Navigating the new fashion landscape in 2025

The global fashion industry is bracing for a pivotal year in 2025, as structural changes in consumer behavior and macroeconomic headwinds force a fundamental rethink of traditional growth strategies. According to the latest BoF - McKinsey State of Fashion 2025 report, the industry faces a sobering reality: just 20 percent of executives expect improved conditions, while 39 percent anticipate further deterioration.

The sector's growth trajectory has shifted decisively from the post-pandemic boom to low single-digit expansion, marking what analysts describe as a "structural deceleration." This new normal is compelling brands to pivot from riding market growth to actively competing for market share - a development that particularly impacts the luxury segment, which for the first time since 2010 is expected to see non-luxury players drive the entirety of economic profit growth.

Geographic fault lines are becoming increasingly pronounced, with brands pursuing a more nuanced approach to global markets. While China remains the gravitational center of Asian fashion, its ongoing property crisis and record-high debt-to-GDP ratio of 288 percent are prompting companies to diversify their regional exposure. Japan, Korea, and India are emerging as crucial alternative growth engines, particularly as Chinese consumer confidence hovers near historic lows.

In response to these challenges, industry leaders are pursuing a three-pronged strategy: localizing their go-to-market models, broadening price ranges to capture value-conscious consumers, and investing in brand differentiation. Notably, sustainability initiatives - previously a top priority - have been relegated to the background as companies focus on immediate market share battles. This reprioritization reflects the industry's pragmatic response to what one executive described as "a time of reckoning" where "the old playbook is now obsolete."

Reducing reliance on China

Global fashion brands are rapidly reconfiguring their sourcing strategies as they seek to reduce dependence on China, where textile and apparel exports to the US and EU have declined by 6 and 3 percentage points respectively between 2019 and 2023. The reports states the shift is being driven by rising Chinese labour costs, which increased 38 percent from 2010 to 2021, alongside recent supply chain disruptions that saw Asia-to-US shipping costs surge by more than 165 percent between December 2023 and February 2024.

The industry is pursuing a two-pronged diversification strategy. Major brands are increasingly turning to other Asian manufacturing hubs, particularly India, Vietnam, and Bangladesh, with US apparel imports from these nations rising by 3 and 2 percentage points respectively between 2020 and 2023. Simultaneously, there is renewed interest in nearshoring, with the US looking to Latin America and Europe focusing on Turkey, though this transition has been hampered by limited manufacturing capacity and lower labour productivity in these regions.

The sourcing shift coincides with broader changes in Asian consumer markets. China's economic deceleration and changing consumer preferences have prompted fashion executives to look toward other growth engines in the region, particularly India and Japan. India's fashion market is projected to grow 12 to 17 percent in 2025, buoyed by its expanding middle class of 430 million people, while Japan's luxury sector saw 25 to 30 percent growth in the first half of 2024, driven by the weak yen and surging tourism. These dynamics underscore a significant realignment in both the production and consumption patterns of the global fashion industry.

Too much choice and too much product

Fashion retailers are grappling with a significant challenge as excessive product choice leads to consumer paralysis, with 74 percent of customers abandoning online purchases due to overwhelming options. The industry is turning to artificial intelligence as a potential solution, with 50 percent of fashion executives identifying product discovery as the key use case for generative AI in 2025. Major retailers are already taking action, with Asos announcing a 30 percent reduction in stock intake and planning a further 16 percent reduction by the end of 2024.

The landscape of fashion discovery is undergoing a profound transformation, driven by rapid advancements in AI technology. OpenAI's GPT-4o is demonstrating 15-20 percent greater accuracy than its predecessors, while companies like Zalando are reporting tangible benefits, crediting an 18 percent year-on-year increase in profitability partly to their AI initiatives. The shift is supported by strong consumer demand, with 82 percent of customers expressing a desire for AI assistance in reducing their product research time.

A new ecosystem of AI-powered discovery platforms is emerging to address these challenges. Start-ups like Daydream, which has secured 50 million dollars in seed funding and partnerships with luxury brands, are introducing sophisticated search capabilities using natural language processing and computer vision. Meanwhile, social commerce is poised for significant growth, with the US and UK markets expected to nearly double by 2027. TikTok Shop, in particular, has demonstrated promising results, with brand Princess Polly reporting a 350 percent increase in purchase value and a fivefold increase in purchase frequency through targeted search.

Over 50s are driving spending

In a significant demographic shift reshaping the fashion industry, brands' traditional focus on youth markets appears increasingly misaligned with economic realities, according to The State of Fashion 2025 report. While 60 percent of fashion executives plan to prioritise younger consumers, data suggests the "Silver Generation" - those aged over 50 - will drive 48 percent of global spending growth in 2025. This cohort, controlling 72 percent of US wealth in early 2024, demonstrates higher per capita fashion spending and greater financial resilience than younger generations. Despite this, they remain largely overlooked by fashion brands. The report indicates that successful brands will need to pivot towards an inter-generational appeal, noting examples such as New Balance and Uniqlo, which have effectively balanced younger audience engagement while maintaining older customer loyalty through functional design and quality-focused marketing. This strategic shift becomes particularly crucial as Gen-Z consumers show increasing price sensitivity, with 73 percent reporting changed spending habits due to inflation and 40 percent reducing clothing expenditure.

Shift towards value-consumption

The fashion industry is experiencing a significant shift towards value-conscious consumption that appears likely to persist even as economic conditions improve. Research indicates that over 60 percent of consumers in major markets are actively seeking to reduce fashion spending, with 64 percent of US shoppers trading down in Q3 2024. The trend is manifesting across various segments, with more than 70 percent of customers planning to purchase from outlets or off-price retailers in the next year, regardless of their discretionary budget. Notable is the rise of "dupe" purchasing, with nearly one-third of US adults deliberately buying replicas of premium or luxury products. This shift has benefited off-price retailers like TJX and Ross, which have outpaced the broader market with 4.6 percent revenue growth in 2024, while the resale market is projected to capture 10 percent of the global apparel market by 2025. In response, brands are being forced to recalibrate their strategies, focusing on demonstrating value through quality, pricing, or alternative channels such as resale platforms, while carefully protecting their core brand equity.

Human touch

In a significant shift for retail strategy, fashion retailers are being urged to refocus on the human element of in-store sales as brick-and-mortar growth is forecast to slow to 1-2 percent across key markets in 2025. According to the report, while nearly 70 percent of retail sales are now digitally influenced, human interactions remain crucial differentiators in the shopping experience, with 75 percent of customers more likely to spend after receiving high-quality service. However, the sector faces substantial challenges, with more than 20 percent of missed sales attributed to issues with store associates and retail workers 1.2 times more likely to leave their jobs than the average US employee. To address these challenges, retailers are advised to implement comprehensive strategies including enhanced staff training, broader incentive structures that reward omnichannel sales, and the strategic deployment of technology to automate routine tasks. Major players such as Kering have already seen success with this approach, reporting 15-20 percent increases in average order value through their clienteling app, while LVMH anticipates needing to recruit 22,000 new workers by the end of 2025, underscoring the continuing importance of human capital in retail.

The changing landscape of the online marketplace

Online fashion marketplaces are facing a severe market correction, with share prices plummeting by as much as 98 percent from their Covid-19 peaks, according to the report. European marketplaces destroyed 700 million dollars in economic profit in 2023, reflecting existential challenges to their business models amid rising customer acquisition costs, high return rates, and intensifying competition from rapid-turnaround competitors like Shein. While Amazon Fashion maintains its dominance in the US value segment with over 40 percent of online fashion revenue, it faces mounting pressure from upstarts Shein and Temu. In China, traditional platforms such as Alibaba's Tmall are being disrupted by social commerce platforms like Douyin, which saw a 52 percent increase in monthly active users between June 2020 and 2024. To survive, industry experts suggest marketplaces must prioritise profitable orders, explore new revenue streams through B2B services, modernise their technology infrastructure, and leverage AI for operational efficiency.

All things sports

In a significant shift within the sportswear industry, challenger brands such as Deckers (owner of Hoka) and Asics are poised to generate over half of the segment's economic profit in 2024, marking a dramatic increase from 20 percent in 2020. According to the report, these challenger brands have achieved this milestone through superior revenue growth – outpacing incumbents Nike, Adidas, Puma, and Under Armour by 14 percentage points annually between 2020 and 2024 – while simultaneously improving profitability by 4 percentage points during a period when incumbents saw profitability decline by 2.4 percentage points. The trend is reflected in the stock market, where challengers have seen remarkable gains in 2024, with Asics' share price surging 168 percent and On rising 91 percent through September. Industry analysts attribute this success to challengers' strategic focus on visible product innovations, targeted category specialisation, authentic cultural marketing, and effective exploitation of wholesale distribution channels as incumbents shifted towards direct-to-consumer sales.

Managing (excess) inventory

The fashion industry faces heightened challenges in inventory management, balancing excess stock and stock-outs as consumer demands and regulatory pressures intensify. In 2023, brands produced up to 5 billion surplus items, prompting markdowns that affected nearly half of some inventories, and in 2024, discounts rose by 5 percentage points year-on-year. With forthcoming EU regulations in 2025 mandating transparency on unsold stock and prohibiting destruction by 2026, brands must pivot to data-driven, agile inventory strategies. These will encompass predictive analytics, “test and react” models, and open-to-buy flexibility to limit stock waste and align with sustainability targets. Executives increasingly endorse cross-functional collaboration, digital forecasting tools, and adaptive supply chain models to reduce inefficiencies, with the end-to-end inventory optimisation forecasted to yield 10-15 percent cost savings. As fashion companies embrace data integration and technology-enabled solutions, they aim to enhance profitability, reduce environmental impact, and meet dynamic consumer expectations in an increasingly regulated market.

Sustainability

On the eve of the United Nations Climate Change Conference, the fashion industry faces entrenched challenges in achieving sustainability, complicated by fragmentation across its value chain, consumer hesitation to pay a premium for sustainable goods, and sluggish regulatory response. Although the sector risks exceeding a quarter of the global carbon budget by 2050, only 18 percent of executives see sustainability as a key risk for 2025. With 63 percent of brands lagging on 2030 decarbonization goals, experts highlight the urgent need for a collective, action-oriented approach to align business profitability with environmental targets. Key strategies include consolidating supplier relationships to drive critical mass, partnering with traceability providers for granular emissions data, and prioritizing cost-neutral sustainability measures such as energy efficiency and waste reduction. Brands like H&M, Inditex, and PVH are piloting these approaches through long-term commitments to sustainable materials, shared financing initiatives, and supplier collaborations. To remain viable and competitive, fashion leaders must integrate sustainability at scale, creating a dual mission that balances profitability with environmental stewardship.

For the full report please visit www.mckinsey.com.