According to a recent McKinsey & Company survey, 7 out of 10 fashion leaders cited consumer confidence and the appetite to spend as the top risk for 2025. Other top risks included geopolitical instability, economic volatility, and supply chain disruptions.
Inflation, which was the No. 1 concern for leaders in 2023, has dropped significantly as central banks began lowering interest rates. Although inflation has cooled, it has played a big role in the slowing growth of the fashion industry globally, dampening consumer spending and causing a shift in behavior.
“There is still growth to be found [in the US], but economic uncertainty, geographic disparities, as well as shifting customer behavior and preferences mean seizing it will require navigating a maze of compounding challenges at every turn," McKinsey & Company partner Joelle Grunberg told Yahoo Finance. "Consequently, 2025 is likely to be a time of reckoning for many brands. ... We expect inflation to not be playing as much as a role as in the past."
People shop at Macy's department store in New York City. (Photo by Spencer Platt/Getty Images) ·Spencer Platt via Getty Images
An economic disconnect
In the US and UK, there is still somewhat of a disconnect between consumer values and actions.
“Consumers’ willingness to pay a premium for sustainable goods remains unclear," the McKinsey survey found. "In the US and UK, for example, 61% of consumers rank price as a more important consideration than sustainability in fashion purchases."
Consumer sentiment is “where it is expected to be, but it's not as good as we could have thought it would be after the election, specifically in the US, and I would say in other markets, Europe, Asia, etc, it's relatively sluggish,” Grunberg said. “So the confidence is not clearly back again in the US, assuming we have changes in interest risk, positive changes in interest rates, and assuming the new administration kicks in.”
Inflation, consumer sentiment, economic volatility, sustainability, and geopolitical instability will continue to be a challenge, and the survey found that middle- and lower-income consumers are tired of price increases in luxury and non-luxury markets.
A Macy's store stands in downtown Brooklyn after the company announced it was closing the store along with over 60 others on January 13, 2025 in New York City. (Photo by Spencer Platt/Getty Images) ·Spencer Platt via Getty Images
Despite off-price retailers like T.J. Maxx (TJX) and Ross (ROST) selling luxury brand items, 70% of consumers plan to continue shopping from outlets in the next 12 months, even if they have more money to spend. They are simply finding better deals. Still, that’s not stopping big box retailers.
Last year, Macy’s (M) launched a high-end version beauty concept in Miami, featuring an updated store design, virtual trial technologies, three relaxation rooms, and three branded treatment rooms offering a wide range of services. The beauty concept houses brands La Mer, Dior, Tom Ford, Gucci, Chanel, and Clarins, among many others.
At the same time, the outlet business has always been strong in the US, so the consumer isn’t necessarily shifting away from luxury, Grumberg explained, noting there are luxury brands at outlet malls. Value will more than likely continue to be a strong focus for the consumer, and “the consumer here has always been drawn to off-price," she said. "It's always been the case."
However, Grumberg added, value formatting "doesn't mean they're not going to buy … first choice or full price, but it means that if they're having a good experience in an outlet, if they're finding the brands they're interested in, if they're finding an offering that is compelling enough, in their size, the colors they're looking for, they're going to continue to go there."
People stand with Hermes shopping bags as they wait at a traffic light in Tsim Sha Tsui, a bustling shopping hotspot, in Hong Kong, China December 5, 2023. REUTERS/Tyrone Siu ·REUTERS / Reuters
International competition
Potential tariffs are also set to shake up the fashion industry.
Incoming President Donald Trump threatened tariffs of 60% on Chinese imports, 25% on Mexico and Canada, and 10%-20% on all imports. For online Chinese fast-fashion brands Shein and Temu and UK-based Boohoo (BOO.L), which sources most of its items from China, that could create a financial headache.
These tariffs are estimated to cost the average American household $2,600 per year, according to a calculation by the Peterson Institute for International Economics (PIIE). Many consumers shop at these online retailers because they provide affordable alternatives to trendy brands. If prices are raised substantially, companies face the possibility of losing revenue and rising inventories.
A model presents creations by Indian fashion designer Rimzim Dadu at the FDCI India Couture Week in New Delhi, India, July 30, 2024. REUTERS/Priyanshu Singh ·REUTERS / Reuters
When coupled with China's economic deceleration and the return of international travel, McKinsey argued that international fashion brands could begin to look to other Asian markets.
"India will be a focus, particularly for high-street players, while Japan’s luxury boom is expected to continue into 2025, fueled by strong international and domestic spend," the McKinsey report said, stating that Japan and India could become “Asia’s New Growth Engines.”
Still, despite the looming threat of tariffs, China is still projected to account for 40% of luxury apparel sales by 2030, meaning there's a long way before anyone dethrones it, Grunberg said.
