having experienced impressive growth in 2021 and in the first half of 2022. As economies around the world began lifting restrictions in 2021 after enduring the pandemic’s devastation, the fashion industry benefitted from a burst of pent-up consumer demand, despite some challenges remaining, like supply chain disruptions. Global industry revenues in 2021 grew 21 percent year on year, while the average EBITA margin close to doubled, growing 6 percentage points. The industry continued its strong performance in early 2022, with 13 percent revenue growth in the first half of the year.

More than 50 percent of the companies tracked by the McKinsey Global Fashion Index contributed to the industry’s total economic profit in 2021, compared to just 32 percent in 2020. The proportion of value destroyers (companies generating negative economic profit) has thus fallen to its lowest since 2013. Our roster of fashion “Super Winners” — the top 20 listed companies by economic profit — comprises many of the usual suspects from the luxury and sportswear categories, while players in the discount segment have also climbed up the list.

But some of these gains were chipped away as 2022 progressed. The war in Ukraine, which started in February, triggered a string of events, including an escalating energy crisis across Europe. Troublesome inflation in many major economies led central banks to roll out back-to-back interest rate hikes, ending a lengthy period of ultra-low and even negative rates, in a bid to temper rising prices and help steer economies away from recession.

Looking ahead to 2023, the drivers contributing to a broad state of global fragility are top of mind for fashion executives. In the BoF-McKinsey State of Fashion 2023 Survey, 85 percent of fashion executives predict inflation will continue to challenge the market next year. Meanwhile, geopolitical tensions, specifically around the ongoing war in Ukraine, have disrupted supply chains and created an energy crisis that 58 percent of executives also believe will weaken the fashion market.

In aggregate, McKinsey expects global fashion sales growth of 5 percent to 10 percent for luxury, and negative 2 percent to positive 3 percent for the rest of the industry in 2023, while the dichotomies that previously defined the fashion business are expected to return. Beyond the differences between luxury and players from other segments, regional differences will be pronounced. The US economy, despite the slowdown, is expected to be more robust than other major global economies — Covid-19 outbreaks and precautions continue in China, while Europe suffers from an energy crisis and a weakened euro against a strong US dollar.

Against this backdrop, the world map for industry growth is shifting. Markets that once showed solid growth potential are now facing a wider range of risks than they once did, ranging from extreme weather conditions to political or social unrest. Other regions such as the Middle East may become new havens of growth, requiring brands to further localise designs, marketing and merchandising to attract new customers. But as fashion executives assess what the new regional realities mean for their businesses, their scenario planning will need to factor in more than financial risks and opportunities.

Fashion companies will need to rethink their operations. Many will update their organisational structures, introducing new roles or elevating existing ones to target key growth opportunities and respond more effectively to risk. Brands may also choose to see the next year as a time to team up with manufacturing partners to sharpen their supply chain strategies. This may involve nearshoring to better respond to fast-shifting consumer demand or leaning more heavily on data analytics and technology to manage inventory efficiently.

Distribution channel mixes are also ripe for reassessment. As e-commerce growth normalises after its pandemic boom, the sheen has started to wear off the direct-to-consumer digital model that propelled many brands over the past decade. As lockdown restrictions lifted, shoppers have made it clear that although they still value online channels — particularly within luxury, where online DTC and third-party platforms will continue to drive growth — shoppers also want brick-and-mortar experiences. Brands will also need to factor in the continued return of international travel to pre-pandemic rates, which will be buoyed by a strong US dollar. Wholesale and physical retail have a new role in revamping customer journeys, requiring brands to look beyond tier-one cities to be physically closer to consumers.

Brands will have to work hard to remain attractive to consumers, given the tough economic environment. Consumer behaviours in 2023 will depend greatly on household incomes. While higher-income households will be less affected by economic pressures and look likely to continue shopping for luxury goods, as in previous downturns, lower-income households will likely cut back or even eliminate discretionary spending, including apparel. Some will trade down, pivoting to value retailers, marked-down items and off-price channels while eschewing full price, premium and mass brands.

All this elevates the importance of brands’ marketing strategies. Brands should use the year ahead to innovate their digital marketing. Budgets will shift to alternative channels that could generate better return on investment than paid social media ads, such retail media networks, while building stronger brand communities. This will feed into distribution channels, as brands will need to seek higher margins and gather more first-party customer data.

Executives are bracing for a tough 2023; leading brands will deploy realistic but bold strategies that combine careful cost control with strategic investments in skills growth.

How brands manage and communicate about issues that are important to consumers will also be critical. Consider sustainability. New and emerging regulations along with heightened consumer awareness of fashion’s contribution to the climate crisis mean that brands will need to be hyper-vigilant about how they talk about their sustainability-related initiatives and achievements to ensure they are not “greenwashing,” which could potentially lead to reputational damage or costly fines.

Brands that effectively navigate industry challenges in 2023 will be better positioned to seize consumer trends. Coming out of the pandemic, formal dress codes remain disrupted, pushing brands to rethink office and special occasion attire. Meanwhile, consumers are increasingly shopping across gender categories, and brands that can adapt their merchandising strategies accordingly will be able to strengthen their relationships with a wider range of consumers.

Executives are bracing for a tough 2023; leading brands will deploy realistic but bold strategies that combine careful cost control with strategic investments in skills growth. Those that recognise that growth will be unpredictable or muted, but still charge forward with investments in innovation throughout their organisations, will find they are in a stronger position to accelerate their businesses when the uncertainty and fragility subside.

The 10 fashion industry themes that will set the agenda in 2023:

1. 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.

2. Regional Realities

Understanding where to invest globally has never been easy but rising geopolitical uncertainty and uneven post-pandemic economic recoveries, among other factors, will likely make it even more challenging in 2023. Brands can re-evaluate regional growth priorities and hone their strategies so they are more tailored to the geographies in which they operate.

3. Two-Track Spending

Consumers may be impacted differently by the potential economic turbulence in 2023. Depending on factors including disposable income levels, some will postpone or curtail discretionary purchases; others will seek out bargains, increasing demand for resale, rental and off-price. Fashion executives should adapt their business models to protect customer loyalty and avoid diluting their brands.

4. Fluid Fashion

Gender-fluid fashion is gaining greater traction amid changing consumer attitudes towards gender identity and expression. For many brands and retailers, the blurring of the lines between menswear and womenswear will require rethinking their product design, marketing, and in-store and digital shopping experiences.

5. Formalwear Reinvented

Formal attire is taking on new definitions as shoppers rethink how they dress for work, weddings and other special 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.

6. DTC Reckoning

Though 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 DTC model into question. To grow, brands will likely need to diversify their channel mix, including wholesale and third-party marketplaces, alongside DTC.

7. Tackling Greenwashing

As the industry continues to grapple with its damaging environmental and social impact, consumers, regulators and other stakeholders may increasingly scrutinise 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.

8. 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 digitisation.

9. 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 embrace creative campaigns and new channels such as retail media networks and the metaverse to achieve greater ROI on marketing spend and gather valuable first-party data that can be leveraged to deepen customer relationships.

10. Organisation 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 organisation of the future will require, focusing on attracting and retaining top talent, as well as elevating teams and critical C-suite roles to execute on priorities like sustainability and digital acceleration.