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I'm Lucia Raheli and I'm Roberta Fisara.
Geopolitics is a very important exogenous factor that is going to have an impact on this industry.
adaptability, is going to be very important because whatever course of action you take, you may need to revise and course correct.
That's McKinsey senior partner, Gemma Dauria.
She's here to talk about the evolving tastes of consumers and the state of fashion generally based on our recently published report.
But first, we want to let you know that Lucia and Gemma spoke before the current spate of tariffs were initiated.
So, tariffs aren't discussed much in this episode.
But if you go to mckenzie .com and search tariffs and geopolitics, you'll find more information on how businesses can respond in this volatile environment.
Also check out our show notes for links to recent articles on the topic.
Obviously this is a fast -changing situation and we do have more research and analysis coming, so stay tuned.
And with that, let's turn to our conversation about the state of fashion.
Gemma, welcome to the podcast. Thank you.
It's great to be here.
So all of us today are confronting a world in flux, given geopolitical and macroeconomic volatility, and AI potentially disrupting the way we work and shop.
How do these dynamics combine to affect the overall outlook for the fashion industry in 2025?
It is going to be a very challenging year.
So we look at three broad regions, right?
We look at Europe, we look at the US, we look at China.
We also, of course, do estimates for the rest of the world, but we focus on these three and what we see here is that in Europe, we think that there is going to be fairly sluggish growth.
The outlook is not super rosy because in many parts of the world, consumer confidence is low.
So what we have seen is a real shift by the consumer towards value.
What we mean by value is not just price but really perceived value for what they're paying.
This is already having an impact.
I just give you one phenomenon.
In the U .S. today, one of three consumers we surveyed has purchased a dupe in the last 12 months.
And talk about what a dupe is, what that means, the dupe phenomenon.
So a dupe is a extremely well -made lookalike of a luxury product.
And when they say extremely well -made, I really mean that.
This is not a new phenomenon.
So dupes have been around for a long time.
But in the past, consumers who wore dupes almost wore them with shame.
But actually what we see now is that they're wearing them with pride.
It sort of become the smart choice, not the cheap choice.
And this is just one small phenomenon.
and the other one is the growth in the resale platforms. People are much more willing than they've ever been to purchase pre -loved goods.
The narrative on something pre -loved can be quite compelling.
And also of course, the fact that you are able to find maybe products that you no longer find on the shelves, right?
Or in a boutique. And it's particularly strong in luxury because in luxury, there is a component of desirability which has come down in the last few years because we've had so much overexposure to luxury goods, people are looking for uniqueness.
People are looking for things that money can't buy.
There's also a certain durability presumably in luxury goods.
Yes, although some categories more than others.
So we see this durability phenomenon and the perception of value maintained over time or in some cases, increased over time, particularly in iconic leather goods, branded jewelry, a bit less so in apparel and footwear.
All of us have this incredible cornucopia of choice now given online retail and social and so forth.
Does that help matters in a cost conscious world or do you see consumers struggling with too much choice?
We talk about discovery as one of the key consumer behaviors to watch for 2025.
In a world where about 70 percent of transactions and purchases start online.
We've seen our proliferation of technology and AI and AI -powered tools to help consumers find what they're looking for more quickly, and also to get a recommendation that is much more precise.
Because it's not just about speed, it's about, do you really understand what I'm looking for?
And then you're gonna be able to offer a product that I need and that I want.
And so we see players that have been investing for years in advanced analytics to actually try and predict what consumers are likely to buy and to want and customize their experience almost to the point, it's so personalized.
The website I see is maybe completely different than the one you see when you log into their websites.
So there is a very powerful opportunity for further personalization, customization, and particularly now in a slowing market where many brands are going to be looking to gain share.
This is going to be an important differentiator.
So this year's State of Fashion report digs into 10 themes.
And obviously we encourage folks to check out the full 150 page report on mckinsey .com.
But for now, Gemma, let's hear about three.
Asia's growth, silver spenders and sporting goods.
What's happening in Asia?
Yeah, this is a sector which has depended for a few years heavily on the Chinese consumer, and we expect Chinese growth to be much more muted this year.
There are, however, some new growth engines that are emerging in Asia, specifically, one One of them being India, which is on pace to become the third largest consumer market in 2027, which is fascinating because there are 430 million people in India's middle -class.
That is as large as the middle class of the U .S. and Europe combined with two -thirds of the population under the age of 35.
So also a very young and dynamic market.
And we see a lot of interest by fashion brands to try and understand how to go to market in India, how to cater to the local consumer needs, and how to ensure that they can grow in that market.
Another interesting market is the Middle East, particularly UAE, Saudi Arabia, very important for luxury, but increasingly also for fashion.
And then there are a number of capitals that are emerging in Asia as fashion hubs, like Jakarta or Bangkok.
So you just mentioned younger spenders in India, but there is another demographic that's ready to buy clothes, the silver spenders.
The fashion industry has been very focused on the younger generations and not only in terms of marketing and communication, but also product, assortment.
And what we see is that, first of all, the population aged 50 plus globally is growing faster than any other generation.
And the importance is they today account for about 38 percent of consumer spend, but they will also account for about half of growth in consumer spend.
So it's really a call to action to fashion brands, to really think about what is their strategy to be relevant and attract these consumers.
Okay, let's turn to sporting goods.
Sporting goods is a very interesting segment within fashion.
It is one that has been very disrupted in recent years by what we call challenger brands.
As recently as 2020, if you look at the economic profits split, literally 80 % of that economic profit was actually generated by what we call incumbent brands.
brands that have sales of over five billion dollars.
So you can think about the big groups, the Nike, Adidas, Under Armor.
And then fast forward 2024, you see that that percentage has halved.
And actually, 60 % of the economic profit is being generated by challenger brands, which are brands like Oka or ON or Vuori or Lululemon. And you see how much product innovation has driven such a shift in profit pool, as well as frankly very smart marketing strategies, building a community of loyal consumers, et cetera.
How does AI and using AI to surface different and very specific curated kinds of shopping experiences affect the dynamics between smaller, newer challenger brands and more traditional, bigger players?
I feel just anecdotally that I'm exposed to so many smaller designers I've never heard of via social media, and I must say that I tend to be susceptible to exploring them.
I think direct to consumer engagement through social media has been a key factor driving the growth of these challenger brands.
I also think that what has sustained this growth has been their investments in product innovation, especially in sportswear where product and product innovation is king.
This has made a big difference.
And so I do think that this has been part of the strategy.
And then they create very sticky communities because it's not just about customer acquisition, is really about customer engagement.
How do you keep these customers engaged with your brand so that you can stay relevant for them?
What should leaders be prioritizing now to stay ahead of this AI -influenced consumer behavior?
One is what we just talked about, which is search and personalization of the experience.
The second one is using AI to truly provide a distinctive customer experience offline in the stores.
We talk a lot about the impact of AI in the online channel.
I don't think we're talking enough about how it can really drive a step change in how the customers experience the physical store and empowering your sales representatives or client advisors with AI tools so that they can be as effective as they can be with your consumers in the stores, is super important.
And then the third area, which we talked about it actually in the 2024 State of Fashion report, is the creative side.
One of the things that's most fascinating about this industry is precisely the combination of craftsmanship and creativity with business, commercial acumen.
And I think there is a lot that AI can do to enhance the creative aspects of this industry and make it help fuel creativity.
So I'll give you an example.
You can create so many more options of a particular handbag design through AI than you could if you had to actually do it yourself, manually.
And the options you can create, the sampling that you can then quickly hone in so that you don't invest too much money in creating samples that you know are not going to be successful or be as compelling to the consumers, is huge.
We've quantified that up to 25 % of the potential of AI in fashion will come from the creative side, but it is in the very, very beginning of the journey.
Let's get back just for a second to your point on the in -store shopping experience, which I thought was almost surprising.
There was a period when younger shoppers, Gen Z shoppers seemed to be returning to stores a little bit more than millennials and looking for a kind of omni -channel shopping experience, if I'm remembering correctly.
Any update there or other sort of generational dynamics that come into play with shopping?
Are consumers returning to stores at this point, generally speaking?
I think the answer is really varied here depending on consumer segments and also, frankly, parts of the world.
What we do know and we believe is that stores do make a big difference.
They can be a real differentiator for the customer experience of brands.
And it has been also corroborated when we did our consumer survey.
75 % of consumers we surveyed said they're likely to spend more after receiving high quality service from store personnel.
The role of the store has changed, 70 % of retail sales today are digitally influenced.
Initial discovery is now typically done online, but then once you see something online, the likelihood is you would want to go and see it in the store, which by the way, doesn't mean you will purchase it in the store.
So, you see that these stores have become more experiential, less stock and more giving you a sense of the DNA of the brand.
What we see is store growth may actually decelerate, so we don't think many brands are going to suddenly go on a spree of opening many new physical stores, but what they will do is they will need to really enhance the experience of the stores they have. We see some brands that have gone the other way, they may only have one or two stores in the country, but they are really special places where people get to experience the brand.
I have to say just anecdotally, I was in this little store, you may not even know this designer, Rachel Comey, who's a New York based designer.
And every time I go into that store, I think these clothes will all be horrible on me.
And there's always some like incredibly beautiful but also accessible stylish person there who She says, you should really try this and you should really try this and she selects things I would never try, and then I grudgingly try them on and I ended up walking out with at least one of them.
So it's amazing what can happen.
I agree with you. I mean, I love the stores where I actually have friendly, helpful stuff.
So anything else you want to call out from the research that leaders might consider doing differently to thrive in what may shape up to be a challenging market this year.
Really understanding consumer behavior and lean into that so that you are able to not only meet the customers once, but frankly try to anticipate them.
You would be surprised how few brands have a really deep, intimate understanding of their consumers and what is their purchase behavior and how is it likely to evolve?
How is that possible in the age of technology when they're feeding back to us, you know, if I mentioned pajamas to my husband, I suddenly get pajamas in my feed and think they're going to transform my life.
How is it possible that we don't have a more sophisticated understanding of the customer now?
We actually write about it in our state of luxury report.
Which is that we believe that many brands may have under invested some of the capabilities that are going to be super important for them in the future.
And frankly, that are very important today.
We talked about one of them, which is the frontline staff, for lack of a better word, or their sales advisors.
you would be surprised how traditional some of the ways in which these sales advisors are hired, developed, compensated, incentivized.
And another area is digital and analytics and consumer insights, which is an area that is evolving very quickly.
What we see is interesting pilots, I don't think we have seen a huge wave of advanced analytics transformation in fashion that has made these companies really cognitive, if you will, in the way in which they understand their consumers.
Paradoxically, the industry is way behind some other parts of the consumer universe.
Like consumer packaged goods are actually really, really advanced when it comes to this, in relative terms. So at the outset of this conversation, you alluded to global trade.
It's obviously top of mind, obviously a lot of uncertainty there as traditional political alignment shift and the world becomes more fragmented.
How do we see these changes affecting fashion players in 2025?
What should leaders be thinking about now to try to anticipate and manage for these disruptions?
First of all, I would say that when we talk about capabilities, geopolitics is a very important exogenous factor that is going to have an impact on this industry.
Oftentimes, it is thought about as a risk and is managed as a risk, typically by the chief risk officer or maybe the CFO. This should be really embedded in the strategy because, yes, there are risks, but there are also opportunities to be captured.
we believe the way to go about the US consumer is fundamentally different than the way you would go about a consumer in Europe or in China or in the rest of Asia.
The second point I would make is that there is so much uncertainty that many brands are just working on different scenarios and I think that's very wise.
What happens if and what are the implications on our brand?
Every brand is different.
It's really hard to generalize here because a lot of it depends on frankly, where the biggest markets are but also what their sourcing footprint looks like and here in fashion, you have the full gamut of brands that are very concentrated footprint, some that are extremely diversified in their footprint.
And the third thing, I think there is a recognition that because there is uncertainty in the system, actually adaptability is going to be very important because whatever course of action a new take, you may need to revise and course correct as you go.
And you cannot be too in love with one course of action because if you do, you may risk going down the wrong path for too long before you are able to then sort of pull back or change direction.
Gemma, are there any ways brands can prepare to respond to the unpredictable?
One is to really reassess and regularly assess and optimize the sourcing footprint, including what are the priority regions for reconfiguration based on manufacturing costs, capabilities, considering potential supply chain disruptions, and climate.
Climate has been a huge force of disruption in this industry, with some of the countries that have been supplying this industry are extremely vulnerable to climate disasters.
And leveraging analytics to really understand What is actually happening?
What is the cost breakdown?
How can we get to a better trade -off between cost and quality is extremely important.
And what are some of the potential disruptions and actions we can do to minimize these disruptions is frankly an exercise every branch should do regularly.
The second thing that we talk about is just rethinking the approach to manufacturers and suppliers with an emphasis to developing long -term strategic relationships so that you can increase both the efficiency and the resilience of the supply chain.
This closer collaboration is extremely important, particularly if you expect the market to be more volatile.
This is another area where AI and analytics and data can help brands get ahead.
And then the last thing I would say is, this is an industry where a collective response or action plan would be very beneficial because no brand can do this on their own.
But also it's not just about brands, it's about suppliers.
It's about regulatory bodies.
It's about manufacturers.
And I think there is something to be said for how do you partner really to get a better, Not only understanding of what's happening, but also a greater ability to respond to whatever may be happening in the future.
And we think this spirit of joint problem solving if you will and collaboration to address challenges is something that we hope will be catalyzed by what's happening at the moment.
You mentioned climate in the context of supply chain disruption and resiliency.
Is sustainability in the current political climate still a priority for fashion leaders?
Do you expect this conversation to persist and, if so, how should leaders be thinking about it?
Sustainability is one of our 10 priorities for the industry.
It is absolutely important for this to remain a priority for a number of reasons.
In the 2024 fashion report, we talked about climate, and we can't forget that fashion is responsible for anywhere between 3 and 8 % of total greenhouse gas emissions.
What we also have estimated is by 2030, extreme weather events could jeopardize $65 billion dollars worth of apparel exports, and eliminate nearly 1 million jobs in four economies that are among the most central to the global fashion industry.
It's extremely important that with climate risk worsening, the fashion industry just cannot hold off any longer on building resilience into its supply chains.
We do know that the perceived economic and operational complexity of meeting sustainability targets is massive.
The fragmentation of suppliers makes it even more difficult.
I mean, over 60 % of global apparel production is conducted by small and medium -sized suppliers.
And of course, you can imagine such suppliers may struggle with uncertain volume commitments and competing sustainability initiative requests from brands.
And often they lack the funding really to do this.
And the reason on the other hand, the disconnect because many consumers express an expectation that brands would prioritize sustainability, but then they may not be willing to pay a premium for sustainable products.
The brands are really caught in a bind here between what the regulators are asking them to do, what many of them think is the right thing to do, but then also how do make it commercially viable.
This seems like a really daunting situation for brands.
We believe brands can reignite progress, but they will need to work collectively with a broader fashion ecosystem.
What we suggest is adopting a dual mission, so committing to sustainability initiatives, but keeping in mind the profitability demands that all of these companies have, and sharing best practices on supplier decarbonization and financing solutions that can really help scale initiatives and reduce financial risk.
Secondly, there needs to be an alignment of incentives to ensure adherence to decarbonization plants.
And what we see is that oftentimes the marginal abatement cost curves are not well understood, or there is just not enough data and insights to be able to prioritize what are the initiatives that are going to make the greatest difference.
And this is something which we believe can only be done if brands take a lead, because brands have oftentimes the resources, the scale to be able to take a lead, but they also need to bring along the suppliers on this journey.
And frankly, just getting granular on data as a very important first step.
Do you actually understand the entire value chain?
And can you maybe even partner with traceability or impact measurement providers to understand the data because that can really help not only set the strategy but also understand the potential impact of some initiatives and prioritize what is otherwise a very large problem to solve.
Gemma, thanks so much for joining us.
Thank you. Thanks so much for listening to the McKinsey Podcast. I'm Lucia Raheli, and I'm Roberta Fissaro.
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