After years of exceptional growth fueled by surging demand, price increases, and the dominance of megabrands, the luxury industry is facing a significant slowdown. Between 2019 and 2023, the sector achieved a 5 percent annual growth rate, driven by record profitability and strong performance in China, but by 2025, macroeconomic headwinds and shifting consumer preferences have curtailed momentum.

The latest insights from The State of Fashion: Luxury by The Business of Fashion and McKinsey & Company report shows younger, more diverse clients demand innovation, while older buyers value tradition, and a growing focus on luxury experiences adds further competition for spending. The rapid expansion also diluted the industry’s core values of exclusivity and craftsmanship, as price hikes outpaced product innovation. With growth projected to slow to 1–3 percent annually through 2027, the sector must recalibrate, emphasizing creativity and long-term strategies to rebuild its value proposition and adapt to evolving market dynamics.

Price hikes

Between 2019 and 2023, luxury brands significantly increased prices, the report states, driving approximately 80 percent of the sector's growth as they moved away from earlier periods of modest 1–2 percent percent annual price adjustments.

Iconic categories such as leather goods and jewelry saw some of the steepest price hikes, with certain items rising as much as 50–100 percent over the four years. Leather goods benefited from sustained demand among aspirational customers, while branded jewelry surged as a preferred investment. Geographically, China was the primary growth engine, contributing 40 percent of global luxury sales growth, followed by the U.S. at 30 percent and Europe at 10 percent. Meanwhile, other regions, including Japan and South Korea, experienced steady growth, with the latter achieving an impressive 8 percent compound annual growth rate. These dynamics underscore the sector's reliance on price increases to bolster growth amid shifting consumer preferences and geographic disparities.

A changing industry

The luxury industry has also undergone significant transformation since 2019, driven by strategic shifts in operations and growth dynamics. Vertical integration has emerged as a key strategy, with companies acquiring suppliers and distributors to enhance control over quality, volumes, and sustainability while optimizing margins. At the same time, several brands have scaled up dramatically, necessitating upgrades to supply chains and a focus on sustainable practices.

Store footprints expanded notably in the Americas, East Asia, and Greater China, complemented by omnichannel strategies blending digital and physical experiences to meet rising consumer expectations. Meanwhile, "megabrands" generating over 5 billion euros annually grew at an impressive 11 percent per year, far outpacing the broader market’s 5 percent growth. This period of rapid expansion has been marked by heightened polarisation, acquisitions like LVMH’s purchase of Tiffany & Co., and a drive for operational sophistication.

A pessimistic outlook

The report iterates luxury executives are increasingly pessimistic about the year ahead as the industry contends with multiple challenges. Economic instability in China is dampening consumer confidence, while proposed import tariffs could curtail U.S. spending by as much as 78 billion dollars annually. Aspirational shoppers are scaling back their luxury purchases amid broader macroeconomic pressures, and the expansion of retail footprints has slowed in response to a cooling market. Multibrand retailers face additional strain from department store closures and challenges in achieving e-commerce profitability. To safeguard margins in this uncertain environment, brands are focusing on cost efficiencies, including tighter controls on marketing budgets and headcount.

Luxury markets in Japan, the Middle East and India are expected to provide growth hotspots, thanks to growing customer bases and infrastructure as well as favourable economic conditions. Emerging markets in APAC, including Indonesia and Thailand, will benefit from rapid economic development, urbanisation and growth in middle- and high-income consumer groups.

The US will emerge as luxury’s growth engine, outstripping growth in Europe and China. The report predicts the US luxury market will grow by 4-6 percent per year through to 2027. Additionally, the US is expected to benefit from decreasing inflation rates and an increase in the ultra-high net worth (UHNW) population, which is projected to grow 5 percent annually between 2023 and 2028. Smaller luxury markets will also play a more central role. For example, the report projects Japan’s luxury sector will grow 6-10 percent in 2025, solidifying its reputation as a valuable luxury market with a healthy balance of domestic and tourism spend.

Imran Amed, Founder and CEO of The Business of Fashion, said: “The luxury slowdown is here to stay, and sector recovery is not expected until late 2026. It is clear that the strategies that helped to drive significant growth over the last five years will not suffice moving forward. Luxury executives need to use this time to refocus on creativity, value and innovation to navigate the challenging market ahead.”

Gemma D’Auria, Senior Partner and Global Leader of McKinsey’s Apparel, Fashion and Luxury sector, said: “The luxury industry is at an important inflection point. Executives will need to pivot their strategies, address some of their existing challenges, and play the long game. While returns might not be immediate, there is an opportunity for luxury brands to reflect and recalibrate, focusing on a few strategic imperatives as a guide for sustained growth.”

For more insights or to read the report visit www.mckinsey.com.