This week, McKinsey weighs in on what to expect in luxury this year.
Growth has slowed, prices have peaked and tariffs are around the corner. It’s a new era of luxury, where the old rules no longer apply and the power of trusted strategies has fizzled.
For insight into the industry’s unprecedented dynamics and direction, Glossy spoke with Gemma D’Auria, the global leader of apparel, fashion and luxury at McKinsey, as the company rolled out its State of Luxury report this month.
Will we continue to see big luxury price increases this year?
“Eighty percent of the growth in luxury over the past few years has been driven by price increases. And therefore, when we have surveyed consumers globally, there is a very limited propensity to accept price hikes. That’s particularly because there is a perception by consumers that neither the quality of the products nor the innovation in the products has kept up with the promise linked to the price increases. And so we believe that there is going to be very limited headroom for price increases in the near future — in the next couple of years, for sure. But if prices are not going to increase, any growth will have to come from volume, right? Given that we expect the market to grow 1-3% in the next couple of years, and then 2-4% — which is much lower than the growth of 2019-2023 — it’s going to be a very interesting game of differentiation: How do you differentiate in order to gain share against other brands, particularly when the consumer propensity to buy luxury goods has been impacted negatively over the last year?”
How can brands differentiate themselves?
“One way is through product excellence. It’s back to basics, in a way. If you are a luxury house, you are selling a promise to a customer of uncompromising product quality and uncompromising experience, and you really need to deliver. That starts with making sure you can guarantee that quality, particularly at the scale of your company — some of these companies have become really large. And the demands that that places on the supply chain and on craftsmanship, which has been one of the unique selling propositions of the luxury industry, are unprecedented. Luxury houses need to realign their business scale with their craftsmanship heritage to sustain their product quality.
The second way is through the customer engagement strategy. [Brands] have done really well by providing [exclusive experiences] to their top spenders. About 40-50% of the growth in luxury has been driven by the top spenders. That’s fantastic. But today, you have AI, data and analytics that can allow you to personalize and provide a top-notch experience at scale — not only to your top spenders. … The experience you get when you walk into many luxury brands’ boutiques is mediocre; it’s not a ‘wow’ experience, and you don’t feel like you’re getting exclusive treatment. This is where [brands] really need to work to differentiate because we know it matters to consumers. That includes ‘silver spenders,’ or those over age 50, who represent a big chunk of the current spending on luxury goods and of its future growth.
Third, these companies need to become as attractive and compelling for their employees as they are for their consumers.”
Luxury has been slow to embrace AI across the board, yes?
“Yes. Think about what a sales advisor or client advisor could do if empowered by AI — the [customer] experience would be much more seamless, pleasant and effective if they recognized who you were, the kind of purchases you had made at the house and your preferences. … I think there will be multiple pressures on [brands] to reconsider scaling up AI. One is cost, because AI will make [processes] more efficient, and brands will want to restore profitability. Secondly is the fact that AI can help on the creative side. For a long time, that was a big, taboo topic. We don’t think AI can replace humans, but it can enhance human impact. We also talk about the impact AI can have on search. Consumers are overwhelmed by choice, and one of the things that the luxury experience should give you is a curated experience. AI can help with that. … There have been lots of small pilots, but there’s never been something that, at scale, tries to unleash the power of AI [in luxury]. These companies grew tremendously through price increases and high spenders, and they got complacent; they fell behind on innovation across the board: innovation on product, innovation on service, innovation on back-office stuff like search engines on their websites, and so on.”
What’s next for luxury e-commerce?
“I’m quite excited by what’s happening in the world of the online pure players — the multi-brand retailers like Mytheresa and Moda Operandi. With the consolidation that has happened in the industry, I’m hopeful that there will be a couple of winning business models that emerge. I believe you do need multi-brand places where people can discover brands, mix and match, and find their styles. By the way, Mytheresa is a great example of a company that’s driven its profitability and growth largely through analytics, data and AI.”
To what extent will luxury prioritize physical retail?
“From 2019-2023, in this period of huge expansion, luxury retail’s footprint in the Americas grew 6%. America has been a focus, followed by East Asia and then Greater China. And there is also a brand like Moncler, for example, which is opening 130 stores globally in four years. We do not expect this pace to continue. It’s already decelerating with the market slowdown. That being said, we think this is going to be a reset year for the industry, including in terms of luxury’s online and offline footprint. There will be some luxury markets that continue to provide dynamic pockets of growth for brands — I’m thinking about the Middle East and even Japan, and new centers of wealth could emerge in the U.S. But we think the deceleration will continue. We think [luxury brands] will be much more judicious about future physical store openings than they’ve been in the past and also much more careful about productivity — because the reality is that not all stores are created equal, right? Stores have increasingly become places where customers go to discover brands. And they’ve also been great tools for conversion. But they are not always the sales channels they used to be because so many of the sales have moved online. So I think it’s important to think about not only how many stores you are going to open, but also what the role of the stores is going to be in their respective markets — and which markets [are best]. And that’s evolved rapidly.”
In 2025, can luxury brands afford to withhold from any sales channel, be it wholesale, e-commerce or owned stores?
“I don’t think so. I think each of these channels has a role to play, including wholesale. There has been a push to go direct-to-consumer, and I think it has been very successful for many brands. I think it has contributed to brands owning the experience end to end and defining a signature experience of what the brand stands for. At the same time, it also depends on the life cycle of the brand. For early-stage brands and lesser-known brands, wholesale is a critical channel. So, I don’t think there is a one-size-fits-all [recommendation], but I do think there is still a role to be played by each of these channels.”
Is the Saks-Neiman consolidation a concern for your brand clients?
“It will be interesting to see what the impact on the consumer is when it all transpires. The department store model is a very difficult model to pull off. And the only parts of the world where it seems to be successful are the Middle East and some countries in Southeast Asia. But I’m optimistic because [difficult] times like this typically drive innovation, and innovation is good for both the consumer and the brands. And this includes innovation in the business models of these channels, for example. But I think it’s going to be choppy for the next 12-24 months.”
Will the U.S.’s upcoming tariffs make a big impact on luxury?
“There are many possible scenarios, including because companies have different ways and different speeds of adapting to the environment. But we estimate that, because of the tariffs, importers could reduce U.S. spending by $46 billion to $78 billion per year, in general. And for luxury goods, in particular, this is a real dampener on enthusiasm for the U.S. We are actually quite bullish on the U.S. as a market — it’s probably the only market that can help compensate for the decline in China. But, at the same time, if you account for import tariffs and also for the fact that we do not yet see aspirational luxury consumers coming back, you still don’t see these big numbers. When I say that we’re more bullish, it means we’re at 2-4% [growth] instead of 1-3%. The tariffs are going to be a factor that will affect the sourcing footprint of many players. And in luxury, in particular, it will be interesting to see how these companies react to whatever tariffs may be put in place.”
Are returns proving to be a big issue for luxury like other market segments?
“Particularly for online pure players, they continue to be a challenge. And the same is true for brands in certain categories, which is why we’re more bullish on other categories: We’re more bullish on leather goods and jewelry than we are on ready-to-wear, for example. One of the reasons is that these are perceived much more as investment goods, or goods that have investment value. And also, many of the [luxury] houses, including Louis Vuitton, Gucci and Prada, were born in the leather goods category. We believe that if there is any consumption of luxury goods, it will probably be in the leather goods category, specifically in handbags, first.”
Overall, what’s your current take on the industry’s slowed growth?
“It’s a good thing. It could actually lead to a much healthier level of growth. We don’t see this as a doomsday scenario, but we do see it as an opportunity to reset strategically — [a chance] to look at where you play, how you play, and how your product and your experience align with your brand’s DNA.”
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