At last, we reach the conclusion of my 14-part series analyzing all 128 pages of the McKinsey’s State of Fashion 2024 report. This was a daunting but rewarding task as I discovered for myself new strategies to guide my clients forward.  Stay tuned as I find other prolific reports to share with you over the coming months.

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The Luxury Segment Reigns Supreme: 10 Takeaways as Fashion Enters 2024

The fashion industry has always shown remarkable resilience, particularly with 2023 marking a year of adaptation and growth. In this final act of exploring the McKinsey State of Fashion 2024 report, I delve deep into the industry’s performance, the emergence of ‘Super Winners,’ the luxury segment’s ascendancy and the complexities of inventory management in McKinsey’s final chapter, “Resilience Buoyed by Luxury.”

2023: A Year of Resilience and Adaptation

Despite grappling with geopolitical tensions, surging inflation, and a dip in consumer confidence, the fashion industry managed to maintain economic profit levels mirroring 2021’s record-breaking year. Proving its resilience and adaptation once more, the fashion industry’s  strategic blend of strong revenues and disciplined cost management shielded profit margins from what could have been a disastrous year.

As usual, the true hero of this tale is the luxury segment, ever the lighthouse guiding the fashion industry through turbulent waters. While the mid-market segment faced immense pressure, luxury players showcased their prowess by defying convention and implementing price hikes that only increased demand.  Unsurprisingly, the lion’s share of the luxury segment’s economic profit was generated by the usual fashion industry titans.

Rise of the “Super Winners”

For the second consecutive year, value creators outnumbered value destroyers. The “Super Winners,” an elite group of fashion industry luxury segment giants, further tightened their grip on economic profit – to the tune of 99 percent of the fashion industry’s reported profits. As a shock to no one who studies the luxury market, LVMH claimed the throne, while interestingly, Nike led the charge. Overall, the industry’s success in 2023 was largely buoyed by the luxury segment’s robust performance amidst economic uncertainty.

LVMH’s Performance:

LVMH’s record revenue of approximately $83 billion and a $22 billion profit from recurring operations — both up by 23% year-over-year — staked its dominant market position in the fashion industry. The company succeeded by managing price increases effectively while keeping US, European and Japanese consumers enthusiastic about its fashion and leather goods category. LVMH’s outstanding results reflected the broader trend of the luxury segment outperforming other industry sectors, with luxury accounting for nearly half of the industry’s total economic profit.

Nike’s Position

Nike also demonstrated strong performance in 2023, securing the second spot among the industry’s “Super Winners.” This success is indicative of our earlier observation on the sportswear sector’s continued momentum, supported by ongoing consumer interest in healthy lifestyles. Nike’s better-than-expected first quarter results in September 2023 underscored the aggressive demand for sportswear despite broader consumer challenges. Nike’s resilience and growth in this sector highlight the company’s effective strategies in product innovation and market expansion.

Hermès and Richemont’s Ascent: Hermès and Richemont made significant strides in 2023, with Hermès rising to fourth place among the Super Winners, thanks to its strong international performance, reporting a remarkable 29% increase in revenue. Also not surprising given Hermès discipline in protecting the heritage of the family company.

Richemont, meanwhile, jumped three places to fifth, propelled by growth in retail and momentum in the Americas. These advancements underscore the companies’ successful strategies in high-end luxury markets, where exclusivity and brand strength continue to drive consumer demand and profitability for the resilient luxury segment.

Tapestry’s Remarkable Growth:

Tapestry, the parent company of brands like Coach and Kate Spade, rose an impressive 13 places to rank 16th among the Super Winners. This leap is a result of the successful launch of its “acceleration program,” which focused on cost-cutting and margin improvement. Tapestry’s performance highlights the effectiveness of strategic rebranding and operational efficiency in navigating the competitive luxury segment, something other fashion industry brands should study.

Lululemon’s Consistent Performance:

Lululemon, known for its high-end athletic apparel, rose from 11th to 10th position, driven by a net revenue increase of 30%. The brand’s success is credited to product innovation, a focus on consumer experiences, and strategic market expansion. Like Nike, Lululemon’s rise reflects the growing consumer preference for quality sportswear and the brand’s ability to maintain a strong connection with its customer base.

Strong Showing by Multi-Brand Retailers

TJX Companies  and Ross, two prominent off-price multi-brand retailers, maintained strong positions among the Super Winners, while not serving the luxury segment. TJX remained in sixth place, while Ross rose to ninth, up from eighth the previous year. Their performance indicates the fashion industry’s robust market for off-price retail, catering to cost-conscious consumers looking for quality fashion at discounted prices.

Macy’s Significant Leap

Macy’s, saw a dramatic rise, moving up 321 places to secure the 20th spot on the list. This significant jump reflects the brand’s post-pandemic recovery and consumers’ renewed interest in in-person shopping experiences as the fashion industry continues to reconfigure post covid lockdowns. It also speaks to how the company has become a takeover target.  

Emergence of New Entrants:

The list of Super Winners saw new entrants like Dillard’s and Signet Jewelers, indicating shifts in consumer preferences and market dynamics in the fashion industry. Dillard’s climbed 21 places to claim the 13th position, demonstrating the potential for department stores to rebound post-pandemic. Signet Jewelers’ significant increase in sales highlights the growing consumer interest in the luxury segment’s accessories and jewelry category.

Performance of Other Companies:

The luxury and affordable luxury segments saw considerable gains, with economic profit surging by 36 percent and 10 percent, respectively. These luxury segment giants demonstrated their ability to weather the storm while the fashion industry’s mid-market segments experienced pressure. Successful repricing strategies and the unwavering spending power of high-income consumers contributed to their triumph.

Companies like Inditex and Uniqlo demonstrated that effective pricing strategies could support profitability even in challenging market conditions. In contrast, the mid-market, premium/bridge, and value/discount segments suffered economic profit declines.

Driven by strong pricing strategies and resilient high-income consumer spending, the luxury segment quadrupled its long-term average economic profit. It’s worth noting, however, that affordable luxury, while improving, still represents a modest portion of the market. Meanwhile, the mid-market and value/discount segments faced substantial headwinds.

Navigating the Inventory Conundrum

Inventory management continues to be a conundrum for the fashion industry. The pandemic led to a surge in inventory levels due to shifting consumer behaviors and supply chain disruptions.  While the pandemic initially caused a spike in inventory levels because of sudden changes in demand and store closures, the situation became more complex as the fashion industry began to recover.

In 2023, the inventory value-to-revenue ratio exceeded pre-pandemic levels, particularly troubling during the fourth quarter when the traditional holiday season inventory clear-out didn’t happen as expected. Non-luxury segment brands felt this pain more as it struggled with unpredictability in consumer demand, leading to bloated inventory levels.

In a reverse of their usual higher inventory levels due to discounting aversion, luxury segment brands managed to scale back their inventories below the long-term average, thanks to a post-pandemic surge in demand.

Despite capitalizing on excess goods from other retailers, off-price retailers like TJX and Ross faced their own inventory challenges, leading to higher inventory-to-revenue ratios. This situation reflects a broader trend within the fashion industry as an ongoing struggle to balance inventory levels with consumer demand and market dynamics still remains an unresolved challenge.

The Road Ahead: Challenges and Uncertainties

The economic environment continues to dampen consumer sentiment, exerting pressure on brands to deliver both value and unforgettable customer experiences. The slower-than-expected recovery of the Chinese economy adds another layer of complexity. Although tentative signs of recovery are emerging, the macroeconomic situation remains uncertain. As the fashion industry continues to navigate choppy waters, one thing is certain: adaptability and innovation will remain the industry’s North Star, guiding it through whatever challenges lie ahead.

KEY TAKEAWAYS AS THE FASHION INDUSTRY ENTERS 2024

1. Resilience in Luxury Fashion: The luxury segment demonstrated remarkable resilience in 2023, propelling industry growth through strategic price increases, which helped offset weaknesses in other segments.
2. Stabilized Economic Profit: The fashion industry’s economic profit stabilized in 2023 at levels similar to the record high in 2021, despite facing macroeconomic challenges.
3. Dominance of Luxury Segment: About 98% of the luxury segment’s total economic profit was generated by the four largest players, highlighting the segment’s dominance.
4. Polarization in Industry Profitability: The industry saw increased polarization, with “Super Winners” of the luxury segment increasing their share of economic profit from 84% to 99%.
5. LVMH’s Leading Position: LVMH emerged as the top performer in the luxury segment, reflecting its effective pricing strategies and strong demand, especially in its fashion and leather goods category.
6. Nike’s Strong Performance: Nike continued to perform strongly, securing the second spot among the industry’s “Super Winners,” driven by its resilience in the sportswear market.
7. Mid-Market Segment Struggles: Excluding the luxury and affordable luxury segment, the industry’s 2023 performance would have been negative, with the mid-market segment under significant pressure.
8. Inventory Management Issues: The industry faced challenges with inventory management, particularly in non-luxury segments, leading to higher-than-average inventory value-to-revenue ratios in 2023.
9. Luxury Segment’s Price Management: The luxury segment successfully managed price increases without significantly impacting demand, contributing to its strong economic performance.
10. Value Creation and Destruction Trends: The fashion industry witnessed a return to traditional patterns of polarization, with the top 20% of companies driving the majority of the industry’s economic profit, while the bottom 20% accounted for most losses.