With the COVID-19 pandemic dominating thoughts and minds, fashion executives are planning for a range of scenarios and hoping for a speedy global recovery. However, amid increasing pressure on performance, shifting consumer behaviors, and accelerating demand for digital, there is an imperative to act decisively to prepare for the next normal.
After a year in which the fashion industry posted record-low economic profits, business leaders are on the front foot, seeking to innovate while continuing to engage their core constituencies. Given the disruptions of recent months, many companies are reconnecting with their supply chains, making tough decisions—for example, about ROI at store level—and ramping up omnichannel services. The beauty segment, covered for the first time this year in our The State of Fashion 2021 report, has remained relatively insulated from the pandemic, offering consumers a comforting pick-me-up in challenging times. As we move toward recovery, companies in the beauty segment have a chance to align with shifting category and regional opportunities.
Those are some of the findings from our latest report, The State of Fashion 2021, written in partnership with the Business of Fashion (BoF). The report, the fifth in our annual series, drills down into the major themes affecting the fashion economy and assesses a range of possible responses. Reflecting our conversations with industry leaders over recent months, it examines the ten key trends likely to shape the business over the coming year. Our latest reading of the our global fashion index, meanwhile, reveals new insights into company performance by category, segment, and region.
The sober mood among fashion executives surveyed in last year’s report has evolved over recent months into a strong determination to manage the industry through the COVID-19 pandemic. Our calculations, based on the changes in market capitalizations over time in our index on global fashion, suggest that the industry’s economic profit will fall by 93 percent in 2020 after rising 4 percent in 2019 (Exhibit 1). That translates into a significant increase in the number of companies that are “value destroyers,” which we expect will rise to 73 percent of those in the index in 2020, compared with 60 percent in 2019.
Still, there are silver linings among the clouds. While the crisis has visited a devastating impact on businesses and jobs, it may also have accelerated responses that can lead to positive outcomes. Indeed, many fashion companies have taken time during the crisis to reshape their business models, streamline their operations, and sharpen their customer propositions.
Looking forward, our base case is cautiously optimistic, with the virus more effectively controlled over the coming year, thanks to a strong public-health response.1 At the same time, government interventions will partially offset economic impacts, and global travel will pick up, alongside the possibility of larger social gatherings. In that scenario, we would see markets such as China recovering strongly. We predict a 5 to 10 percent sales growth in China in 2021 compared with 2019. Europe, on the other hand, will probably continue to feel the effects of subdued tourist arrivals, leading in 2021 to a 2 to 7 percent sales decline from 2019. Moreover, precrisis levels of activity are unlikely to return before the third quarter of 2022. We expect a similar trajectory in the United States, with sales down 7 to 12 percent next year compared with 2019, and only a modest recovery before the first quarter of 2023.
Where there is positive momentum, the primary driver will continue to be digital channels, reflecting the trend established before the COVID-19 crisis and the reluctance of people in many countries to gather in crowded environments. Indeed, recent data show that we have vaulted five years forward in consumer and business adoption of digital in a matter of months. Around the globe, we expect more than 20 percent annual digital growth in 2021 (with 30 percent in Europe and the United States) compared with 2020.2 Other positive trajectories will include the growing influence of platform propositions as customers warm to marketplace experiences and renewed appetite among both brands and consumers for local engagement—the personal touch that reflects the priorities of many.
Against this background, fashion-industry fortunes are highly polarized. Given the disruptions in financial year 2019, it was not possible for us to calculate our annual list of 20 “super winners” accurately. Instead, we referenced our 2018 list to gauge the fortunes of the elite group. Perhaps unsurprisingly, investors this year had more confidence in the top 20 than in other companies, and super winners were less badly hit by the April stock market sell-off than their peers were (–26 percent from December, compared with –33 percent on average). By the time the Northern Hemisphere went on its August vacation, the super winners had recovered on aggregate to just 5 percent below precrisis levels.
Companies that have performed the best over recent months tended to share at least one of two key characteristics (Exhibit 2). Many have had a strong Asia–Pacific focus, reflecting the economic strength of the region and the relatively lower impact of the pandemic there, and many have offered a compelling digital proposition. E-commerce players, such as ASOS, FARFETCH UK, Revolve, and Zalando, have consistently outperformed in 2020, as locked-down customers turned to digital devices to shop. By August, such digital-first players were trading 35 percent higher, on average, than they did in December 2019.
Given the standout performance of digital channels in the current environment, we expect digital to remain king in 2021. Indeed, some 22 percent of executives say it will be the key momentum driver in the coming year—a percentage point less than the proportion that cites “uncertainty” and slightly more than the 20 percent that pick “challenging.”3
Ten themes for 2021
As the world recovers from the COVID-19 pandemic, what will be the defining themes in the business of fashion? Our discussions with industry executives suggest that the key drivers will include shifting consumer behaviors (in relation to digital channels, social-justice concerns, and a reluctance to travel), opportunistic investment, and the need to build more efficient, simple, and demand-focused operating models (Exhibit 3).
As decision makers continue to manage uncertainty, the most successful will be those that get a grip on the trends shaping the fashion landscape. That means focusing on an omnichannel perspective, of course, but also emphasizing the importance of sustainability through the value chain. Consumers (and increasingly, investors) will reward companies that treat their workers and the environment with respect, and the deeper relationships that emerge will bring benefits in agility and accountability.
Physical retail has been under historic levels of pressure. In the United States alone, some 20,000 to 25,000 stores were expected to close in 2020, more than double the number that did so in 2019. With the pandemic adding to the segment’s woes, many brands have embarked on strategic reviews or have compressed multiyear transformations into just a few months. In 2020, Nike announced the acceleration of its digital strategy and investment in its highest potential areas, which it said would lead to job cuts in stores.4 Zara said that it plans to cut 1,200 stores over two years and invest €2.7 billion in store-based digital.5 Still, we do not believe the curtain is falling on physical channels. Instead, from the wreckage of 2020, a sleeker, more focused offering will emerge. That offering will combine the best of human and automated services—the beginning of a truly “bionic” customer experience.
We see brands rethinking store formats and leveraging data and analytics to predict footfall, manage assortments, and built personalized offerings. Flagship stores will be branded as discovery zones and tasked with creating emotional connections with customers. We have already seen Burberry and Nike, as well as digitally native ARIAS New York, invest in hybrid spaces and deploy technologies such as apps and body scans to create more compelling experiences. At the same time, we are likely to see more nuanced assessments of store ROI based on a combination of digital and physical lenses. With companies in China leading the way, brands will engage even more closely with social media to offer shoppers exclusive content and personalized experiences.
Strategically, there will be an imperative in 2021 to manage commercial opportunities actively and to be acute in picking winning segments, markets, and channel combinations. With tourism in the doldrums, domestic outlets will become more important than ever. We also expect to see a rise in M&A activity as companies take advantage of low valuations and grab share in fast-growing markets.
There is little doubt that 2021 will continue to be tough for many as the COVID-19 pandemic tracks an uncertain trajectory. The task for decision makers, therefore, is to find silver linings, knowing that times of change are inherently rich with opportunity. Fashion companies that double down on strategy, align with key trends, and reflect an evolving consumer landscape are likely to emerge from the crisis stronger, leaner, and ready to thrive in the next normal.
ABOUT THE AUTHOR(S)
The authors of this article are Imran Amed (founder, editor in chief, and CEO of the Business of Fashion, and an alumnus of McKinsey’s London office), Anita Balchandani (a partner in the London office), Jakob Ekeløf Jensen (a consultant in the London office), Achim Berg (a senior partner in the Frankfurt office), Saskia Hedrich (a senior expert in the Munich office), and Felix Rölkens (an associate partner in the Berlin office).
The authors wish to thank Sarah Andre, Althea Peng, Sonja Penttilä, and Robb Young for their contributions to this article.
It’s time to rewire the fashion system: State of Fashion coronavirus update
By Imran Amed, Anita Balchandani, Achim Berg, Saskia Hedrich, Jakob Ekeløf Jensen, and Felix Rölkens
Fashion executives are focusing on crisis management now but eventually must shift to reimagining the industry. How will changes to the global economy and consumers’ behavior affect fashion in the postcoronavirus world?
Even before the coronavirus disrupted financial markets, upended supply chains, and crushed consumer demand across the global economy, fashion-industry leaders were not optimistic about 2020. The industry was already on high alert, and executives expressed pessimism across all geographies and price points in our annual report, The State of Fashion 2020, released late last year. But fast-forward a few months, and fashion’s outlook has gotten dramatically and suddenly bleaker. The industry is now on red alert.
This unforeseeable humanitarian and financial crisis has rendered previously planned strategies for 2020 redundant, leaving fashion businesses exposed or rudderless as their leaders confront a disorienting future and vulnerable workers face hardship and destitution. With this special coronavirus update to The State of Fashion 2020, we have taken a stance on what our new normal will look like in the aftermath of this “black swan” event to provide insights (from analyzing surveys, data, and expert interviews) for fashion professionals as they embark on the 12- to 18-month period after the dust settles.
The black swan and fashion
COVID-19 could spur the biggest economic contraction since World War II, hitting every sector from finance to hospitality.6 Yet fashion, because of its discretionary nature, is particularly vulnerable. The average market capitalization of apparel, fashion, and luxury players dropped almost 40 percent between the start of January and March 24, 20207 —a much steeper decline than that of the overall stock market.
Humanitarian repercussions are expected to outlast the pandemic itself. Dire consequences for fashion, one of the biggest industries in the world, generating $2.5 trillion in global annual revenues before the pandemic,8 entails joblessness or financial hardship for people across the value chain.
We estimate that revenues for the global fashion industry (apparel and footwear sectors) will contract by –27 to –30 percent in 2020 year-on-year, although the industry could regain positive growth of 2 to 4 percent in 2021 (compared with the 2019 baseline figure). For the personal luxury goods industry (luxury fashion, luxury accessories, luxury watches, luxury jewelry, and high-end beauty), we estimate a global revenue contraction of –35 to –39 percent in 2020 year-on-year, but positive growth of 1 to 4 percent in 2021 (compared with the 2019 baseline figure). If stores remain closed for two months, McKinsey analysis approximates that 80 percent of publicly listed fashion companies in Europe and North America will be in financial distress. Combined with the McKinsey Global Fashion Index (MGFI) analysis, which found that 56 percent of global fashion companies were not earning their cost of capital in 2018, we expect a large number of global fashion companies to go bankrupt in the next 12 to 18 months.
The interconnectedness of the industry is making it harder for businesses to plan ahead. Just as China inched through recovery, outbreaks worsened in Europe and the United States. But it is in the developing world, where healthcare systems are often inadequate and poverty is rife, that people will be hit the hardest. For workers in low-cost sourcing and fashion-manufacturing hubs, such as Bangladesh, Cambodia, Ethiopia, Honduras, and India, extended periods of unemployment will mean hunger and disease.
The crisis is affecting daily lives, instilling anxiety and uncertainty in the minds of almost everyone. Indeed, consumer pessimism about the economy is widespread, with 75 percent of shoppers in Europe and the United States believing that their financial situation will be affected negatively for more than two months.9
Although the duration and ultimate severity of the pandemic remains unknown, it is apparent that the fashion industry is just at the beginning of its struggle. By causing blow after blow to both supply and demand, the pandemic has brewed a perfect storm for the industry: a highly integrated global supply chain means that companies have been under immense strain as they have tried to manage crises on multiple fronts as lockdowns were imposed in rapid succession, halting manufacturing in China first, then Italy, followed by countries elsewhere around the world.
A freeze on spending is aggravating the supply-side crisis. Widespread store closures for an industry reliant on offline channels, coupled with consumer instinct to prioritize necessary over discretionary goods, hit brands’ bottom lines and depleted cash reserves. Even online sales have declined 15 to 25 percent in China, 5 to 20 percent across Europe, and 30 to 40 percent in the United States.10
Once the dust settles
Once the dust settles on the immediate crisis, fashion will face a recessionary market and an industry landscape still undergoing dramatic transformation. The exhibit unpacks five areas that could see significant changes; the full report explores these areas in greater depth. We expect a period of recovery to be characterized by a continued lull in spending and a decrease in demand across channels. As noted in our previous articles on “getting woke,” radical transparency, and sustainability first, the consumer mindset was already showing signs of shifting in certain directions before the pandemic.
Now, the resulting “quarantine of consumption”11 could accelerate some of these consumer shifts, such as a growing antipathy toward waste-producing business models and heightened expectations for purpose-driven, sustainable action. Meanwhile, some of the shifts we will witness in the fashion system, such as the digital step change, in-season retail, seasonless design, and the decline of wholesale, are mostly an acceleration of the inevitable—things that would have happened further down the road if the pandemic had not helped them gain speed and urgency now.
The coronavirus also presents the fashion industry with a chance to reset and reshape the industry’s value chain completely—and an opportunity to reassess the values by which it measures actions. We expect that themes of digital acceleration, discounting, industry consolidation, and corporate innovation will be prioritized once the immediate crisis subsides. Even after witnessing waves of insolvencies, industry leaders will need to get comfortable with uncertainty and ramp up future-proofing efforts as the potential for further outbreaks and lockdowns loom.
This will also be a time for collaboration within the industry—even among competing organizations. No company will get through the pandemic alone, and fashion players need to share data, strategies, and insights on how to navigate the storm. Brands, suppliers, contractors, and property owners should also find ways to share the burden.
This joint report by the Business of Fashion and McKinsey is an effort to advance the discussion beyond crisis management and immediate contingency planning by outlining the areas in which the fashion industry must focus once the dust settles on the current crisis. Exactly when this will happen is impossible to know for sure, except that it will, in all likelihood, be linked to the discovery of a workable antiviral treatment and delivery of a proven vaccine, which some experts say is at least 12 to 18 months away.
Navigating this uncertainty will not be easy for fashion leaders. Players need to be decisive and start putting recovery strategies into motion to emerge with renewed energy. The crisis is a catalyst that will shock the industry into change—now is the time to get ready for a postcoronavirus world.
Download The State of Fashion 2020: Coronavirus Update, the full report on which this article is based (PDF–3MB).
ABOUT THE AUTHOR(S)
Imran Amed, the founder, editor-in-chief, and CEO of the Business of Fashion, is an alumnus of McKinsey’s London office, where Anita Balchandani is a partner and Jakob Ekeløf Jensen is a consultant; Achim Berg is a senior partner in the Frankfurt office; Saskia Hedrich is a senior expert in the Munich office; and Felix Rölkens is an associate partner in the Berlin office.
The authors wish to thank McKinsey’s Tiffany Wendler, as well as the Business of Fashion’s Robb Young, for their contributions to this article.
The State of Fashion 2020: Navigating uncertainty
By Imran Amed, Anita Balchandani, Achim Berg, Saskia Hedrich, Shrina Poojara, and Felix Rölkens
The industry is not looking forward to 2020—suggesting strategic clarity will be important.
The prevailing mood of fashion leaders is one of anxiety and concern. On the one hand, evolving channels, shifting markets, and groundbreaking research offer revenue opportunities and the chance for radical innovation. On the other, global economic growth is slowing and competition is more intense than ever.
To thrive in this environment, companies must think strategically, sharpen their decision making, and keep their fingers on the pulse of customer demand. They need to get digital right and to address consumers increasingly concerned by the climate-change agenda. At the same time, they must cater to local tastes across multiple markets and cultures. One size will not fit all.
These are some of the findings from our latest report, The State of Fashion 2020, written in partnership with The Business of Fashion (BoF). This fourth in our annual series analyzes major themes around the fashion economy and breaks new ground to explain the dynamics driving the industry. Our survey of 290 global fashion executives and interviews with thought leaders and pioneers have helped us identify ten key themes that will set the agenda in the year ahead. The latest reading of the McKinsey Global Fashion Index (MGFI), meanwhile, reveals new insights into fashion-company performance by category, segment, and region.
A darkening mood
For many in the fashion industry, the glass is half empty. The mood among respondents to our executive survey is sober across geographies and price points, and the pockets of optimism seen last year in North America and the luxury segment have steadily evaporated (Exhibit 1).
The MGFI forecasts that growth will slow to 3 to 4 percent in 2020, slightly below the predicted rate for 2019. Strikingly, only 9 percent of respondents think conditions will improve next year, compared with 49 percent who said the same last year.
Economic profit grew for the second year running in 2018, following consecutive annual declines from 2012 to 2016 (Exhibit 2). The 16 percent year-on-year rise came largely from improved operating margins driven by cost cutting. The average industry EBITA12 margin was 10.8 percent, a tick up on 2017 and the highest since 2014.
One reason that executives are not breaking out the bunting is that the outlook for the global economy is less rosy than it was a year ago. Against this background, fashion-industry fortunes are highly polarized. For an exclusive group of “Super Winners,” the sun is shining (Exhibit 3); by economic profit, these 20 companies added more to the industry bottom line in 2018 than all others combined. The Super Winners include three new entrants—Anta Sports, Heilan Home (HLA Corporation), and Lululemon—reflecting the strength of sportswear and the growing influence of Chinese players. In luxury, Kering made an impressive rise through the ranks, driven by Gucci’s double-digit sales growth and strong performance in Asia–Pacific markets such as Japan. Not only are leading companies highly value-creating, they are also at the cutting edge of innovation. They are also most successful in attracting funding and talent, often leaving the rest to fight over scraps.
Alongside public companies, we also identified a group of “hidden champions.” These privately owned gems often dominate their category areas and generate significant revenues. Some are household names, while others are less visible but still pack a punch. Among the well-known brands, Chanel is a significant player, with revenues of more than $10 billion, while Rolex is one of the few large independent and private luxury watch brands remaining. At the opposite end of the price spectrum is Primark, whose commitment to its core value proposition has made it a formidable competitor. These players show that there is a great deal of industry value outside the spotlight, and the “hidden champions” too have much to offer alongside their listed counterparts.
Of course, for every success, there are also relative failures. A growing number of publicly traded and private companies have become “value destroyers.” The midmarket in particular is in the doldrums, generating negative returns for shareholders. For some, the abyss beckons.
Ten themes for 2020
What will define the industry in the coming year? Based on our executive survey, the words on everyone’s lips are sustainability, digitization, and innovation (Exhibit 4).
When it comes to sustainability, the industry’s track record remains a source of concern. The textile sector still represents 6 percent of global greenhouse-gas emissions and 10 to 20 percent of pesticide use. Washing, solvents, and dyes used in manufacturing are responsible for one-fifth of industrial water pollution, and fashion accounts for 20 to 35 percent of microplastic flows into the ocean. Consumers are increasingly waking up to this reality and demanding change. In August 2019, Kering CEO François-Henri Pinault spearheaded an industry-wide pact to achieve net-zero emissions by 2050. According to McKinsey’s 2019 Apparel Chief Purchasing Officer Survey, while the absolute number of sustainable fashion products remains low, there has been a fivefold increase over the past two years.
Looking forward, we see more research into sustainable materials and technologies, as well as the circular economy. This should lead to a move beyond 2019’s focus on transparency toward real commitment. That’s great news for consumers and for companies that can make sustainability real. However, given the scale of investment required, it means nervous times for small and midsize players.
Equally, consumers and advocates are calling for the industry to become more inclusive. We see 2020 as being a watershed for “Inclusive Culture,” with diverse races, genders, and sexual orientations increasingly present across organizations and in leadership roles.
Digital disruptors will face more cautious investors in the year ahead. Stock-market valuations of tech players have reached dizzying levels, reminiscent of the dot-com boom of the early 2000s, while a number of private companies have reached unicorn status. The trick in 2020 will be to prove to investors they can turn potential into profit. At the vanguard, we are seeing a new breed of direct-to-customer companies. Asia in particular is emerging as a fertile ground for small and midsize enterprises that leverage e-commerce to reach out from the factory floor.
At the forefront for many is the future role of brick-and-mortar stores. Although they are written off by some as “too 20th century,” we take a more constructive view. We see local stores in particular building a role as partners in the digital revolution, helping customers touch, feel, and experience in convenient locations as they browse online and offline.
The bottom line? The coming year will be tough, as the digital shakeout gathers pace, customers demand more on sustainability, and slower growth puts pressure on margins. However, there will be opportunities. Brands that can align with the dominant trends and continue to innovate are most likely to ride the challenges and emerge ahead of the pack.
Download The State of Fashion 2020, the full report on which this article is based (PDF–7 MB).
ABOUT THE AUTHOR(S)
Anita Balchandani is a partner in McKinsey’s London office, where Shrina Poojara is a consultant; Achim Berg is a senior partner in the Frankfurt office; Saskia Hedrich is a senior expert in the Munich office; and Felix Rölkens is an associate partner in the Berlin office. Imran Amed is the founder, editor-in-chief, and CEO of The Business of Fashion.
The authors wish to thank McKinsey’s Tiffany Chan and Marilena Schmich, as well as The Business of Fashion’s Robb Young, for their contributions to this article.
The State of Fashion 2019: A year of awakening
By Imran Amed, Anita Balchandani, Marco Beltrami, Achim Berg, Saskia Hedrich, and Felix Rölkens
The industry as a whole is embracing new opportunities—even as dangers lurk.
The year ahead will be an awakening after the reckoning of 2018—a time for fashion companies to look at opportunities and not just at surmounting challenges. The ones that will succeed will have come to terms with the fact that in the new paradigm taking shape around them, some of the old rules simply don’t work. Regardless of size and segment, players now need to be nimble, think digital-first, and achieve ever-faster speed to market. They need to take an active stance on social issues, satisfy consumer demands for radical transparency and sustainability, and, most important, have the courage to “self-disrupt” their own identity and the sources of their old success to realize these changes and win new generations of customers.
They also need to invest in enhancing their productivity and resilience, as the outlook is uncertain. External shocks to the system continue to lurk, and growth cannot be taken for granted.
These are some of the findings from our latest report on The State of Fashion, written in partnership with the Business of Fashion (BoF), which explores the industry’s fragmented, complex ecosystem. Our first two reports, last year and the year before, laid the foundation for rigorous in-depth research and analysis, focusing on the themes, issues, and opportunities affecting the sector and its performance. The State of Fashion is now the largest and most authoritative overview of the industry, surveying more than 275 global fashion executives (approximately 30 percent more than last year) and interviewing thought leaders and pioneers. We also highlight the ten trends that will define the fashion agenda in 2019 (interactive).
The report includes the third readout of our industry benchmark, the McKinsey Global Fashion Index. This database of more than 500 companies allows us to analyze and compare the performance of individual companies with their peers, by category, segment, or region.
Sunny intervals but storms ahead
For fashion players, 2019 will be a year of awakening. External shocks to the system continue to lurk around the corner, and growth cannot be taken for granted: the McKinsey Global Fashion Index forecasts growth of 3.5 to 4.5 percent, slightly below 2018 figures. By geography, the most optimistic about the coming year are executives in North America. By segment, the most positive are executives from luxury brands, reflecting their strong growth trajectory in 2018. In all other regions and segments, executives are notably pessimistic, reflecting the potential challenges ahead (Exhibit 1).
All this comes against a backdrop of the fashion industry having turned a corner in 2018, with increased growth justifying the optimism expressed in last year’s global fashion survey. The caution in the economic outlook is also reflected in the BoF–McKinsey State of Fashion Survey, with 42 percent of respondents expecting conditions to become worse in 2019.
The rise of the ‘superwinners’
Polarization continues to be a stark reality in fashion: fully 97 percent of economic profits for the whole industry are earned by just 20 companies, most of them in the luxury segment. Notably, the top 20 group of companies has remained stable over time. Twelve of the top 20 have been a member of the group for the last decade. Long-term leaders include, among others, Inditex, LVMH, and Nike, which have more than doubled their economic profit over the past ten years (Exhibit 2). According to our estimates, each racked up more than $2 billion in economic profit in 2017.
Ten trends for 2019
This caution is one of our ten trends to watch in 2019. Another is that India is on the rise—its growing middle class, powerful manufacturing sector, and increasingly savvy tech have made it an essential destination for fashion companies. Our third trend is Trade 2.0: a warning that companies should make contingency plans for a potential shake-up of global value chains. The apparel trade could be reshaped by new barriers, trade tensions, and uncertainty. However, there may also be new opportunities from growing south–south trade and the renegotiation of trade agreements.
On the consumer side, we foresee the end of ownership, as concerns about sustainability grow and consumers and companies alike worry about how to alleviate their impact on the environment. Sustainability, which breaks into our respondents’ list of the most important challenges for the first time, is evolving from a tick-box exercise into a transformational feature. And “woke” consumers are also pushing for greater transparency into supply chains—and rewarding their favorite brands for taking controversial political stands. At the same time, they are demanding ever-quicker and more seamless fulfillment, from mobile shopping to drone delivery.
In response, wise companies are self-disrupting before upstarts do it for them, engaging in a digital landgrab to diversify their ecosystem, and using automation and data analytics to produce on demand to reduce waste and react rapidly to trends.
The speed of change
Overall, the industry continues to hover in a state of flux, and the fortunes of individual players can turn with frightening speed. As our ten trends indicate, new markets, new technologies, and shifting consumer needs present opportunities—but also risks. We predict that 2019 will be a year shaped by consumer shifts linked to technology, social causes, and trust issues, alongside the potential disruption from geopolitical and macroeconomic events. Only those brands that accurately reflect the Zeitgeist or have the courage to “self-disrupt” will emerge as winners.
Download The State of Fashion 2019, the full report on which this article is based (PDF–3 MB).
ABOUT THE AUTHOR(S)
Anita Balchandani is a partner in McKinsey’s London office, where Marco Beltrami is a consultant; Achim Berg is a senior partner in the Frankfurt office, Saskia Hedrich is a senior expert in the Munich office, and Felix Rölkens is a consultant in the Berlin office. Imran Amed is the founder, editor-in-chief, and CEO of the Business of Fashion.
The authors wish to thank McKinsey’s Johanna Andersson and Dale Kim, as well as the Business of Fashion’s Robb Young, for their contributions to this work.
The State of Fashion 2018: Renewed optimism for the fashion industry
By Imran Amed, Johanna Andersson, Achim Berg, Martine Drageset, Saskia Hedrich, and Sara Kappelmark
After a challenging stretch, has fashion turned the corner? Things are looking up, but the rebound may be uneven, says this year’s The State of Fashion report.
There is general agreement that 2016 was one of the most challenging years the fashion industry has ever seen. But we are now detecting glimmers of hope: executives report optimism (even amid uncertainty), and the McKinsey Global Fashion Index forecasts industry sales growth to nearly triple between 2016 and 2018, from 1.5 percent to between 3.5 and 4.5 percent. Emerging markets remain a crucial source of this growth; indeed, in 2018, for the first time, more than half of apparel and footwear sales will originate outside Europe and North America.
These are some of the findings from our latest The State of Fashion report, written in partnership with the Business of Fashion (BoF) to explore the industry’s fragmented, complex ecosystem. Our first report, last year, laid the foundation for rigorous in-depth research and analysis, focusing on the themes, issues, and opportunities affecting the sector and its performance. (For more, see our infographic on the ten trends that will define the fashion agenda in 2018.) This year, we are seeing real signs of change.
Fashion’s growth outlook by region, and by category
Although the fashion industry appears to be turning a corner, the rebound is not being felt evenly across the globe. In fact, 2017 signals the end of an era, as the West will no longer be the global stronghold for fashion sales—more than half of apparel and footwear sales will originate outside of Europe and North America. The main sources of growth are emerging-market countries across Asia–Pacific, Latin America, and other regions; they are forecasted to grow at rates ranging between 5 and 7.5 percent in 2018 (exhibit). Meanwhile, the economic outlook in the mature part of Europe is stable, and fashion-industry sales growth is likewise expected to remain at a modest but steady 2 to 3 percent. In North America, while overall consumer confidence is strong, the impact of policy changes is uncertain, and markdown pressures, market corrections, and store closures continue. Here, we expect a modest growth of 1 to 2 percent. Not surprisingly, this regional divide is reflected in fashion executives’ sentiments, as respondents to the BoF–McKinsey Global Fashion Survey from emerging countries are more optimistic about the industry’s outlook in 2018 than their European or North American counterparts.
The outlook for the fashion industry varies across different value segments, too. The industry continues to polarize: consumers are trading away from the midmarket price points even while the luxury, value, and discount segments are picking up speed. When it comes to categories, the improvement of fashion-industry sales is reflected in stronger sales growth forecasts across the board, including apparel and footwear. Handbags and luggage, and to some extent watches and jewelry, are returning slowly to their historic highs, driven by demand in Asia–Pacific. Athletic wear is the only category where record growth rates look to slow down slightly in 2018, as the “athleisure” trend has reached its peak in some mature markets. Nonetheless, this is still expected to be the fastest-growing category, with continued strong demand in many markets.
Shifts among consumers
These developments take place at the same time as the fashion industry goes through other transformative shifts. Mainstream customers are moving into a decisive phase of digital adoption, and online sales of apparel and footwear are projected to grow rapidly. Consumers in Southeast Asia spend about eight hours a day online on average. The modern shopper’s comfort with digital channels and content has created a complex customer journey across online and offline touchpoints. But regardless of touchpoint, consumers expect a consistent brand experience across channels. Consumers also have higher expectations of customer experience and scrutinize convenience, price, quality, and newness. Digital-first companies such as Alibaba, Amazon, Net-a-Porter, and Zappos continue to force fashion companies to provide an even more premium experience. Many consumers today expect perfect functionality and immediate support at all times, coupled with rapid delivery times as players constantly compete to expedite products.
Customers’ attention is also tuned to new channels. This has a profound impact as purchase decisions are influenced by social media, peer reviews, influencer marketing, and traditional marketing, and even many purchases themselves are made consumer-to-consumer. With information and the ease of comparison at their fingertips, consumers are becoming less brand loyal among millennials, two-thirds say they are willing to switch brands for a discount of 30 percent or more. Shoppers are also becoming more selective. More and more, they base their purchase decisions on whether a company’s practices and mission aligns with their values—while at the same time they are highly price sensitive.
So consumers expect it all: convenience, quality, values orientation, newness, and price. In response, leading fashion players are offering innovative business models, using granular customer insights as a source of differentiation, and pushing the limits of go-to-market times. Sales of the traditional fast-fashion sector have grown by more than 20 percent over the last three years, and new online fast-fashion players are gaining ground. To keep up, leading fashion players are accelerating their speed from design to shelf. This “need for speed” is driven partly by social media accelerating the movement of fashion trends to the masses, and by industry leaders using analytics and customer insights to meet customer needs better and increase responsiveness.
But speed and flexibility bring added complexity. Shortening lead times requires major changes to the traditional business model and supply chain, and a shift in focus to a customer-centric model. Laggards face increased fashion risk and excess inventory if they fail to match customer demand. Frontrunners are building agile supply chains supported by higher-quality consumer insights—with the frontier being close to a real-time supply chain fed by “test and learn” and data analytics.
In the light of all this change, the performance gap between frontrunners and laggards continues to widen: from 2005 to 2015, the top 20 percent of fashion companies contributed 100 percent of the industry’s entire economic profit; in 2016, the top 20 percent’s contribution had increased to 144 percent.
The challenges of a fundamentally changing industry and a continued unpredictable macroeconomic environment has led fashion players to toughen up. Industry players are coming to accept unpredictability as the new norm, and fashion executives will in 2018 respond by focusing their energy on improving what is within their control. For those leaning forward and willing to help design the new features of the modern fashion system, the opportunities at hand to truly connect with fashion consumers across the globe have never been greater.
Download The State of Fashion 2018, the full report on which this article is based (PDF–3 MB).
ABOUT THE AUTHOR(S)
Johanna Andersson is a consultant in McKinsey’s Stockholm office, where Sara Kappelmark is a partner; Achim Berg is a senior partner in the Frankfurt office, Martine Drageset is a consultant in the Oslo office, and Saskia Hedrich is a senior expert in the Munich office. Imran Amed is the founder, editor-in-chief, and CEO of the Business of Fashion.
The State of Fashion 2017
Fashion is one of the past decade’s rare economic success stories. Over that period, the industry has grown at 5.5 percent annually, according to the McKinsey Global Fashion Index, to now be worth an estimated $2.4 trillion. In fact, not only does it touch everyone, but it would be the world’s seventh-largest economy if ranked alongside individual countries’ GDP.
Yet 2016 was one of the industry’s toughest years. Terrorist attacks in France, the Brexit vote in the United Kingdom, and the volatility of the Chinese stock market have created shocks to the global economy. At the same time, consumers have become more demanding, more discerning, and less predictable in their purchasing behavior, which is being radically reshaped by new technologies. It’s against this backdrop that McKinsey has teamed with the Business of Fashion to shine a light on the fragmented, complex ecosystem that underpins this giant global industry.
2016: A year to forget
Our first The State of Fashion report (PDF–8MB) finds that it’s not only external shock waves that have roiled the industry. Companies have also been looking inward, implementing changes to the core operations that are reshaping the entire fashion system, from shortening the length of the fashion cycle to integrating sustainable innovation into the core product-design and manufacturing processes. Perhaps unsurprisingly, 67 percent of executives said conditions for the fashion industry have worsened over the past 12 months.
This fact is clearly borne out in the industry’s financial performance. Sales growth seems set to slow to a mere 2 or, at most, 3 percent by the close of 2016, with stagnating profit margins. Speculation and uncertainty over the repercussions of the US election outcome could further dampen consumer sentiment and affect sales. This is in stark contrast to the fashion industry’s performance over the previous decade, which saw the industry expand at 5.5 percent annually.
Yet this sluggish overall growth masks some big winners: affordable luxury, value, and athletic wear.
With respect to sales growth, the affordable-luxury and value sectors have outperformed all other segments by one to one-and-a-half percentage points. This is consistent with their compound annual growth rate (CAGR) over the past three years, which has been 9 percent for affordable luxury and 6 percent for value, the highest of any segment since 2013.
Affordable-luxury players benefited from consumers trading down from luxury, particularly among Chinese consumers. However, their profit margins are expected to decline, especially after 2016, because of a pricing-arbitrage disadvantage across geographies and fluctuating foreign-exchange rates.
The value segment continued to grow in 2016, particularly as a consequence of large global players expanding geographically. With its clearly defined value proposition, the value segment has been taking share from discount this year.
In 2016, the 8.0 to 8.5 percent growth for athletic wear is more than double any other category. This is consistent with its 10 percent CAGR of the past decade, driven by consumers’ more active lifestyles, the rise of “athleisure,” emerging brands in the high-end segments, and product innovations. As athletic wear continues to grow, it will become a category with the ability to compete on equal terms with clothing and footwear, particularly in the midmarket and premium segments.
2017: Glimmers of recovery
So what will change in 2017? No one would put money on volatility and uncertainty lessening. Nonetheless, our report finds that fashion companies are hopeful they can improve their performance through a combination of organic growth and leveraging new technologies. Successful companies will invest more to nurture local clientele: 2017 will be the year of organic growth by deepening relationships with existing clients, rather than through geographic, channel, and store-network expansion. And digital innovation will go behind the scenes: digitization will be the key to supply-chain efficiency, lowering procurement costs, and the enhancement of sourcing opportunities.
Some 40 percent of executives we interviewed expect conditions for the fashion industry to improve in 2017, compared with the 19 percent who reported improving conditions in 2016 (exhibit). This is particularly true for the major players within each of the market segments and product categories. Many of them have already undertaken significant cost cutting and restructuring, and they are now primed to capture the benefits.
All things considered, we expect fashion-industry growth will increase to 2.5 to 3.5 percent in 2017, although the days when the industry outpaced GDP growth by as much as two percentage points seem over. A return to the riches of the previous decade appears unlikely. But equally, there is no call for rags just yet.
Performance will vary depending on the individual dynamics of specific market segments and categories. Value and affordable luxury will probably be the big winners, both outpacing the industry average at a projected 3.0 to 4.0 percent and 3.5 to 4.5 percent growth, respectively. That said, almost all other market segments should see a slight improvement in sales growth of half to one-and-a-half percentage points. Only the discount segment is likely not to be part of the recovery trend.
Product categories are expected to grow in line with the overall industry average, but the biggest winners will be those companies with coherent channel strategies and clear value definitions. Athletic wear is set to become the absolute category champion, maintaining 6.5 to 7.5 percent sales growth, although it will be unable to reproduce the double-digit growth of the past. The affordable-luxury segment seems likely to continue benefiting from consumers trading down from luxury, while signs point to the continued growth of the value segment as large global players expand internationally.
In short, the industry next year has an opportunity to stabilize and reset, and success stories will probably be written by those already planning for the year ahead. They should bear in mind the three trends that we believe will shape the 2017 fashion industry: the global economy, consumer behavior, and the fashion business model.
Economically, we see a number of trends that will shape the industry, including fashion’s response to intensifying volatility, continued challenges in China, and the rise of urban centers. To address consumer behavior, players will have to learn to serve shrewder and more-demanding customers and adjust to a shifting demographic profile. Finally, 2017 will also be a critical year for the fashion business system, with developments expected around the fashion cycle, technological advancements, and a shake-up in the ownership of fashion companies, as players restructure and industry outsiders step up their activities in the fashion sector.
The bottom line is that amid this uncertainty and change, our analysis suggests cautious optimism is warranted. It’s a sentiment shared by industry executives: 40 percent expect conditions for the industry to improve in the year ahead. As with everything in this fast-moving sector, we’ll just have to wait and see.
This is an edited excerpt from the first joint report from McKinsey and the Business of Fashion, The State of Fashion (PDF–8MB).