Global retail sector heading for slim growth in 2025

The fashion industry is set for slow but steady growth in 2025, according to new McKinsey & Company research. The study suggests fashion players can expect single-digit revenue expansion, as inflation slows in the world’s leading markets – but if they want to acclerate that, they should consider how they relate to thrifty shoppers, and the sustainability expectations of customers.

Recent years have seen the luxury and non-luxury fashion industries struggling to shore up their profits. With the supply chain shock of the Covid-19 lockdown months, and the heightened inflation after hobbling consumer spending power, companies have resorted to cutting production and raising their own prices.

According to a new whitepaper from strategy giant McKinsey & Company, however, things look set for a positive change in 2025. The study titled ‘The State of Fashion 2025: Challenges at every turn’ finds that non-luxury goods in particular will see an uptick, and could drive the entirety of the increase in economic profit for the first time since 2010, excluding the Covid-19 pandemic period.

This looks set to be the case across all of the world’s leading economies. In China, while non-luxury retail sales slowed significantly in 2024, they will stabilise in 2025 at 4%. In the US, with the sector having narrowly recovered from negative growth in 2023, the sector will continue to accelerate its growth to arround 5%, while Europe will similarly continue to make slow progress.

However, Europe and the US look set to pull away from China in terms of the performance of luxury retail. Both markts could see growth of around 5% in 2025, while China will continue its negative growth in the sector from 2024 – in stark contrast to news over the past decade touting the country as one of the world’s fastest-growing luxury markets.

The report identifies several key focus areas for the fashion industry in the year ahead, which firms can use to try and get ahead of the curve. Supported by proprietary data from a global survey of fashion executives, as well as a consumer survey conducted in the US, UK, France and China, chief among these was noting that even though inflation and economic pressures might be mildly easing, they have created a value shift.

With many consumers hundreds of pounds worse off now than two years ago – inflation having continuously outpaced inflation – customers are still adopting cost-conscious behaviours. This is resulting in growth for segments with strong ‘value for money’ perceptions. For example, 41% of consumers are now looking to secondhand outlets when seeking apparel deals. At the same time, even though online scams remain rife, the purchasing of cheaper replica brands continues to grow in popularity thanks to Gen Z. Among UK shoppers, 11% say they buy a ‘dupe’ product at least once every few months. Half do so for the savings, while 17% said they consider dupes a great substitute, even if they can afford the original.

As well as adapting to these trends, McKinsey’s study warns that the retail industry should not underestimate the importance of consumer attitudes to climate change. The report shows that while consumers still expect companies they purchase from to be pushing for a better world – and growing regulations reinforcing this from governments – 63% of brands are behind on 2030 decarbonisation targets and just 18% of fashion executives consider sustainability a top risk for 2025 – down from 29% in 2024.

The question of how much this matters still comes down to how willing consumers are to hold true to their beliefs. Customers say they expect sustainability to become part of their products, but are unwilling to pay extra for goods which do not actively harm the planet – as if that were a ‘luxury’ option. And in that context, it seems that few consumers are holding firm – especially as apparel consumption – sustainable or otherwise – is projected to rise by 63% to 102 million tonnes by 2030. Should the industry continues its current trajectory, by 2050 it would consume more than one quarter of the world’s carbon budget.