The events of the past few years have inspired many consumers to engage in retail therapy for a reprieve. But new research by McKinsey shows that company performance across the apparel, fashion, and luxury (AF&L) sector has been quite fragmented, with some companies gaining an upper hand over the past few years. In short, whether a company can outperform its competitors in the global apparel market relies largely on the segment in which it operates (see sidebar, “Fashion category definitions”), though, of course, strategic and operational choices can also make an impact.
In 2020, we examined the industry’s TSR and recommended that companies take decisive action in the face of ambiguity.1 At the time, premium and luxury segments were significant outperformers in the AF&L market—a trend that endured throughout the pandemic. While the luxury segment has been the longest-standing winner within the industry, a recent surge in sportswear has gained momentum as a preferred choice among premium customers.
This article examines the success of the luxury and sportswear segments since 2020 and compares the shared characteristics of companies in nonluxury fashion segments that—despite all odds—have delivered strong returns to shareholders. By fostering innovation and making smart cost control decisions to align with revenue shifts, brands that are currently performing only moderately—or losing ground—can bolster their performance in the global apparel market.
State of TSR in the global fashion market
The AF&L industry has delivered a strong performance over the past decade, with 70 percent of the world’s largest AF&L companies generating returns upward of 10 percent since 2016. As of our analysis in December 2021, the global apparel market was faring favorably compared with most other sectors, with AF&L shareholder returns exceeding those of the S&P 500, technology sector, retail sector, and MSCI World Index (Exhibit 1).
While the overall market has been strong, individual AF&L players have (predictably) experienced mixed results (Exhibit 2). Cost pressures, the accelerated shift to e-commerce,2 supply chain disruptions, and pandemic-driven changes in consumer patterns3 are contributing to these varied performance results. We are seeing the greatest successes from legacy players focused on luxury and sportswear products and from companies that have invested in bold strategic and operational initiatives to drive top-line sales and protect margins.
At the opposite end of the spectrum, the most challenged retailers have been traditional value and mass players, which are much more dependent on competitive pricing and in-person shopping. These players have typically had a more difficult time adapting to both the changing needs of their customers and macroeconomic pressures, and they have delivered significantly lower returns to their shareholders as a result.
Sportswear: The nonluxury leader
Sportswear brands and retailers have thrived in recent years, with upward of 20.3 percent returns from 2019 to 2021 compared with 4.5 percent among traditional apparel players (Exhibit 3). Indeed, sportswear (together with its buzzword cousin, “athleisure”) has been a strong industry category with a long history of sustained performance and momentum. The category strengthened further during the pandemic as many customers shifted to a “work from home” wardrobe, reflecting a focus on personal health and wellness.
While our State of Fashion 2022 report noted that the dresses, shirts, blouses, and luggage categories grew the most in 2021, sportswear is now a permanent fixture in more people’s wardrobes than before the pandemic. According to our analyses, sportswear continues to be the most resilient nonluxury category and one that continues to thrive within every price tier.
The fortunes of luxury
Like sportswear, luxury and premium brands have been dramatically outperforming the rest of the global apparel market since before the pandemic (Exhibit 4). Amid COVID-19, this trend accelerated, with luxury and premium segments delivering shareholder returns of 33.2 percent and 18.0 percent, respectively, compared with 8.9 percent in value segments and 6.2 percent in mass segments.
Before COVID-19, the value category was a highlight of the industry, with shareholder returns of 21.1 percent. This changed significantly during the pandemic as customers were forced to shop online; most of the major value brands lacked robust e-commerce platforms to cater to these changing demands.
Meanwhile, several forces have contributed to the luxury category’s extraordinary strength:
Pandemic-affected saving and spending habits. To start, COVID-19 lockdowns pushed more consumer dollars (particularly North American dollars) away from travel and experiences and toward savings and shopping for luxury goods.4 During the pandemic, consumers were saving at all-time high rates,5 and once restrictions lifted in 2021 and 2022, they actively engaged in “revenge spending” as consumers sought a reward for life on pause.
North American luxury dominance. After decades of dominance by Asian and European business, many luxury brands are seeing their share of market shift to the Americas. US consumers have historically been less interested in the luxury segment than their peers in Asia and Europe, but this seems to be changing. For example, the share of LVMH’s revenue that came from the Americas grew from 24 percent in 2019 to 26 percent in 2021, according to the company’s financial disclosures. Likewise, during the same period, Kering’s US share of revenue grew from 19 percent to 26 percent. This new wave is likely a result of both traditional market strength in the United States creating an increase in wealth and the limited international travel opportunities during COVID-19 that reduced cash-spending options.
More investable and sustainable shopping. Consumers are starting to view luxury goods through a new lens, in terms of both the goods’ attractiveness as long-term financial investments and the appeal of sustainable shopping through high-end resale. This period can rightfully be defined as a new era of luxury shopping, and the primary consumer is a departure from the traditional international shopper. A new profile of mindful luxury shoppers—those who prioritize sustainable shopping, products with long life cycles, and potential investment opportunities—seems to be shifting the landscape and driving increased momentum for the luxury category. (Consider that McKinsey predicts resale segments could grow at more than a 10 percent CAGR in the coming years.)
This period can rightfully be defined as a new era of luxury shopping, and the primary consumer is a departure from the traditional international shopper.
Nonluxury brands’ options for growth
Despite facing substantial challenges before and during COVID-19, a few leading mass and value brands achieved notably standout performances—and their stories can offer valuable guidance to other fashion companies seeking growth during tight times. One of the most replicable strategies revolves around driving top-line growth through exciting product innovation and channel realignment. Another is protecting bottom-line margins through strict cost controls that are in line with revenue shifts.
Growth through product and channel mix. Companies should consider stretching toward more luxury products and direct-to-consumer categories in ways that make sense for their brands. To this end, many premium brands are actively working to blur the line between luxury and the rest of the market, as are standout mass brands such as Crocs. The footwear maker, which had a TSR of 80 percent from 2016 to 2021, can attribute much of its recent surge in popularity to unique brand partnerships, such as its collaboration with Balenciaga this year.
Additionally, many nonluxury companies are starting to adopt the luxury channel model, moving away from commoditized products and outlet stores into closer proximity to the luxury brands that consumers covet.
Operational excellence through cost control. Across the entire industry, regardless of segment, players that kept SG&A spending (as a percentage of sales) more or less in line with revenue saw significantly better returns than those that did not cut costs as revenue growth slowed (Exhibit 5). The market rewarded AF&L brands that decreased their relative fixed assets with average returns of 20 percent, compared with 10 percent for those that increased their relative fixed assets. In other words, companies in which relative costs are down are doing well even if they are in categories that did not look likely to succeed during the COVID-19 era.
In the postpandemic world, it will be increasingly important for AF&L players to continue to focus on what is working for both customers and the global apparel market, but players should also look ahead and consider how things will evolve over time. For businesses already heavily indexed in the luxury category, the priority will be listening to nuanced changes in consumer demand and allocating investments to burgeoning growth opportunities and product innovation. For those seeking new growth strategies, category exploration and cost control might be great options.