It’s not all doom and gloom in fashion, executives just need to switch tactics, experts say.

A panel of experts from McKinsey acknowledged the fashion industry is facing unprecedented challenges in 2025, but one argued the industry has proven incredible resilience so far and survival may just mean thinking outside the box.

The conversation was held as part of McKinsey’s fashion trends that matter webinar which featured a discussion between senior partners Anita Balchandani and Gemma D’Auria, following McKinsey’s earlier publication of the State of Fashion 2025 report. 

While challenges including geopolitics and consumer softness continue to weigh on the fashion industry, Balchandani argued the industry needs to start thinking differently – perhaps indeed – from a “glass half full” perspective.

“I’d like to make a case for optimism for the following reasons,” Balchandani began.

“Firstly, when we look at the margin structure of the industry, it has proven to be remarkably resilient, so not withstanding the demand headwinds and the slowdown, this is an industry where economic profit overall stepped up. And when we looked at the margin analysis by sub sector, across all of the sectors, bar luxury, if we look at mid market, value and premium, this industry has actually seen percentage margins step up even in a challenging time. 

“And while luxury is under pressure, underlying intrinsically, the margin rates in luxury also still remain fairly resilient, and this year we’re also seeing much less polarisation in that spread of economic profit. So I think actually the industry starts off on a positive note in terms of margin resilience.”

Balchandani continued to signal the “pockets of growth” that industry executives need to capitalise on through 2025 and beyond.

“Could this be the wake up call the industry needs to really get stronger and better by capitalising on the technology shifts, the growth pockets and demand. Does it just force the industry to operate at a much higher level of performance and focus than it has needed to in the last decade?”

Where are the pockets of growth?

The Silver Spender: This category of over 55s accounts for 72% of all the wealth in North America.

“Increasingly, the demographics in many geographies, including China, are heading towards the older generation, which the report calls The Silver Spenders. And we do believe this is a buoyant and robust base to focus a business on. And many of the brands that have been really successful recently have also done a fine job of creating multi-generational appeal. So they’re appealing to the younger customers, but frankly, they’ve unlocked the recipe to also be relevant to the older ones,” Balchandani said.

The mid-market and value categories: Pointing to the State of Fashion 2025 report, Balchandani said it is the first time since the start of publishing the reports that the segment has been in growth both in terms of revenue and economic profit.

She said transformation efforts by mid-market brands that were struggling for growth are coming to bear now.

“So this is a moment for mid-market value consciousness. Off price is also another channel where we’re seeing consumer demand and appetite.”

Strength in sportswear: The athleisure boom that peaked during the pandemic is showing no signs of abating.

Balchandani noted many of the insurgent brands in sports now account for close to 60% of the economic profit.

“This is not just a game that is being won by the incumbents and the big brands. So we do believe there are actually many of these category niches and value positions that are robust and in growth.

Which consumer markets will dominate the fashion industry in 2025 and beyond?

D’Auria acknowledged India has been a “big focus” of the report.

“India is a very interesting market that we think will play a more prominent role. Why? Because it is expected to grow 12 to 17% in the fashion segment and 15 to 20% in the luxury segment in 2025 which does not even compare to the single digit growth that we see in other markets. It’s also been interesting, because the inflection point is driven by the fact that there is a middle class of aspirational consumers that is 430m people strong. Just for reference, this is larger than the middle class of the whole of Europe and US combined.

“It is also a fast growing economy with a lot of positive consumer sentiment and optimism, which is in stark contrast to what we were discussing before in other markets.

“It is going to be soon, the third largest consumer market in the world. So we’re talking about a very deep potential pool of customers there, the ultra high net worth population, albeit from a small base, is the fastest growing in the world. We expect it to rock 50% between 2023 and 2028 which is phenomenal growth.”

Opportunities in the digital space

Inevitibly, AI came up as part of the conversation, with audience members asking how fashion leaders should be approaching the technology?

Balchandani said AI and Gen AI are the biggest opportunities for this industry.

“We talked earlier about a ‘moment for the industry… a step change’ in terms of how the industry operates. We believe data, technology and AI will absolutely be a critical underpin of that.

“When we talk about AI as an opportunity, we absolutely include data, advanced analytics and traditional AI. We also believe Gen AI can also play a big role in the fashion industry. But equally, we would almost start with the opportunities on advanced analytics and AI standpoint.

“And I think you can talk about hundreds of use cases, but we feel often that thinking takes you down a path of micro improvements, which then become hard for an organisation to see where is the difference coming from. So I’d like to step that up a level, and to think about three big things and three big areas in which AI could really allow fashion executives to transform the industry. 

“How does data and AI truly enable the end to end value chain to be operated at a whole different level of productivity? How do you plan assortment – is it at the store level? How do you think about replenishment and the role data can play through the value chain to address the issues the industry faces? 

“This is an industry that overproduces. 40% of goods the industry makes is expected not to be sold. That in itself creates a huge sustainability problem. So data and AI that can enable better prediction of best sellers, better replenishment, better matching of inventory to where the customers are could be game changers in the value chain to really step change on productivity.

“The second big area is digital interaction and engagement in the fashion world. But for those of us shopping and looking for fashion online, it is quite a list-driven experience. It doesn’t have the curation, the inspiration, the personalisation that one would expect of the fashion industry. So we do believe that platforms, applications and players that really enable curation of fashion in a much more personalised way and make that search and discovery genuinely thoughtful and relevant could be an absolute game changer.

“And then the third area I’d look to is transforming clienteling. The whole world of clienteling is still fairly anchored in great service and an ethos of great service, but it is very individually oriented and probably quite manual, if you will. The question is how can AI improve that customer service journey and arm the personal shopper in store with a whole different degree of information to make it personalised, genuinely 24/7, and really transform that?”