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In 2023, the global fashion industry will need to weather inflation
while finding opportunities in shifting consumer patterns, channel and
digital marketing strategies, and manufacturing approaches.
A
fter experiencing 18 months of robust growth (early 2021 through midDOWNLOADS
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
%
Sidebar
The State of Fashion 2023
Holding onto growth as global
clouds gather
will outperform the rest of the industry, as wealthy
shoppers continue to travel and spend, and thus
About the authors
remain more insulated from the effects of
hyperinflation. Based on McKinsey’s analysis of
# Full Report (144 pages)
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.
Exhibit
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 and geopolitical tensions loom
Inflation is at the top of executives’ minds for the coming year, according to
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results from the annual Business of Fashion and McKinsey State of Fashion
Survey. They expect that inflation will undercut consumer demand, pushing
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shoppers to curtail fashion spending or trade down for less expensive products
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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
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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
4. Innovative growers: A view from the
top
year, respectively.[ 1 ]
5. US holiday shopping 2023: Consumer
caution and retailer resilience
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.
Ten themes for 2023
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:
Global economy:
Global fragility. Amid the highest inflation in a generation, rising geopolitical tensions,
climate crises, and sinking consumer confidence in anticipation of an economic
downturn, the global economy is in a volatile state. Fashion brands will need careful
planning to navigate the many uncertainties and recessionary risks that lie ahead in
2023.
Regional realities. Understanding where to invest around the world has never been
easy, but rising geopolitical uncertainty and uneven economic recoveries related to the
COVID-19 pandemic, among other factors, will likely make it even more challenging in
2023. Brands can reevaluate regional growth priorities and hone their strategies so
that they are more tailored to the geographies in which they operate.
Consumer shifts:
Two-track spending. Consumers may be affected differently by the potential economic
turbulence in 2023. Depending on factors such as disposable income level, some will
postpone or curtail discretionary purchases; others will seek out bargains, increasing
the demand for resale, rental, and off-price products. Fashion executives should adapt
their business models to protect customer loyalty and avoid diluting their brands.
Fluid fashion. Gender-fluid fashion is gaining greater traction amid changing consumer
attitudes toward gender identity and expression. For many brands and retailers, the
blurring of the lines between men’s wear and women’s wear will require rethinking
their product design, marketing, and in-store and digital shopping experiences.
Formal wear reinvented. Formal attire is taking on new definitions as shoppers rethink
how they dress for work, weddings, and other occasions. While offices and events will
likely become more casual, special occasions may be dominated by statement-making
outfits that consumers rent or buy to stand out when they do decide to dress up.
Fashion system:
Direct-to-consumer reckoning. Although brands across price segments and
categories have embraced digital direct-to-consumer channels, mounting digital
marketing costs and e-commerce readjustments have put the viability of the model
into question. To grow, brands will likely need to diversify their channel mix, including
wholesale and third-party marketplaces, alongside direct-to-consumer models.
Tackling greenwashing. As the industry continues to grapple with its damaging
environmental and social impact, consumers, regulators, and other stakeholders may
increasingly scrutinize how brands communicate about their sustainability credentials.
If brands are to avoid greenwashing, they must show that they are making meaningful
and credible change while abiding by emerging regulatory requirements.
Future-proofing manufacturing. Continued disruptions in supply chains are a catalyst
for a reconfiguration of global production. Textile manufacturers can create new supply
chain models based around vertical integration, nearshoring, and small-batch
production, enabled by enhanced digitization.
Digital marketing reloaded. Recent data rules are spurring a new chapter for digital
marketing as customer targeting becomes less effective and more costly. Brands will
need to embrace creative campaigns and new channels, such as retail media networks
and the metaverse, to achieve greater ROI on marketing spend and to gather valuable
first-party data that can be leveraged to deepen customer relationships.
Organization overhaul. Successful execution of strategies in 2023 will in part hinge on
a company’s alignment around key functions. Fashion executives need a new vision for
what the organization of the future will require, focusing on attracting and retaining
top talent, as well as on elevating teams and critical C-suite roles to execute on
priorities such as sustainability and digital acceleration.
Looking ahead
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.
Download The State of Fashion 2023, the full report on which this article is based (PDF–21.5MB).
ABOUT THE AUTHOR(S)
Imran Amed is the founder, editor-in-chief, and CEO of the Business of Fashion and an alumnus
of McKinsey’s London office, where Anita Balchandani is a senior partner; Sarah André is a
consultant in the Paris office; Achim Berg is a senior partner in the Frankfurt office; and Felix
Rölkens is a partner in the Berlin office.
The authors wish to thank Sandrine Devillard, Joëlle Grunberg, and Michael Straub for their
contributions to this article.
Previous State of Fashion editions
1. State of Fashion 2022: An uneven recovery and new frontiers
2. The State of Fashion 2021: In search of promise in perilous times
3. It’s time to rewire the fashion system: State of Fashion coronavirus update
4. The State of Fashion 2020: Navigating uncertainty
5. The State of Fashion 2019: A year of awakening
6. The State of Fashion 2018: Renewed optimism for the fashion industry
7. The State of Fashion 2017
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.
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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
About the authors
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.
Exhibit 1
Luxury
Non-luxury
These are some of the findings from The State of Fashion 2022, written in partnership with the
Business of Fashion (BoF). The report, the sixth in our 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 business in the year ahead.
Discount and luxury outperform
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.
Ten themes for 2022
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).
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. Hyperinteractive 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 the fashion industry faces a complex mix of challenges
and opportunities , 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.
Download The State of Fashion 2022, the full report on which this article is based (PDF–14MB).
ABOUT THE AUTHOR(S)
Anita Balchandani is a partner in McKinsey’s London office, where Jakob Ekeløf Jensen is an
associate partner and Leila Le Merle is a consultant. Achim Berg is a senior partner in the
Frankfurt office. Saskia Hedrich is a senior knowledge expert in the Munich office. 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 and an alumnus of the London office.
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.
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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
About the authors
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.
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.
Exhibit 1
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.[ 2 ] 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.[ 3 ] 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.
Exhibit 2
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.”[ 4 ]
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).
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.[ 5 ] Zara said that it plans to cut 1,200 stores over two
years and invest €2.7 billion in store-based digital.[ 6 ] 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.
Download The State of Fashion 2021, the full report on which this article is based (PDF–9MB).
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.
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 18month 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.[ 7 ] 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, 2020[ 8 ] —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,[ 9 ] 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.[ 10 ]
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.[ 11 ]
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[ 12 ] 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”[ 13 ] 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.
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
Video
Themes defining the state of fashion
2020
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).[ 14 ]
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).[ 15 ] The 16 percent year-on-year rise came largely from improved
operating margins driven by cost cutting. The average industry EBITA[ 16 ] 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);[ 17 ] 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).[ 18 ]
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–7MB).
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.
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
Video
overview of the industry, surveying more than 275 global fashion
Ten trends defining the fashion industry
agenda in 2019
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).
Ten trends will define the fashion agenda in 2019.
HOVER AND CLICK ON BOXES TO LEARN MORE
Source: McKinsey analysis
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).[ 19 ]
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).[ 20 ] 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.
Download The State of Fashion (PDF–3MB).
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.
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.
Ten trends that will define the fashion agenda in 2018
HOVER AND CLICK ON BOXES TO LEARN MORE
Globalization reboot
Predictably unpredictable
Asian trailblazers
Platforms first
Getting personal
Despite the rise of nationalism,
isolationist rhetoric, and reshoring,
globalization will not stall. A new
phase of globalization characterized
by the exponential growth of crossborder bandwidth, connectivity, and
digital data flows will alter the global
playing field and give certain players a
competitive edge.
Geopolitical turmoil, economic
uncertainty, and unpredictability are
the new normal. Fashion companies
and executives must continue to be
vigilant and nimble in order to adapt
to an ever-changing environment, but
they will increasingly focus on
directing their energies toward what is
within their control.
With two-thirds of the world’s ecommerce “unicorns,” over half of
global online retail sales, and myriad
digital innovations, Asia isn’t waiting
for Western companies to step up.
Asian players will assert their power
and leadership even more through
pioneering innovations and globalscale investment and expansion.
Consumers will look to online
platforms as the first point of search,
attracted by their convenience,
relevance, and broad offering.
Platforms will grow in scale and reach
fashion brands to find ways of
engaging with these powerful sales
channels. The question for brands is
no longer if they should collaborate
but how to do it.
Personalization and curation will
become more important to the
customer. As consumer values
coalesce around authenticity and
individuality, brands will value data
even more to tailor recommendations,
engage influencers, and personalize
experiences. The fashion companies
that flourish will refocus on their
strengths.
AI gets real
Mobile obsessed
Off-price deception
Sustainability credibility
Start-up thinking
Innovators will reveal the possibilities
of artificial intelligence (AI) in all parts
of the fashion value chain, exploring
new ways to create value and
redefine employees’ work–life
outlook. AI enhancements will go
beyond machine tasks into customerinteraction and other processes,
blurring the line between technology
and creativity.
As consumers’ obsession with mobile
grows and they integrate digital
touchpoints into their shopping
experience, the end-to-end
transaction will also move to mobile.
With an abundance of mobilepayment solutions available globally,
consumers will expect fashion
companies to cater to increasingly
convenient mobile transactions.
Off-price sector growth remains
driven by the notion that it solves
challenges like excess stock and slow
growth, but the US market serves as
a warning about saturation and
possible sales cannibalization. As
Asia and Europe get hooked on the
myth, companies must consider their
off-price strategies carefully to avoid
margin erosion.
Sustainability will become an integral
part of the planning system, with
circular-economy principles
embedded in the value chain. More
fashion brands will plan for
recyclability from the fiber stage of the
supply chain; many will harness
sustainability via tech innovation to
unlock efficiency, transparency, and
genuine ethical upgrades.
Given the industry’s urgent need for
innovation, a growing number of
fashion companies will aim to emulate
the qualities of start-ups such as
agility, collaboration, and openness.
Traditional and heritage players will
continue to be compelled to open
their minds up to new talent, ways of
working, partnerships, and
investment models.
Source: McKinsey analysis
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).[ 21 ] 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.
Download The State of Fashion (PDF–3 MB).
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 to view the exhibit and read 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.
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.
Download The State of Fashion (PDF–8MB).
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 foreignexchange 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).[ 22 ] 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). Download the report to view the exhibit.
ABOUT THE AUTHOR(S)
Achim Berg is a senior partner in McKinsey’s Frankfurt office, Leonie Brantberg is an associate partner in
the London 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 authors wish to thank Robb Young, the Business of Fashion ’s global markets editor, for his contribution
to this article.
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