McKinsey & BoF: Are Luxury Fashion Supplies in Jeopardy?

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According to a new report by McKinsey and BoF, the luxury market faces a crucial supply chain test
McKinsey and BoF Insights' luxury edition of their 'The State of Fashion' report blames changing habits and macroeconomic pressures for stagnated demand

McKinsey and BoF Insights have published the luxury edition of their 'The State of Fashion' report, finding that for the first time in nearly a decade the industry is experiencing a contraction in value creation.

It says macroeconomic pressures, particularly in China — where luxury sales previously grew by more than 18% annually — are curtailing momentum.

Meanwhile, global luxury sales are projected to grow at a slower pace of 2 to 4% annually from 2025 to 2027, with leather goods and jewellery set to lead the charge at a 4 to 6% growth rate.

While top-spending clients will drive up to 80% of the industry’s growth, the luxury sector faces mounting challenges, particularly in its supply chain and strategic operations.

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From 2019 to 2023, the luxury market enjoyed unparalleled growth. Fuelled by soaring demand for personal luxury items such as handbags, watches and jewellery, the sector achieved a 5% annual growth rate.

Major brands, especially “megabrands” with revenues in excess of €5bn (US$5.3bn), capitalised on their global reach to dominate markets.

However, this success was primarily driven by price hikes, which accounted for more than 80% of the growth, with volume increases playing a secondary role.

Adding to these external pressures is a more complex client base; younger consumers demand contemporary products and digital engagement, while older clients value tradition and exclusivity.

Furthermore, the rise of luxury experiences, including high-end travel and wellness, is creating fierce competition for discretionary spending.

Supply chain strains erode exclusivity

The sector’s rapid growth exposed weaknesses in its ability to deliver on promises of exclusivity and craftsmanship.

As demand surged, brands increased prices but failed to sufficiently scale their supply chains or adapt creative strategies to meet the evolving market. The result is a dilution of luxury’s core values, leaving customers dissatisfied and brands scrambling to rebuild their appeal.

Supply chain challenges are particularly pronounced. Many luxury brands operate through intricate, artisanal processes that are not easily scalable. Efforts to meet rising demand often led to compromises in quality, tarnishing the industry’s reputation for excellence.

In response, experts argue that companies must realign their operations with their craftsmanship heritage. Vertical integration, best-in-class sourcing and advanced manufacturing practices are seen as critical steps to future-proof supply chains and ensure stability.

Emerging markets such as India, the Middle East and other parts of Asia-Pacific offer some relief, but they are unlikely to compensate for slower growth in China and Europe. The US market, however, remains a bright spot with more optimistic projections.

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A call for long-term strategy

As the sector navigates this slower growth phase, industry leaders must embrace a forward-thinking approach. Analysts recommend a comprehensive strategy built around five imperatives:

  1. Reassessing core values: Brands need to clarify their long-term priorities, including product range, communication and customer experience. This involves targeting key client groups and sharpening their unique value propositions.

  2. Investing in product excellence: Luxury businesses must prioritise iconic, high-quality items that resonate with clients. Securing long-term supply chain stability and refining manufacturing processes are essential.

  3. Innovating customer engagement: Brands should offer bespoke experiences, both online and in-store, tailored to their most loyal and promising customers. Leveraging technology and AI can provide insights to personalise these interactions further.

  4. Closing the talent gap: Attracting and retaining top talent across all functions, not just in creative roles, is critical. Luxury companies should learn from other industries to professionalise operations, particularly in supply chain, digital technology and data management.

  5. Diversifying portfolios: As growth slows in traditional categories, luxury groups are exploring adjacent markets like travel and hospitality. Careful resource allocation and potential acquisitions can help maintain relevance and expand customer engagement.

The luxury industry finds itself at a crossroads. The choices leaders make now will shape their brand’s future.

A focus on strengthening supply chains, embracing innovation and reaffirming core values could provide the foundation for renewed growth.


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