Fashion industry heading for global downturn in 2023

The mood in the fashion industry for the coming year is pessimistic. More than half of the fashion executives surveyed expect conditions in 2023 to worsen compared to the current year, according to a survey by management consultancy McKinsey.

This is due to inflation and the rising cost of living. 78 percent of those surveyed name this issue as their greatest concern, because people with low household incomes are significantly reducing their spending on fashion or choosing cheaper alternatives. In contrast, households with higher incomes were less affected by the crisis and continue to buy luxury goods.

“We see and expect two sets of spending behaviors when it comes to different categories,” said Anita Balchandani, senior partner at McKinsey in London. “Especially in the lower income segments, fashion is seen as a less essential thing compared to food and necessities seen category.”

The forecasts differ

As a result, the field in the fashion industry is divided into two groups: The sales of luxury fashion will grow between 5 and 10 percent worldwide in 2023, predicts the study, which was prepared together with the industry medium Business of Fashion. Things are less rosy for the rest of the fashion industry: Expectations for revenues are between minus two percent and plus three percent.

“We don’t believe that luxury is completely immune to recession, because not only do rich and affluent people buy luxury, we’ve seen a lot of investment buying at entry-level prices,” said Achim Berg, senior partner in McKinsey’s Frankfurt office.

“That is also why we expect lower growth in 2022 than before, but there is growth. This is very different from other segments. The middle market has been hit hard in recent years, we see no reason why that should change,” he said during a video call.

Lasting Winners

However, the proportion of “value-destroying” companies that are making losses is now the lowest it has been since 2013. The management consultancy attributes this to the “solid foundation” that was built in the previous period. The industry’s global sales grew by 21 percent year-on-year in 2021 and also increased by 13 percent in the first half of 2022.

Two fashion branches in particular shone during the pandemic: The luxury industry generated an average of 79 percent more profit from 2019 to 2021 than in the previous eight years. The sportswear sector even made an average of 121 percent more profits in the period than in the years 2010 to 2018.

This trend is also evident when comparing the fashion companies with the highest average earnings between 2019 and 2021. Sporting goods manufacturer Nike leads the list of the top 20 most profitable companies, followed by luxury groups LVMH, Kering and Hermes in second, fourth and fifth place. Competitors Adidas and Anta occupy seventh and ninth place respectively.

cost pressure

Given the overall situation, 85 percent of the fashion executives surveyed expect that inflation will continue to be a challenge next year. 58 percent believe that rising energy prices will continue to weigh on the market.

Not surprisingly, 37 percent of those surveyed want to pay attention to costs and 63 percent want to focus on increasing sales. Even in 2021, when Covid restrictions were still plaguing the fashion industry, only 33 percent of fashion executives said they wanted to pay more attention to costs. For 2022, only 13 percent paid more attention to cost savings,

More than 97 percent of those surveyed see rising costs for goods sold as well as higher expenses for sales and administration. Most want to counter the rising costs with price increases.

“Nearly three-quarters of executives want to increase the price of goods in the coming year, and 10 percent expect a price increase of more than 10 percent,” said Sandrine Devillard, a senior partner at McKinsey in Montreal.

Regional shifts

Retail sales in 2023 will not only develop in different directions by segment, but also regionally. In Europe, the luxury segment will grow between three and eight percent, McKinsey expects. The revenue expectations for the rest of the fashion market, on the other hand, are between minus four and one percent.

The forecasts for the US market in the coming year are slightly more optimistic. Sales of luxury goods are expected to increase between five and ten percent, and the rest of the market between one and six percent. In China, the expectations are even higher – with nine to 14 percent in the luxury sector and two to seven in the rest of the market.

In view of this forecast, it is not surprising that the fashion managers surveyed rated regions such as North America and the Middle East as the most promising for expansion and that Western Europe was losing its attractiveness.

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