Pessimism is growing in the face of economic pressure

After years of exceptional growth driven by increasing demand, price increases and the dominance of mega-brands, the luxury industry is facing a significant slowdown. Between 2019 and 2023, the sector achieved an annual growth rate of five percent, supported by record profits and strong performance in China. But by 2025, macroeconomic headwinds and changing consumer preferences will slow the momentum.

According to the latest ‘The State of Fashion: Luxury’ report from trade magazine The Business of Fashion and consulting firm McKinsey & Company, younger, more diverse customers are demanding innovation, while older customers value tradition. At the same time, a growing focus on luxury experiences is attracting additional spending from consumers.

However, rapid expansion has diluted the industry’s core values ​​of exclusivity and craftsmanship as price increases outpaced product innovation. With forecast annual growth of just one to three percent until 2027, the industry is faced with the challenge of realigning its strategies and focusing on creativity and long-term measures to strengthen its value creation and adapt to changing market dynamics.

Price increases as a driver of growth

Between 2019 and 2023, luxury brands increased their prices significantly, the report highlights. These price increases accounted for around 80 percent of industry growth, moving companies away from previous moderate annual price adjustments of one to two percent. Categories such as leather goods and jewelry in particular recorded the highest price increases; Some products became up to fifty or even one hundred percent more expensive within four years. Leather goods benefited from continued strong demand among emerging shoppers, while branded jewelry became increasingly popular as a preferred investment.

Geographically, China was the main growth driver, responsible for forty percent of global luxury growth, followed by the US at thirty percent and Europe at ten percent. Other regions such as Japan and South Korea also experienced solid growth, with South Korea achieving an impressive annual percent growth rate. These developments show how strongly the industry relies on price adjustments in order to continue to grow in a changing market environment.

An industrial change

The luxury industry has changed significantly since 2019, marked by strategic realignments in operations and growth. Vertical integration has established itself as a central strategy: companies take over suppliers and distributors in order to better control quality, volume and sustainability while optimizing margins. Many brands have also massively expanded their business, requiring modernization of supply chains and a greater focus on sustainable practices.

In the Americas, East Asia and especially Greater China, the number of brick-and-mortar stores grew significantly. This expansion has been complemented by omnichannel strategies that seamlessly combine digital and physical experiences to meet increased consumer expectations. At the same time, so-called ‘mega brands’ achieved an impressive annual growth of eleven percent with annual sales of over five billion euros – well above the five percent of the overall market. This period of rapid growth was marked by increased polarization, acquisitions such as luxury goods group LVMH’s purchase of jewelry maker Tiffany & Co., and a drive for operational efficiency.

Pessimistic outlook

The report shows that luxury managers are increasingly pessimistic about the coming years as the industry faces numerous challenges. Economic uncertainty in China is weighing on consumer confidence, while proposed import tariffs could reduce U.S. spending by up to $78 billion annually.

Emerging shoppers are curbing their luxury spending amid macroeconomic pressures, and retail space expansion has slowed as the market slows. Multi-brand retailers also face additional challenges due to the closure of department stores and the difficulties of making e-commerce profitable. To protect margins in this uncertain environment, brands are increasingly relying on cost efficiency, for example through tighter controls on marketing budgets and headcount.

At the same time, luxury markets in Japan, the Middle East and India are becoming important growth centers, supported by growing customer bases, infrastructure and favorable economic conditions. Emerging markets in the APAC region such as Indonesia and Thailand are benefiting from rapid economic development, urbanization and a growing middle and upper class.

“The slowdown in the luxury segment will continue and the sector is not expected to recover until the end of 2026,” said Imran Amed, founder and CEO of The Business of Fashion. “It is clear that the strategies that have delivered significant growth over the past five years will no longer be sufficient in the future. Luxury managers must use this time to focus on creativity, values ​​and innovation to survive in a challenging market environment.”

The USA will establish itself as the growth engine of the luxury industry and surpass Europe and China. According to the report, the U.S. luxury market will grow four to six percent annually through 2027. The US is benefiting from falling inflation and a growing ultra-high-net-worth (UHNW) population, which is expected to grow by five percent per year between 2023 and 2028. Smaller luxury markets will also become more important. Japan’s luxury sector, for example, is expected to grow by six to ten percent in 2025, further strengthening the country as a valuable market with a healthy balance of domestic and tourism spending.

“The luxury industry is at a crucial turning point. Leaders must realign their strategies, address existing challenges and think long-term,” said Gemma D’Auria, senior partner and global head of apparel, fashion and luxury at McKinsey. “While the results will not be immediately visible, there is an opportunity for luxury brands to pause and reposition themselves by focusing on a few strategic priorities that will enable sustainable growth.”