You were one of the initiators of the State of Fashion report that BoF and McKinsey have been publishing annually for many years. I think we can skip discussing the latest edition—companies are seeing the current state of fashion reflected in their cash registers every day.
Imagine you’ve been asleep for the last fifteen years and suddenly you wake up to see how the world has changed: Donald Trump has become President of the United States, Putin has invaded Ukraine, Elon Musk wants to fly to Mars, and artificial intelligence is available to everyone. Politically, economically, and technologically, we are living in a completely different environment. Every company is affected by this.
Are we looking at a cyclical downturn caused by geopolitical shifts—particularly the policies of Donald Trump—that will eventually pass? Or are we witnessing a fundamental structural transformation that is here to stay?
Both. The fact that the luxury sector has stumbled after thirty years of tremendous growth and a decade-long boom is not entirely unusual. But the reality is that wardrobes across the Western world are already packed and consumers are spending less on clothing—that is here to stay. In my view, that’s not a cyclical issue. Ultimately, the only way forward for brands is through desirability and cultural relevance.
Why does this seem to have caught so many people off guard?
There is still a tremendous amount of money being made in this industry. Globally, we’re talking about a two-trillion-dollar business. And the McKinsey Global Fashion Index, which admittedly only covers publicly listed companies, still reports average EBIT margins of around 12 percent. Compared to the grocery retail sector, fashion remains a highly profitable industry on average. As a result, the pressure to change has been relatively low, and many companies simply slept through important developments instead of adjusting their business models.
That 12 percent is, of course, an average. The vast majority of companies earn significantly less, and most German fashion retailers didn’t make any profit at all in 2025.
That’s true. We analyzed this extensively during my time at McKinsey. Ultimately, it’s the top 50 companies that capture the lion’s share of the industry’s profits.
Not exactly encouraging news for companies ranked 51ff.
That’s the challenge. If you’re a family-owned mid-sized company that has enjoyed many years of strong profitability, you may believe you can continue operating for a while without even covering your capital costs —waiting for the good old days to return. But they won’t.
“Many players lack the critical scale and the financial resources needed to invest adequately in technology, sustainability, digitalization, and international expansion.”
Are you suggesting they should simply close the stores?
No. But the market will continue to consolidate. In my view, the mid-market segment has largely run its course. The premium segment will be next. Many players simply lack the critical scale and the financial resources required to invest sufficiently in technology, sustainability, digitalization, and international expansion.
What do you consider premium?
I’m talking about brands like Marc O’Polo, GANT or Tommy Hilfiger. The mid-market has long been dominated by players such as Zara and Mango. At the same time, even when a company disappears, the brand itself rarely ceases to exist. It is typically acquired by another company and continues under new ownership. Take Baldessarini, which is now part of S.Oliver. Or think of brands such as Shein and Everlane. Alternatively, brands with sufficient consumer relevance end up being licensed by the likes of Jamie Salter, founder of Authentic Brands Group. The range of products on offer doesn’t seem to be shrinking. That’s why you don’t really notice this consolidation.
Who are the winners and losers in this structural transformation?
It’s not as if discounters are somehow benefiting from the current weakness in purchasing power. And it’s just as much an old wives’ tale that the luxury sector is completely immune because the wealthy always spend money. If you look at the global Top 50 list, you’ll see that all price categories and all geographic regions are represented there. That means, in and of itself, you can make money in every segment. Of course, we have a few more luxury companies on that list. And more sports brands, too. And we have those that have developed innovative business models. There aren’t many of them.
Such as?
Inditex, above all, with its business model. And, of course, Shein, which has grown to a $35 billion business in an extraordinarily short period of time. E-commerce remains another winner, and the off-price sector has been one of the clear success stories. Resale is undoubtedly growing as well, although those business models have yet to reach a level where they are consistently highly profitable.
Let’s say you’re the owner or CEO of a fashion retailer in a provincial German town. There are still many proud, financially sound businesses that continue to generate profits. What would you do to future-proof the company?
I believe the only way is to establish genuine relevance within a sufficiently large catchment area. At least rents in these mid-sized towns are probably less of an issue.
Many retailers own their properties. In some cases, they practically own half the town.
That certainly provides security. But ultimately, what matters is economic value—the metric we used for the McKinsey Global Fashion Index. That’s profit after deducting the cost of capital. In the long run, you simply cannot survive unless you’re able to generate returns that at least cover your cost of capital.
“Success ultimately depends on having a truly deep understanding of your customer. In that respect, some local players may actually have an advantage.”
Back to my question: what should they do?
A truly deep understanding of your customers is key to success. Some local players may have an advantage here. It requires genuine curation. We’re talking about retail. It can’t just be about selling whatever a wholesale brand tries to push into your store. Desirability is what matters. That can come from curation, or it can come from an experience. After all, customers have the full selection available to them even outside major cities. Our online sales now account for 30 to 40 percent, depending on the price point and region. So, you really have to give customers a reason why to come into the store.
That sounds as though you’re not really convinced by the multi-brand retail model.
Sure. But it must be carefully curated. As a multi-brand retailer, you need to combat the monotony of the shopping district and stand out. Look at Wiesbaden, my hometown with 300,000 residents and high purchasing power. The downtown area is a disaster!
If multi-brand retail continues to decline, brand suppliers will face problems as well.
As a brand, you either must go vertically or run a consistent wholesale business. You are either Mango or you are Bestseller. But you can’t be in anything in between.
So, is multichannel no longer the answer?
Many companies that originated in manufacturing or wholesale have overstretched themselves by moving into retail. At first, they were simply delighted to see their name above the store entrance. Then e-commerce came along as well, dramatically increasing the complexity of the business. The reality is that many companies are simply not able to manage all these channels effectively while making money across all of them.
So is much of the German apparel industry heading in the wrong direction?
Not necessarily. Today, brands need to be present wherever their customers choose to shop. But to do that successfully, companies need critical scale.
What is critical scale about?
Ten years ago, annual revenues of around €1 billion probably represented sufficient scale. Today, you need more like €3, €4 or €5 billion. You need to excel across every channel. You need speed. You need agile back-end processes. You need to be sustainable. And you need to be digital.
“For smaller companies, the future lies in occupying a niche. You have to be a specialist, stand out by offering the best product. But companies should think very carefully about whether they really need to compete on every playing field.”
And now AI coming in as well
Exactly. All of this has become enormously complex. Fashion distribution used to be a relatively straightforward business. You sold wholesale at healthy margins, retailers took care of the rest, and whatever they couldn’t sell they simply marked down. As a wholesaler, that was only of limited concern to you. Those days are gone.
So what if I’m Brax, Digel or Betty Barclay? All of them, incidentally, are far from unsuccessful companies.
I don’t want to comment on individual brands. But I do believe that for smaller companies, the future lies in finding and owning a niche. You must become a specialist and stand out because you offer the best product. At the same time, companies should ask themselves whether they really need to compete across every possible playing field.
Consultants have made a good living from telling companies what do to
Just look at all the concepts we’ve been discussing for the past twenty years with relatively little coming out of it: mass customization, personalization, omnichannel. What does omnichannel really mean for most retailers today? In many cases, it’s a video screen in the store, perhaps Click & Collect, and if they’re particularly advanced, Ship from Store. Compare this to what Inditex has built. They offer an app that guides customers through the store, shows product availability and creates genuine added value. You can pay via self-checkout or have purchases shipped directly from the store to your home. That’s the new benchmark. Most mid-sized companies simply can’t afford to develop these kinds of capacities. Inditex now generates close to $40 billion in annual revenue, almost twice the size of H&M. And it’s not just a question of financial resources. You also need the technological capabilities to develop and implement those solutions.
Hmm.
Which is precisely why, in some cases, companies may be better off resisting the temptation to follow every trend and instead focus on areas where they can truly differentiate themselves: personal service, thoughtful curation, entertainment, and, above all, a genuine understanding of their customers.
What’s interesting is that a company like Inditex still seems very, very agile despite its size. In the past, as companies grew, so did their problems, and at some point, they were successfully challenged by smaller, faster, and more adaptable competitors.
That’s true. But not everything at Inditex is as perfect as it seems. Like-for-like growth has weakened over the past few seasons. And you’ll notice that Zara’s performance figures are now reported together with Zara Home and Lefties—that’s almost certainly no coincidence. Of the group’s nearly $40 billion in revenue, Zara still accounts for more than 70 percent. The other eight brands generate “only” around $11 billion combined. That’s still an extraordinary success, but it also demonstrates that you can’t simply replicate Zara over and over again.
Still, there’s no reason to worry about Inditex.
Certainly not. The strength of the Inditex business model lies in its ability to detect shifts in consumer demand and correct assortment mistakes extremely quickly. If they misjudge a collection, they can fix it within a matter of weeks, whereas a conventional nine-to-twelve-month supply chain may need two full seasons to correct the same mistake.
And now along comes Shein—the next industry disruptor.
In terms of business model development, that is indeed the next step. Of course, Shein has taken advantage of benefits that shouldn’t really exist: not having to pay customs duties and not having to comply with product standards. But it’s a misconception that if these advantages were eliminated now, the business model would collapse. That won’t be the case. Following Zara and e-commerce players like ASOS, Shein represents the third wave of fast fashion.
“Companies were still making plenty of money the old way. So why change? The pressure simply wasn’t strong enough. Too many businesses ultimately stood still—like a deer caught in the headlights.”
Is Shein’s manufacturing-to-consumer model the future of the fashion business?
Not necessarily. A customer looking for a well-made pair of trousers isn’t automatically chasing the latest trend. That means I don’t need to produce and deliver that product within three weeks. Even so, there is a great deal to learn from Shein. It would be a mistake to believe that, as a quality trouser brand with a less fashion-driven proposition, you can continue operating with the same back-end systems and processes as before. I’m just not convinced everyone has fully grasped that.
Why not?
Inditex has been around for forty years. Its business model has been well understood by at least twenty-five. And yet very few companies have managed to replicate it successfully.
Why is that?
Because companies were still making plenty of money the old way. Why change if the business is still profitable? The pressure simply wasn’t strong enough. Too many companies ultimately stood still—like a deer caught in the headlights. One factor may be that many of the industry’s great success stories are still controlled by their founders or the second generation, who remain attached to familiar processes and leadership approaches that worked in the past, but struggle to reinvent their business models.
Isn’t it usually new entrants that shake up established markets? Just look at Zalando’s rise. Some observers are already arguing that even this model—multi-brand fashion retail online—is under threat, calling Zalando “Karstadt without escalators.” Would you buy Zalando shares?
Fundamentally, I believe online penetration will continue to increase. I wouldn’t rule out it reaching 50 percent. At the same time, I expect to see consolidation in the mid-market, much as we’ve already seen in luxury e-commerce—with Matches, Farfetch, YNAP and Mytheresa.
Zalando has already swallowed About You.
I think we’ll see different models of e-commerce emerge. One is the Amazon-like model, and that’s where I’d place Zalando. You’re essentially a digital platform: you generate the traffic, manage the supply chain and back-end operations, and ultimately work as a marketplace.
An ECE shopping centre for the internet.
Exactly. The second model is curated, as exemplified by ASOS or Mytheresa. Here, you still need a sophisticated technology platform, but customers also come because they’re offered something distinctive: a carefully curated assortment combining private labels with selected third-party brands. The third model is Shein, which adds its own manufacturing engine to the equation.
What’s your take on the brands’ D2C efforts?
If you’ve reached critical scale, then it certainly makes sense. But brands will continue to sell through marketplaces as well. Just look at luxury. Only a handful of brands aren’t present on platforms – Dior, Louis Vuitton – while Chanel isn’t even fully online itself. Everyone else also sells through marketplaces. The dream of going entirely direct-to-consumer only works for a very small number of brands, and by now most companies have come to realize that.
“When e-commerce first emerged, many of the early pioneers went bankrupt after the bubble burst. It took another ten years before the business model was truly commercialised. The same thing could happen with AI.”
AI has now become the industry’s next major agenda item. It offers enormous opportunities—but also significant risks.
I see the opportunities above all. Market conditions remain challenging, and there’s little indication that the structural environment will improve any time soon. It’s unlikely that fashion will suddenly become more relevant again or claim a larger share of consumers’ wallets in Western markets. Purchasing costs certainly aren’t going to fall; if anything, costs are likely to increase. Then there’s the shortage of skilled labour. Looking at these structural challenges, AI is really the only development that promises a meaningful improvement in productivity. The question is whether companies are capable of capturing that potential—and which companies will they be. Large corporations are far more likely to have the resources to do so. Small and medium-sized businesses will have to wait until affordable tools and solutions become available. The question is whether enough of them will survive long enough to benefit.
As if that wasn’t enough, agentic commerce is already being touted as the next game changer. What’s your view?
I still think agentic commerce is something of a mirage. It’s far from clear what it will become. Will ChatGPT eventually replace Google while also handling transactions? Perhaps. There’s certainly a lot of talk, and plenty of partnership announcements. But there’s also a considerable amount of hype. When I look at the valuations being discussed for upcoming AI IPOs—where companies are valued on extraordinary revenue multiples rather than on profits—it inevitably reminds me of a bubble. When e-commerce first emerged, many of the early pioneers went bankrupt after the bubble burst. It took another ten years before the business model was truly commercialized. The same thing could happen with AI.
What should be the key priorities for entrepreneurs and decision-makers in the fashion industry over the next three to five years?
I could easily produce an entire catalogue of priorities—and that’s part of the problem. There is no longer one single issue companies need to focus on. The challenges have become far more numerous and considerably more complex.
Try anyway.
I’d start with the product. Without product and brand desirability, nothing else matters. Secondly, companies need rigorous cost discipline—across every channel and throughout the sourcing process. Dynamic pricing also remains a surprisingly neglected area.
So, business as usual?
Not quite. We’re going to become much more data-driven. Ten years ago, companies either didn’t have access to the data or lacked the tools to make use of it. Today, those tools exist. Companies need to become technologically literate. They don’t necessarily have to be first movers in every area, but they do need to understand what’s changing, which technologies are worth embracing, and which ones can safely be ignored.
“Fashion has become far more culturally relevant over the years. Whether that will translate into attracting the technical talent the industry now needs remains an open question.”
The industry needs the right people.
Absolutely. Fashion must become better at attracting talent. I believe the industry’s cultural relevance has grown significantly over the years. Whether that translates into attracting people with the technical expertise companies increasingly require is another question. At the same time, there are numerous start-ups and scale-ups operating at the intersection of fashion and technology. Established companies need to engage with them, explore partnerships and determine where collaboration can create value.
Do we need a different kind of manager from the ones we have today?
Yes—and no. As I said, many aspects of the business will have to change structurally. A manager who relies solely on the experience of the past thirty years and isn’t open to change will almost certainly struggle and is probably no longer the right choice. On the other hand, simply handing the reins to a technology-obsessed young executive isn’t the answer either. Ultimately, success depends on finding the right balance. Leadership has become far more complex, and the profile required for the job is much broader than it was in the past.
Let’s say I’m an investor with too much money, and I hand over to you a few million euros to launch a fashion retail company. What kind of business would you build?
That’s an excellent question. On the one hand, the barriers to launching a fashion brand—or any fashion-related business—have never been lower. Many of the things that were once highly complex, required specialist expertise and involved substantial investment have become dramatically cheaper and more accessible. If you manage to capture the cultural zeitgeist and create genuine relevance, you can still build something successful almost from scratch.
But?
If we look at it objectively, who has managed to build something truly significant over the past fifteen years? The list isn’t very long. In sportswear, perhaps Lululemon and On. In luxury, Toteme or The Row. Then you’ve had direct-to-consumer success stories such as Skims, Everlane and Allbirds, and in resale, Vestiaire Collective. Ultimately, it’s less about launching new brands than about innovating business models. With annual revenues of around $35 billion, Shein is the undisputed superstar in that respect. But the idea that “I’m a creative talent, I’ll design a great collection and build a successful brand”—that’s highly unlikely to work today.
So if you were to start a business, I’d have to give you quite a lot of money.
Yes, that’s true. Just ask yourself why the major fashion groups so rarely launch entirely new brands and instead prefer to acquire existing ones. The most obvious opportunity would be to introduce a new sustainable fashion brand. So why hasn’t anyone really succeeded in doing that?
Inditex has launched several new chains over the years. H&M has as well.
The exceptions prove the rule. But one thing is certain: succeeding in today’s market has not become any easier. We’ve painted a rather bleak picture here.
You’re right. Are there reasons to be optimistic?
Absolutely. The global fashion market is still growing. Fashion remains one of the most effective ways for people to express their individuality. We can rely on consumers’ hedonism. I also believe sustainability will return as a defining issue. And I’m convinced that technological innovation will ultimately prove to be an enabler rather than a threat. Companies will continue to make money in this industry, even if margins continue to come under pressure. After technology and finance, many of the billionaires on the Forbes list built their fortunes in retail, fashion and luxury goods—the Ottos, the Ortegas, the Perssons, the Arnaults and the Pinaults. I’m convinced this industry will continue to generate successful businesses and substantial profits for many years to come.
