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.Sidebar
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.
Silver linings
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.
It’s time to rewire the fashion system: State of Fashion coronavirus update
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.https://view.ceros.com/mckinsey/coronavirus-promo-video-desktop
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).
