After years of extraordinary growth driven by soaring demand, rising prices and the dominance of mega-brands, the luxury goods industry is facing a significant slowdown. From 2019 to 2023, the sector achieved an annual growth rate of 5%, driven by record profitability and strong performance in China, but by 2025, macroeconomic headwinds and consumer preferences momentum was suppressed by changes in
New insights from The State of Fashion: Luxury by The Business of Fashion and a McKinsey & Company report show that younger, more diverse customers are looking for innovation, while older buyers value tradition. , shows that the increased focus on luxury experiences is further intensifying spending competition. Rapid expansion has also eroded the industry’s core values of exclusivity and craftsmanship, as rising prices have outpaced product innovation. With growth expected to slow to 1-3% annually until 2027, the sector will need to recalibrate with an emphasis on creativity and long-term strategy to reshape its value proposition and adapt to evolving market dynamics. There is.
price increase
Luxury brands significantly increased prices from 2019 to 2023, driving around 80% of the sector’s growth, breaking away from earlier modest price adjustments of around 1-2% per year, the report said. .
Iconic categories like leather goods and jewelry saw the steepest price increases, with certain items increasing in price by 50 to 100 percent over four years. Leather goods benefited from continued demand from ambitious customers, and branded jewelry soared as a preferred investment. Geographically, China was the main growth driver, contributing 40% of global luxury goods sales growth, followed by the US at 30% and Europe at 10%. Meanwhile, other regions, including Japan and South Korea, experienced steady growth, with the latter achieving an impressive compound annual growth rate of 8%. The moves highlight the sector’s reliance on price hikes to drive growth amid changing consumer preferences and geographic disparities.
changing industry
The luxury goods industry has also experienced significant transformation since 2019 due to strategic changes in business operations and growth dynamics. Vertical integration has emerged as a key strategy, with companies acquiring suppliers and distributors to increase control over quality, quantity and sustainability while optimizing profits. At the same time, some brands are scaling up dramatically, requiring supply chain upgrades and a focus on sustainable practices.
Store footprint expanded, particularly in the Americas, East Asia and Greater China, complemented by an omnichannel strategy that blends digital and physical experiences to meet rising consumer expectations. Meanwhile, ‘megabrands’, which generate more than €5 billion a year, grew at a staggering 11% per year, far outpacing the 5% growth of the overall market. This period of rapid expansion was marked by increased polarization, acquisitions such as LVMH’s purchase of Tiffany, and increased operational sophistication.
pessimistic outlook
The report reiterates that luxury goods executives are increasingly pessimistic about the year ahead as the industry grapples with multiple challenges. Economic instability in China is hurting consumer confidence, while proposed import tariffs could reduce U.S. spending by up to $78 billion a year. Under broader macroeconomic pressures, ambitious shoppers are cutting back on luxury purchases, and retail store expansion is slowing as the market cools. Multi-brand retailers face additional burden from department store closures and challenges in achieving e-commerce profitability. To stay profitable in this uncertain environment, brands are focusing on cost efficiencies, including greater control over marketing budgets and employee numbers.
Luxury markets in Japan, the Middle East and India are expected to be growth hotspots due to expanding customer base and infrastructure, as well as favorable economic conditions. Emerging markets in APAC, including Indonesia and Thailand, will benefit from rapid economic development, urbanization, and growth in middle- and high-income consumer groups.
The United States will emerge as a growth engine for luxury goods, outpacing growth in Europe and China. The report predicts that the U.S. luxury goods market will grow at 4% to 6% annually through 2027. Additionally, the United States is expected to benefit from lower inflation rates and a growing ultra-high-net-worth (UHNW) population. It is expected to grow by 5% annually from 2023 to 2028. The smaller luxury goods market will also play a more central role. For example, the report predicts Japan’s luxury sector to grow 6-10% in 2025, cementing its reputation as a value-packed luxury market with a healthy balance of domestic and tourism spending. .
Imran Amed, founder and CEO of Business of Fashion, said: “The downturn in luxury goods is here to stay, with a recovery in the sector not expected until late 2026. It is clear that the strategies that have fostered growth are working.” It’s not enough to just move on. Luxury business leaders need to use this time to refocus on creativity, value, and innovation to navigate the challenging markets ahead. ”
said Gemma D’Auria, senior partner and global leader of McKinsey’s Apparel, Fashion and Luxury practice. Management needs to shift strategy, address some of the existing challenges and play the long game. While the benefits may not be immediate, luxury brands have an opportunity to focus, reflect, and realign some strategic imperatives to guide sustainable growth. ”
For more information and reports, please visit www.mckinsey.com.
