Luxury & Fashion: Introduction – Lexology

This article is an excerpt from GTDT 2023 Luxury & Fashion. Click here for the complete guide.

Despite starting to revive in 2021 and 2022, the global fashion industry still faces major challenges from supply chain disruptions, uneven demand, rapid shifts across marketing and distribution channels, increased regulation and consistent pressure on revenue. Added to this in 2023 are rapidly rising inflation, higher interest rates, and geopolitical tensions amid the war in Ukraine. Although these pressures have taken their toll, brands are continuing to adapt to the new world of evolving market landscapes, customer demands and digital innovation.

The fashion industry posted a 20 percent decline in revenue in 2019–2020, with 69 percent of companies showing losses and about 7 percent of companies leaving the market entirely, either due to financial difficulties or due to being bought out by a rival, according to McKinsey. In 2021, China is the standout player, as its economy is recovering faster than any other country, but in 2022 growth is slowing even in China, as zero-covid policies continue and consumers tighten their belts due to rising inflation – painting a rather gloomy picture for 2023. Most executives expect the fashion market to grow in 2023, but at a slower rate as inflation affects retailer costs and consumers’ willingness to spend. Luxury may exhibit more resilience than other markets, with luxury consumers less affected by inflation and eager to travel (driving revenue from airports and tourist destinations, mainstay of luxury retail sales). But even in the luxury goods market, regional differences persist, and brands will have to weigh their regional priorities carefully in 2023.

If inflation is the fashion industry’s most significant threat in 2023, sustainability continues to present opportunities for brands to stand out. Environmental, social and governance (ESG) have become even more significant forces in this sector. We are seeing increasing scrutiny of the supply chain and workforce, with regulators and consumers demanding transparency across the manufacturing and distribution chain. While socially conscious supply chain statements were originally embraced by luxury brands and often demonstrated as part of their heritage credentials, they are now being introduced by value brands as a means of connecting with a younger demographic. While the tension between fast fashion and sustainability is waning, the fashion industry still has a lot of work to do in this area. Brands must represent actual change, because false or misleading advertising of sustainability efforts can cause regulatory and consumer backlash that far exceeds the expected benefits.

Inseparably with ESG, ownership models are constantly changing, especially among young consumers. Garment rental is growing through sites like My Wardrobe HQ, Rent the Runway and Wardrobista, while second-hand fashion sites like Vestiare Collective, Vinted and Poshmark provide ways to own high-end brands at affordable prices through websites. This model offers a way for the fashion industry to reduce its environmental impact; however, this is only a drop in the ocean, and a global systematic closed-loop recycling system is required in the long term.

Authentication has long been a problem for the fashion industry—a problem that has been exacerbated by the rise of e-commerce. Counterfeit goods are becoming more and more convincing, and those responsible for their production are becoming more adept at evading arrest. Online platforms, including social media sites, must increasingly be relied upon to police the advertising and sale of counterfeit goods. Blockchain is now being used to guarantee origin and ownership of high-value items, in an effort to build consumer trust and confidence, and its use is expanding to certify materials, dyes, and serial numbers of individual garments.

Fashion brands also face the challenge of striking a balance between giving consumers control over their data and digital lives, and, at the same time, providing access to affordable and relevant products and services. As new and highly punitive regulations took effect around the world, it became clear that data privacy is a topic of great interest to regulators and can tarnish reputations and generate profits if ignored. And in 2023, we expect more investment in marketing, as brands have to rely less on certain types of data collected and focus more on other ways to monitor and generate consumer interest.

The fashion industry invests heavily in digital innovation. Digital assets such as non-fungible tokens have experienced an explosion in popularity, and partnerships between established fashion brands and gaming communities are being built as a means to capitalize on these opportunities and appeal to a younger demographic. The move to reduce the number of clicks to the point of sale has seen the development of ‘in-app’ social commerce, and this will continue to grow over the course of 2022. Virtual commerce (VC) has been embraced, particularly in Asia-Pacific countries, as a means to enjoy a high level of personal service from luxury brands without leaving your home. The luxury goods sector provides an excellent example of how innovative businesses can pivot and create services in response to their customers’ inability to travel. Influencers continue to be important drivers of sales. However, their scope is increasingly restricted, as regulators seek to increase the transparency of influencers’ involvement in promotional activities. As the digitization of the fashion industry continues, so does the threat of cyberattacks. Ensuring adequate safeguards to protect customer data, IP, and other assets from loss, accidental sharing, or ransomware remains a concern.

After increasing initiatives related to the metaverse in fashion in 2021 and 2022, 2023 will be a challenge and a short-term shopping experience. Retailers combine artificial intelligence and data in uses such as virtual fitting rooms or intelligent service chatbots. Ecommerce rates normalized as digital marketing costs increased, and brands returned to focusing on physical stores; in 2022, physical store openings in the US surpassed closings for the first time since 2019. In 2023, retailers will focus on ‘omnichannel’ experiences, where retailers engage consumers through communication in personalized messaging across multiple channels, both physical and digital. This focus will further integrate digital advancements and strategies with physical space to achieve a unified customer journey.

Global supply chains are perhaps the biggest losers during and after the pandemic. Events such as the floods in Pakistan and the covid-19 lockdown in China limited production during 2022. To deal with the uncertainty, fashion companies will continue to diversify sources in their supply chains, while considering ‘nearshoring’ to place their manufacturing centers closer to their domestic consumers. But labor shortages are expected to remain a challenge regardless of production location. In addition, brands want to strengthen their manufacturing partnerships with better communication and understanding to respond more agilely to price fluctuations.

The fashion industry is likely to face new and existing challenges in 2023 – but agility, and the ability to adapt and thrive with ever-changing consumer demands will continue to be key attributes fashion companies need to weather the storm. Many could not foresee the need to leverage technology to the extent necessary, while others were caught off guard by the rapid adoption of a sustainability agenda. Success will come to those willing to take risks, perhaps having one foot in an established marketing and distribution channel and another in the metaverse, with a virtual storefront. Brands that can embrace change and follow their customers’ preferences will be the winners in this market.