The State of Fashion 2023: Holding onto growth as global clouds gather
After experiencing 18 months of robust growth (early 2021 through mid-2022), the fashion industry is again facing a challenging climate. Hyperinflation and depressed customer sentiments have already resulted in declining growth rates in the second half of 2022. We expect that the slowdown is likely to continue through 2023.
Many industry players are in a stronger position than they were a year ago, however. The fashion industry delivered a 21 percent increase in revenues in 2020–21, and EBITA margins doubled by 6 percentage points to 12.3 percent.
Looking forward, we anticipate that the luxury sector will outperform the rest of the industry, as wealthy shoppers continue to travel and spend, and thus remain more insulated from the effects of hyperinflation. Based on McKinsey’s analysis of fashion forecasts, the luxury sector is expected to grow between 5 and 10 percent in 2023, driven by strong momentum in China (projected to grow between 9 and 14 percent) and in the United States (projected to grow between 5 and 10 percent). Europe, on the other hand, is under high pressure from currency rates and a growing energy crisis, which are likely to result in modest sales growth for the luxury sector (projected to grow between 3 and 8 percent).
The fashion market, excluding the luxury sector, will struggle to deliver significant growth in 2023. McKinsey analysis of fashion forecasts projects relatively slow sales growth of between –2 and +3 percent, weighed down by a contraction in the European market (expected to shrink between 1 and 4 percent) (exhibit). China and the United States are expected to fare better, growing between 2 and 7 percent and between 1 and 6 percent, respectively. These forecasts are reflective of inflation and are calculated in local currencies, meaning that the real impact for the sector could be more negative than these figures suggest.
These are just some of the findings from The State of Fashion 2023, a joint report from the Business of Fashion and McKinsey. The report, the seventh in the annual series, discusses the major themes shaping the fashion economy and assesses a range of possible responses. Reflecting in-depth research and numerous conversations with industry leaders, it reveals the key trends likely to shape the fashion landscape in the year ahead.
Inflation is at the top of executives’ minds for the coming year, according to results from the annual Business of Fashion and McKinsey State of Fashion Survey. They expect that inflation will undercut consumer demand, pushing shoppers to curtail fashion spending or trade down for less expensive products as their energy and grocery bills spike. Fashion companies are also anticipating that inflation will spike their costs, with 97 percent of executives forecasting that their cost of goods sold and SG&A expenses will rise in 2023. Cotton and cashmere prices, for example, have increased 45 percent and 30 percent year on year, respectively.
Fashion leaders are also watching global headlines closely in the year ahead, as macroeconomic and political uncertainties continue to obstruct business operations and escalate reputational risk. The war in Ukraine is of high concern to the industry, having already disrupted trade routes and triggered an energy crisis that will continue to have impact. In China, further COVID-19 outbreaks and the real estate crisis have undermined the region’s growth trajectory, as well as disrupted supply chains. Meanwhile, extreme weather is negatively affecting supply chains and raw materials across Asia.
This global economic gloom is increasingly reflected in consumers’ shopping habits, and the fashion industry is expecting that demand will be weakened or unpredictable in the year ahead. We foresee that the differences between the shopping habits of low- and high-income households will become more pronounced, as cost-conscious customers are likely to cut back or trade down. Meanwhile, shoppers for luxury items will likely continue to spend largely as they have been, insulated from the impact of the economic slowdown.
This year’s report presents a difficult outlook ahead, as fashion companies face challenges and revise forecasts downward after an exceptionally strong 2021, per McKinsey analysis of global data in the fashion industry. Inflation and geopolitical concerns dominate the agenda for 2023, negatively affecting both consumer demand and brands’ operating costs. Consumers are adjusting their behaviors, as many trade down to cheaper or discounted items to reduce their spending, though the luxury sector will remain strong, with affluent consumers less heavily affected by inflation.
Fashion companies that can adapt to the increasing complexity by updating their operating models and adjusting their strategies for supply chain, sales channels, and digital marketing will be best placed to weather the upcoming storm. They can lean into the following ten emerging consumer trends:
Bereft by global risks and uncertainties, leaders in the fashion industry will need to pay careful attention to macroeconomic and political issues in the regions where they produce and sell their products in the year ahead. They will need to develop risk mitigation strategies that can be implemented quickly as conflicts, fiscal policies, and government regulations evolve. Additionally, they will need to think critically about where they operate, looking beyond top-line growth potential when evaluating new and existing foreign markets. Brands can no longer plan on complete political neutrality as their global customer bases become more connected and outspoken.
In 2023, consumers will be unpredictable and fickle. Brands will need to consider carefully the factors that affect shopping behaviors and respond accordingly. Even as many customers reduce spending, brands have an opportunity to keep customers engaged through, for example, rental channels and off-price retailers. But these strategies will require careful execution to ensure that margins and brand reputations are protected. At the same time, brands will need to update their merchandising and design approaches to reflect shifting ideas around gender lines in fashion and dress codes. Daily office attire will become more casual, and special-occasion dress will become bolder.
Despite the economic headwinds ahead, fashion leaders are in a unique position to reevaluate the ways that their brands produce, distribute, and market their collections. Supply chains remain disrupted from the COVID-19 pandemic, elevating the need to invest in faster and geographically closer manufacturing systems. While direct-to-consumer, digital channels remain a top priority, fashion industry leaders will need to diversify their sales channels to maintain efficiency and market relevance. And finally, brands will need to be more creative in marketing to attract customers through bold, differentiated content that cuts through a crowded digital environment in which data targeting is no longer effective. To execute these changes and respond better to forthcoming regulations around sustainability marketing, the fashion industry should rethink how it allocates talent, promotes, and establishes executive roles and teams—reflecting the key challenges facing the industry in the years ahead.
The outlook for the global fashion industry in 2023 is uncertain and tenuous. Many customers are reigning in their budgets after months of discretionary spending. Growth has slowed in China, and major questions loom about the market’s future trajectory. An energy crisis is disrupting European economies. While the luxury and sportswear sectors have dominated the industry’s list of super successes in recent years, macroeconomic context might change that in the upcoming year. Heading into 2023, the industry’s decision makers will need to prepare to make strategic sacrifices while investing in agility and creativity to succeed when the market eventually recovers.
The authors wish to thank Sandrine Devillard, Joëlle Grunberg, and Michael Straub for their contributions to this article.
In 2022, the fashion industry can return to growth as changing category landscapes, new digital frontiers, and advances in sustainability continue to present opportunities.
After nearly two years of disruption, the global fashion industry is once again finding its feet. Companies are adapting to new consumer priorities, and digital is providing a nexus for growth. Still, the industry faces significant challenges amid supply-chain disruption, patchy demand, and persistent pressure on the bottom line. With the majority of companies struggling to turn a profit, growth will be a key priority in the year ahead.
The fashion industry posted a 20 percent decline in revenues in 2019–20, as earnings before interest, taxes, and amortization (EBITA) margins declined by 3.4 percentage points to 6.8 percent. As the pandemic continued to run its course, the performance inequalities that have become a challenge over recent years were more in evidence than ever. A record 69 percent of companies were value destroyers in 2020, according to the latest reading of the McKinsey Global Fashion Index (MGFI), compared with 61 percent in 2019 and just 28 percent in 2011. About 7 percent of companies left the market entirely, either due to financial distress or because they were bought by rivals.
From a geographic perspective, China was the standout performer over 2021, as its economy recovered much faster than those of other countries. In 2022, the industry’s growth will likely be driven by both China and the United States, while Europe lags behind and will need the return of international tourism to recover fully (Exhibit 1). In the meantime, domestic markets are set to continue their recent strong performance.
Despite a dip in margins, discount and luxury outperformed the wider market in 2020, while the midmarket continued to be squeezed. However, performance was uneven, as countries with strong healthcare systems and economic resilience fared better than others. Among product categories, it was a breakout year for sportswear, with 42 percent of positive economic profit in the MGFI index coming from sportswear companies, amid strong growth for Chinese players.
In last year’s report, we did not publish our annual list of “super winners,” due to distortions and reporting gaps caused by the pandemic. This year, we return to our analysis but with an adapted approach: smoothing pandemic-induced distortions by calculating the average economic profit over both 2019 and 2020. Over that period, the top five performers by economic profit were Nike, Inditex, Kering, LVMH (including Tiffany), and Hermes. The prominence of luxury brands among the top performers was attributable to the economic resilience of wealthier demographics, leading to a continuing demand for bags, luxury jewelry, and ready-to-wear.
We kick off our ten key themes for this year by taking the temperature of the global economy and analyzing the complex impacts of the pandemic as it continues its unpredictable progress. Amid these challenging dynamics, the imperative for brands will be to secure their recovery. At the same time, they must adapt to evolving consumer demand and ensure they take the opportunities offered by new digital frontiers. As sustainability becomes a more urgent concern, brands need to ramp up their efforts to reflect customer values in their assortments, supply chains, and ways of working. Finally, amid rising competition for talent—particularly tech talent—brands need to find new ways to attract the best and brightest, with cybersecurity likely to be near the top of the agenda (Exhibit 2).
In many global regions, the business of fashion is set to pick up momentum in 2022, as consumers unleash pent-up buying power and dress to impress (where the pandemic allows). Indeed, recovery is at the top of executives’ minds for the coming year, with 75 percent of luxury-segment executives, 61 percent of midmarket executives, and 50 percent of value executives expecting better trading conditions. However, as they pivot toward growth, a significant challenge is potential shortages of products and resources, as chocked supply chains and rising shipping costs undermine operations. Over recent months, numerous companies reported struggles to manage inventory flows or tied lower sales forecasts to supply-chain blockages. In response, many have turned to remedies that include more nearshoring, in-store supply stocking, and agile operating models designed to respond flexibly to change.
Among the standout themes of the past year has been the continuing flourishing of online business models, reflecting a longer-term trend that accelerated during the pandemic. Hyper-interactive digital environments and investment in e-commerce are increasingly the leitmotifs of brands that are pushing on fashion frontiers. We expect in 2022 that companies will seek fresh approaches to online creativity and commerce, with nonfungible tokens, gaming “skins,” and virtual fashion edging closer to the mainstream. Some brands over the past year expanded into the digital “metaverse,” rolling out virtual stores, gaming, and digital events. In the coming 12 months, these efforts will gather pace, as in-app social commerce plays an increasingly important role.
More than ever, sustainability is dominating consumer priorities and the fashion agenda. Consumers want to know where materials come from, how products are made, and whether the people involved are treated fairly. In response, more and more companies are expanding their sustainable assortments and working to boost the sustainability of their supply chains. As part of those efforts, some are leveraging digital product passports. These can be embedded in items to support after-use activities such as resale and recycling. Brands are also turning to passports, married with distributed-ledger technologies, in the battle against counterfeiting.
As fashion brands invest in new digital applications, they must work harder than ever to protect their systems, partners, and customers. Amid intense competition, cybertalent will be at a premium. And more broadly, all-time-high vacancy rates mean brands must find novel ways to attract and retain employees—as other industries compete hard on salaries, sustainability, and job security. Authenticity and employee well-being will be more important than ever.
The bottom line going into 2022 is that , in which there is little room for missteps. Decision makers have their work cut out to manage the demands of digital, sustainability, and the supply chain. That said, the past year’s experience shows that consumers are resilient and that as economies recover, demand will follow suit. Therefore, the task for companies will be to unlock growth, align with changing customer needs, and focus intently on the bottom line.
The authors wish to thank Pamela Brown, Emma Bruni, Dunja Matanovic, Michael Straub, and Robb Young for their contributions to this article.In 2021, the COVID-19 pandemic will accelerate industry trends, with shopping shifting to digital channels and consumers continuing to champion fairness and social justice.
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.
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.
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.
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).
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.
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 RölkensFashion 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?
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.
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.
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.
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.
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 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.
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.
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.
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.
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 industry as a whole is embracing new opportunities—even as dangers lurk.
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.
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.
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.
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.
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.
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.
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.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.
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.
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.to view the exhibit and read the full report on which this article is based (PDF–3 MB).
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, , 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.
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.
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.
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 authors wish to thank Robb Young, the Business of Fashion’s global markets editor, for his contribution to this article.