Affordable luxury: It may sound like an oxymoron, but in an uncertain economy, it’s striking a chord with cautious consumers looking for value—and expecting more from the brands they buy. “Brands are actively thinking about the fact that people are shifting their spending,” according to McKinsey Senior Partner Gemma D’Auria. “If they want to stay relevant, they need to meet their customers where they are.” In this episode of The McKinsey Podcast, D’Auria and McKinsey Senior Partner Holger Harreis speak with Global Editorial Director Lucia Rahilly about recent research on the state of the fashion landscape, including what consumers want, where they’re finding it, and how fashion executives can use AI to enhance creativity, competitiveness, and the customer experience overall.
The McKinsey Podcast is cohosted by Lucia Rahilly and Roberta Fusaro.
The following transcript has been edited for clarity and length.
What ‘value’ looks like in a volatile economy
Lucia Rahilly: Gemma, you’re based in Milan, arguably the world’s fashion capital. Any news on the ground?
Gemma D’Auria: I’m hearing continued concern about two things: consumer appetite to spend, particularly toward luxury, and geopolitical tensions. That said, the fashion industry has shown tremendous resilience, as seen in this year’s The State of Fashion report.1 We track 400 publicly listed fashion and luxury companies in the McKinsey Global Fashion Index, and we see that the industry has created value since we started tracking in 2010. Despite everything that has happened since COVID-19—the decline in China, tariffs, geopolitical tensions—profit levels and value creation have remained relatively stable.
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Lucia Rahilly: You invoked concern about appetite to spend. Given the economic uncertainty, customers are understandably prioritizing value—and affordable luxury appears to be delivering on that value, which means it’s a fast-growing segment. What are brands doing in this area to attract consumers’ attention?
Gemma D’Auria: We track the top 20 companies that generate the greatest economic profit. This is a highly concentrated industry in terms of value creation: The top 20 companies generate 92 percent of the economic profit. In general, the midmarket has been winning in affordable luxury, but also in brand elevation strategies, because they’ve understood that consumers are seeking value. What we mean by value is less a “cheap product” and more, “show me that what I’m paying for is worth its value.”
Lucia Rahilly: Since COVID-19, we’ve seen an uptick in the online secondhand market, which can be a platform for value-oriented shoppers to explore “aspirational luxury.” How should luxury brands think about resale without diluting other aspects of luxury, like desirability and exclusivity?
Gemma D’Auria: For the longest time, luxury brands were skeptical about this channel for many reasons—brand dilution, how to guarantee the authenticity of products, and a lack of control over the end-to-end experience, which is fundamental to them and their clients.
In recent years, however, resale has provided consumers with a platform to look for items at lower prices. Also, consumers have been seeking uniqueness—items not everyone has. We’ve underestimated factors such as the thrill of the hunt: finally finding something you would find only in a boutique.
So it has become a very important channel, not only for customer acquisition but also because resale platforms have scaled. They’ve improved their technology, enabling them to authenticate at a much lower cost with the help of AI.
Brands are proactively thinking about how to partner with these platforms. They’re thinking about how to curate the experience their consumers have on these platforms and which items are most likely to be successful. Historically, resale was mostly a platform for iconic leather goods and jewelry—rare, high-value items. Now, it’s expanding to other categories as well, which will also drive growth.
Lucia Rahilly: Jewelry seems to be defying the muted growth otherwise expected across the industry. What’s attracting customers to jewelry more than to other categories in the luxury market?
Gemma D’Auria: Jewelry is expected to grow more than 4 percent annually in the next three years, which is basically four times clothing’s expected growth. It’s a very meaningful gap.
There are a couple important things about jewelry. One, it is perceived as a better value than other purchases. For the first time, as prices of personal luxury goods rise, people are substituting luxury jewelry for ready-to-wear clothing and leather goods, particularly handbags. Two is individuality and the ability to authentically stack and layer pieces that represent uniquely who you are. That’s much easier to do with jewelry than with other categories.
Well-being and your wardrobe
Lucia Rahilly: Well-being has emerged as a factor influencing how consumers spend on fashion. How do you see brands responding?
Gemma D’Auria: Well-being will become a core part of some brands’ DNA, because well-being is not just about what customers do but who they are—their identity. And brands want to make sure they align with their clients’ identity to drive loyalty and engagement. So brands are actively considering the best strategic course of action. They’re thinking about the fact that people are shifting their spending. If they want to stay relevant, they need to meet their customers where they are.
Lucia Rahilly: Give us an example of what that means, vis-à-vis well-being.
Gemma D’Auria: We talk in our report about the massive growth in wearables, particularly smart glasses, which are equipped with technology that allows you to do some of what you do on your phone. You’re probably aware of the Ray-Ban Meta glasses. Meta has also collaborated with brands like Oakley on the sports side—sports glasses you can wear while skiing, for example, that let you gather all sorts of information about the weather, the windchill factor, the quality of the snow, your speed, your health vitals, and more.
That’s something that absolutely has taken customers by storm. There are privacy considerations, but wearable technology—whether your Oura Ring, your Whoop, or smart glasses—is a fantastic area of growth and a category closely linked to well-being and AI.
Lucia Rahilly: Gemma, you talk to clients in the luxury space all the time. What are a few concrete areas luxury leaders can focus on as the rest of the year unfolds?
Gemma D’Auria: This is a year of strategic reset for many brands, with a lot of new management teams and new creative directors in place. It’s a great opportunity to have a hard look at where you’re playing, how you’re playing, and who you’re playing for. That would be my overarching priority for the year.
When it comes to AI, brands cannot run fast enough. There are real questions about how to harness AI and how it’s changing the customer journey end to end. Where are you going to make your bets? How are you going to transform your organization? Sadly, what we see in the industry is a lot of pilots and nice experiments, but not a lot of true rewiring of the organization, particularly in domains that are strategic, like supply chain.
Brands must think about the shifting luxury consumer—not the top 2 percent but the rest who are trading down toward affordable luxury, considering their well-being, and prioritizing experiences. I would also think about how to recapture that consumer, including how to stay relevant and how to win back consumers who are no longer buying luxury products the way they used to.
Lucia Rahilly: Was there a particular finding or result in the research that really surprised you this year?
Gemma D’Auria: What surprised me is the extent to which healthy aging, or health span, has become a priority across the globe. I would have expected this in markets such as the US, maybe Europe, but finding out that it’s also extremely important in places like China—that it’s a more global phenomenon—was surprising.
I’m fascinated by this trend because I think that, ultimately, luxury is going to be about becoming a better version of yourself. For some people, that may mean better nutrition and better fitness; for others, that may mean beauty. Some people will focus on what they wear; others may focus on all of the above. People prioritize their spend based on what they believe in.
Can AI really enhance creativity?
Lucia Rahilly: Holger, let’s get concrete about how AI could transform the fashion value chain.
Holger Harreis: There are ample opportunities across the value chain, and the technology is ripe, ready, and able to go everywhere. So the key message is that this is for real, starting with creativity.
Whether you’re talking about beauty products or luxury apparel, you can enhance the creative process with generative AI tools. Obviously, it’s not creativity as we know it from a human coworker, but AI—although it relies on past designs and brings some risk—enables vast options for creation that offer much higher productivity on the creative end.
The same holds true in terms of marketing and commercialization, where end-to-end marketing campaigns—from the brief to the video, audio, or visuals—can be created entirely with AI. On top of that, you can create different versions of a campaign for a Chinese customer, a West Coast customer, or someone in southern Italy.
Further down the value chain are demand forecasting and planning, which create a lot of value for both the bottom line and sustainability. AI can help you be in a much better position to know which consumers will be likely to shop in which part of the world, at which point in time, and for which products. This can increase your sell-through rate, help you avoid running out of stock in any given store or online, and reduce returns.
Lucia Rahilly: Fashion is an archetypally creative field. Do you see heightened resistance to AI for that reason, or does the cost–benefit calculus mean that adoption is relatively straightforward?
Holger Harreis: We regularly do a broad client survey called “The state of AI.”2 This survey shows that while immense amounts of money are being spent on AI pilots, very few of them make it to enterprise-grade adoption that delivers return on investment and value at scale.
Why? Success with AI is about business transformation, not technology transformation—which means rewiring the entire enterprise. Leaders need to spend three to five times what they’re spending on technology on adoption and change management across the board. There are areas where adoption will be a little harder, and those tend to be areas where the work is prototypically human—creative professions like design or marketing. But if you frame the change in the right way and make it about augmenting human work to increase productivity and optionality, it can help.
Lucia Rahilly: If more brands start using AI to create optionality, is there a risk of algorithmic reversion to the mean? How can leaders maintain brand differentiation?
Holger Harreis: This is a risk, and everyone needs to be very cognizant of their starting point. If you approach AI in a way that’s compatible with your brand value, you could be saying, “I’m going to use AI as a tool for human creativity. I’m going to create many options, which I will then augment in a human way. I’ll just use them as an input.” And then what you would deem genuinely creative, in the artistic sense, would build on that.
For example, many luxury brands still produce physical prototypes. Reimagining the “prototyping journey” with AI—not to take out human creativity but to ease and accelerate parts of each step and do more digitally—takes money and time. But all of a sudden, you have cost reductions, and you’re faster. You’re more at the point where you can try things out with your customers and make your products even more attractive. You can foster brand equity value. You can move and evolve your brand value more than you could with a classic approach.
Lucia Rahilly: The use case for fast fashion seems easy to grok in this context. Fast fashion has, of course, come under fire at various points for its environmental implications. How does AI affect this equation?
Holger Harreis: AI can have a profound impact on sustainability. For example, if you’re more precise in understanding how your prototypes could look and you reduce the number of those prototypes, you can reduce cycle times, which, in itself, is more sustainable. If you’re more precise in forecasting what will be consumed and where, you can increase your sell-through rate, so less will be left over and sold off at reduced prices, which is absolutely not sustainable. AI also helps make logistics more sustainable because you can be laser focused on where parts of the collection will be shipped.
AI and the CX
Lucia Rahilly: Let’s shift to customer experience [CX]. How are brands using AI to improve customer satisfaction—for example, via features like virtual try-on?
Holger Harreis: Consider how we’re all discovering products now. Sometime in the middle of last year, there was a profound acceleration in the adoption of AI tools. All of a sudden, adoption among luxury consumers is at roughly 80 percent of what we see in our regular consumer surveys on AI adoption.3 In other words, consumers are starting to discover products through conversations with AI agents.
Lucia Rahilly: Say more about agentic AI and how you see agents functioning within the fashion ecosystem.
Holger Harreis: Consumers are shifting to LLMs [large language models] and asking, “What should I wear?” And they actually get suggestions. For example, I can take a picture of myself and do a virtual try-on. I’ll say, “That looks great, but I’d actually love a bowtie” or “Can you suggest shoes that go with this outfit?” Suddenly, I have these possibilities suggested to me that didn’t exist as easily before.
Here, I will point to one thing that, for many of our clients, really started to emerge late last year with agentic AI. We’re seeing a structural, strategic shift in this industry that is probably as profound as the advent of online commerce. And the fundamental question is: Will the customer relationship and the transactions all move over to agentic conversational agents? If so, what will that mean for me if I’m a brand, a retailer, or a platform?
Lucia Rahilly: What does it mean for brand loyalty when customers are exposed within the LLM context to all these different hyperpersonalized suggestions? Is it different from shifting into a brand’s ecosystem or online marketplace?
Holger Harreis: Absolutely. And this represents a profound structural shift. If I’m most catered to by a multipurpose AI conversational agent—where I get the best answers to my questions, the nicest and most appealing items—I will be more likely to make a purchase through that agent. From a brand or retailer marketplace point of view, that is shocking because it cuts you out of the equation. That is one version of where this might go.
Another version is that, as a brand or retailer, you might decide to build a conversational agent of your own to better understand your customers. Perhaps you develop an agent that can sync with customers’ calendars; for example, you might know that your customer is going to an art event, so you proactively suggest an outfit. You might also know what the customer has in her wardrobe and suggest she combine this piece with that piece. That can build your brand value for this customer much more than a general, multipurpose conversational agent could.
Lucia Rahilly: Remarkable—like having a personal stylist.
Holger Harreis: Yes. But the first real question should be: Will this drive value for my enterprise? Is doing things this way good for my business? Or will the better option be to collaborate with a multipurpose agent? What’s most attractive for brand value, the value of the company, or total shareholder return?
And the second question should always be: How can I make sure I drive this value? This gets back to the point of seeing this not as a tool rollout but as a profound business transformation that requires rewiring the enterprise.
