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The State of Fashion 2021
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The State of Fashion 2021
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The State of Fashion 2021
CONTENTS
Executive Summary
8—9 10—13
GLOBAL ECONOMY
16—33
01: Living with the Virus Jumia: Balancing Speed with Discipline in a Crisis
17 20
02: Diminished Demand Covid-19 and the New Era of Luxury
23 29
34—57 35 38 41
04: Seeking Justice Louis Vuitton: Hardwiring Accountability in a State of Flux
45 48
05: Travel Interrupted Selfridges Group: Managing the Pivot to Local Shopping
52 55
58—99 59 63
07: Opportunistic Investment
67
08: Deeper Partnerships Shahi Exports: Reforming the Fashion Supply Chain Risk, Resilience and Rebalancing in the Apparel Value Chain
70 74 77
09: Retail ROI H&M Group: Making Retail More Resilient Mapping the Retail Portfolio of the Future
81 85 89
10: Work Revolution
96
BEAUTY 2021
06: Less is More A More Circular Fashion Industry Will Require a Collective Effort
THE STATE OF BEAUTY 2021
FASHION SYSTEM
03: Digital Sprint Kering: Fast-Tracking a Digital Upgrade Alibaba: Innovating for China’s Advanced Ecosystem
FASHION SYSTEM
CONSUMER SHIFTS
CONSUMER SHIFTS
GLOBAL ECONOMY
Industry Outlook
100—107 MGFI
MCKINSEY GLOBAL FASHION INDEX
108—115
Glossary
116
End Notes and Infographics
118 7
The State of Fashion 2021
CONTRIBUTORS
IMRAN AMED
ACHIM BERG
ANITA BALCHANDANI
SASKIA HEDRICH
As founder, editor-in-chief and chief executive of The Business of Fashion, Imran Amed is one of the fashion industry’s leading writers, thinkers and commentators. Fascinated by the industry’s potent blend of creativity and business, he began BoF as a blog in 2007, which has since grown into the pre-eminent global fashion industry resource serving a fivemillion-strong community from over 200 countries and territories. Previously, he was a consultant at McKinsey in London.
Based in Frankfurt, Achim Berg leads McKinsey’s Global Apparel, Fashion & Luxury group and is active in all relevant sectors including clothing, textiles, footwear, athletic wear, beauty, accessories and retailers spanning from the value end to luxury. As a global fashion industry and retail expert, he supports clients on a broad range of strategic and top management topics, as well as on operations and sourcingrelated issues.
Anita Balchandani is a Partner in McKinsey’s London office, and leads the Apparel, Fashion & Luxury group in EMEA. Her expertise extends across fashion, health and beauty, specialty retail and e-commerce. She focuses on supporting clients in developing their strategic responses to the disruptions shaping the retail industry and in delivering customer and brand-led growth transformations.
As global senior expert in McKinsey’s Apparel, Fashion & Luxury group, Saskia Hedrich works with fashion companies around the world on strategy, sourcing optimisation, merchandising transformation, and sustainability topics — all topics she is also publishing about regularly. Additionally, she is involved in developing strategies for national garment industries across Africa, Asia and Latin America.
FELIX RÖLKENS
ROBB YOUNG
JAKOB EKELØF JENSEN
ALTHEA PENG
Felix Rölkens is part of the leadership of McKinsey’s Apparel, Fashion & Luxury group and works with apparel, sportswear and pure play fashion e-commerce companies in Europe and North America, on a wide range of topics including strategy, operating model and merchandising transformations.
As global markets editor of The Business of Fashion, Robb Young oversees content from Asia-Pacific, the Middle East, Latin America, Africa, the CIS and Eastern Europe. He is an expert on emerging and frontier markets, whose career as a fashion editor, business journalist, author and strategic consultant has seen him lead industry projects around the world.
Jakob Ekeløf Jensen is a consultant in McKinsey’s London office, specialising in Apparel, Fashion & Luxury. He works with fashion and luxury companies as well as investors in the industry across Europe, on topics such as e-commerce, strategy, value creation, operating model and M&A.
Althea Peng is a Partner in McKinsey’s San Francisco office, and leads the Apparel, Fashion & Luxury group for the Americas. In this dynamic industry, she partners with global apparel and retail companies to drive largescale transformations for profitability and to build new capabilities for growth.
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ACKNOWLEDGEMENTS
The authors would like to thank all members of The Business of Fashion and the McKinsey community for their contribution to the research and participation in the BoF-McKinsey State of Fashion Survey, and the many industry experts who generously shared their perspectives during interviews. In particular, we would like to thank: Adam Freede, Albert Chan, Alexander Pavlov, Anant Ahuja, Anne Line Hansen, Anne Pitcher, Charlotte Elstob, Dickson Szeto, Doug Stephens, Elsa Berry, Grégory Boutté, Helena Helmersson, Josh Gardner, Juan Carlos Escribano, Juliet Anammah, Michael Burke, Mike Hu, Nelli Kim, Philip Guarino, Rania Masri, Robert Burke, Sharifa Murdock and Thiago Alonso de Oliveira. The wider BoF team has also played an instrumental role in creating this report — in particular Amanda Dargan, Anna Rawling, Anouk Vlahovic, Casey Hall, Chelsea Carpenter, Hannah Crump, Kate Vartan, Lauren Sherman, Niamh Coombes, Nick Blunden, Rachel Deeley, Sarah Brown, Sarah Kent, Tamison O’Connor, Venetia van Hoorn Alkema, Victoria Berezhna, Vikram Alexei Kansara and Zoe Suen. The authors would in particular like to thank Sonja Penttilä and Sarah André from McKinsey’s Helsinki and London offices respectively for their critical roles in delivering this report. We also acknowledge the following McKinsey colleagues for their special contributions to the report creation and in-depth articles: Adhiraj Chand, Aimee Kim, Alex Sukharevsky, Andres Avila, Anita Liao, Antonio Gonzalo, Cherry Chen, Claire Gu, Clarisse Magnin, Colin Henry, Colleen Baum, Daniel Zipser, Danielle Bozarth, Ellie Baker, Emanuele Pedrotti, Emily Gerstell, Ekaterina Abramicheva, Ewa Sikora, Fernanda Hoefel, Franck Laizet, Gillian Wright, Hanna Grabenhofer, Hannah Yankelevich, Jihye Lee, John Hooks, Julia Dageförde, Karl-Hendrik Magnus, Karthikeyan Swaminathan, Libbi Lee, Lisa Renaud, Marie Strawczynski, Mekala Krishnan, Miriam Lobis, Nakul Verma, Neha Onteeru, Nicola Montenegri, Patricio Ibanez, Peter Stumpner, Raphael Buck, Rebeca Vega, Rebecca Zhang, Ryan Shultz, Sajal Kohli, Sakina Mehenni, Sophie Marchessou, Susan Lund, Thomas Tochtermann, Tom Skiles, Ulric Jerome, Valerie Van der Voort, Vorah Shin. We’d also like to thank David Wigan and Jonathan Turton for their editorial support, and Adriana Clemens for external relations and communications. In addition, the authors would like to thank Joanna Zawadzka and Lucinda Scholey for their creative input and direction into this State of Fashion report, Martin Nicolausson for the cover illustration and Getty Images for supplying imagery to bring the findings to life. 9
EXECUTIVE SUMMARY
The State of Fashion 2021
In Search of Promise in Perilous Times For the fashion industry, 2020 was the year in which everything changed. As the coronavirus pandemic sent shockwaves around the world, the industry suffered its worst year on record with almost three quarters of listed companies losing money. Consumer behaviour shifted, supply chains were disrupted and the year approached its end with many regions in the grip of a second wave of infections. A turbulent and worrying year has left us all looking for silver linings — both in life and in business — knowing full well that we will need to make the most of them in the year ahead. Indeed, according to McKinsey Global Fashion Index analysis, fashion companies will post approximately a 90 percent decline in economic profit in 2020, after a 4 percent rise in 2019. Given the ongoing uncertainty, our predictions for industry performance next year are focused on two scenarios. The first, more optimistic “Earlier Recovery” scenario envisages that global fashion sales will decline by between 0 and 5 percent in 2021 compared to 2019. This would be predicated on successful virus containment in multiple 10
geographies and a relatively rapid transition to economic recovery. In this scenario, the industry would return to 2019 levels of activity by the third quarter of 2022. Our second, “Later Recovery” scenario would see sales growth decline by 10 to 15 percent over the coming year compared with 2019. In this case, the virus would continue to wreak havoc despite widespread containment measures and fashion sales would only revert to 2019 levels in the fourth quarter of 2023. In either scenario, we expect tough trading conditions to persist next year, in some geographies at least, and for high levels of bankruptcies, store closures and job cuts to continue. At the same time, the pandemic will accelerate trends that were in motion prior to the crisis, as shopping shifts to digital and consumers continue to champion fairness and social justice. Given the extreme jeopardy facing the industry, there is no simple, standardised playbook for the coming year. Instead, fashion companies must tailor their strategies to fit their individual priorities, market exposure and capabilities.
In other words, deploy your “silver linings strategy” that takes advantage of bright spots in the proverbial storm. The key principles for managing change will be flexibility and agility, alongside operational resilience — a critical capability in an uncertain environment. To inform decisionmaking, we expect data and analytics to play an increasingly important role, helping companies to track shifts in demand across geographies, categories, channels and value segments.
The pandemic will accelerate trends that were in motion prior to the crisis, as shopping shifts to digital and consumers continue to champion fairness and social justice. Consumer behaviour has undoubtedly shifted over the past year, as people sheltered from the virus in their homes, travel was restricted and stores were closed around the world. However, as digital consumption continues its dominance and growth in 2021, companies must develop more engaging and social experiences to encourage consumers to connect. At the same time, we anticipate executive teams to increasingly focus on ensuring that digital channels add measurable value to the bottom line, given tight budgets and the need for productivity and efficiency. With tourism in the doldrums for some time to come, brands need to unlock new pockets of demand and tailor assortments to attract more local customers. As they become more conscious of worker welfare issues and the human impact of factory closures, company leaders must uphold the highest ethical business practices and overhaul business models that are exploitative of people and the planet. Looking forward, the industry should set its sights higher, aiming for a “better normal” across stores, partnerships and assortments.
In a disrupted environment, decision-makers must be bold. They must develop novel strategies for their assortments or product offering, focused on profitability, value, simplicity and downsized collections, rather than discounting and volumes. They also should create a more nuanced assessment of store ROI to manage the crisis in physical retail while implementing a truly omnichannel perspective on store operations. The pandemic will continue to put supply chains under pressure and executives should be prepared for further shocks in 2021. Brands should secure high-quality and reliable production capacity and make the long-overdue shift to a demand-focused model to operate in this fluid environment. Leveraging volume commitments and strategic alignment with key suppliers will help some suppliers’ financial stability and, in the process, improve the credibility of brands’ ethical commitments. While there is little doubt that the year ahead will be an arduous one for some fashion industry players, it will also be a year of opportunity for others. Market valuations, a forward-looking measure of expected company success, show that a brighter future lies ahead for companies that are heavily indexed in digital channels and the Asia-Pacific region. We believe 2021 will bring continuing opportunities in both the value and luxury segments, where the former benefits from consumers trading down in uncertain times, and the latter benefits from a strong recovery in markets like China. Whatever their positioning, stronger players will have an opportunity to seize market share from their peers and, in some cases, acquire their rivals at a bargain price. In this highly tempestuous and increasingly competitive market environment, players across the board will need to reflect carefully (but swiftly) on their next moves. Not every silver lining that emerged from the crisis will lead to a business opportunity and those that do will certainly not last forever. 11
INDUSTRY OUTLOOK
The State of Fashion 2021
Navigating Fashion’s Rocky Road to Recovery The past year will go down in history as one of the most challenging for the fashion industry on record, marked by declining sales, shifting customer behaviour and disrupted supply chains. On top of a humanitarian crisis affecting the lives of billions of people, Covid-19 is the catalyst for a deepening economic crisis. Like many other sectors, the fashion industry finds itself in the midst of unprecedented adversity, with revenues and margins under pressure. Yet the shifting landscape is also creating pockets of momentum and, despite the ongoing, widespread impact of the pandemic, some fashion companies are developing new ways to compete. The pandemic has compounded the demand for all things digital, which in turn has enabled innovation, efficiency and new ways for businesses to scale up. The shift is permanent, and will continue to create opportunities to build slicker, smarter operating models and differentiated customer propositions that are more personalised to each customer. Equally, the crisis has emphasised the need to move to more sustainable and responsible ways of working in all areas of the value chain. As the number of fashion players responding to this need continues to grow, it will prove to be a long-term boon to companies, workers, customers and the planet. 12
Although more than half of business leaders in our BoF-McKinsey State of Fashion 2021 Survey also expressed concerns about things other than the Covid-19 health and economic crisis for the year ahead, the pandemic recovery timeline did weigh heavily on their minds. We should acknowledge that the mood of fashion business leaders may have evolved in the weeks that transpired since the survey, especially as the pandemic worsens again in the fourth quarter of 2020 — with government responses including more severe social distancing measures in Europe, the threat of new lockdowns across numerous regions and mass-testing in some Chinese provinces. Nevertheless, the collective sentiment of fashion executives gleaned from our survey does constitute a compelling yardstick against which to measure business leaders’ predictions and expectations for the year ahead. Naturally, business leaders across the board hope for the effects of Covid-19 to dissipate and for the global economy to recover as quickly as possible. McKinsey Fashion Scenarios analysis for the industry over the next year anticipates that, in an Earlier Recovery scenario, the virus will be effectively controlled, thanks to a strong public health response (based on information available September 2020).1 In this scenario, government
Exhibit 1:
Fashion executives are divided on the outlook for the industry in 2021 % OF FASHION EXECUTIVE RESPONDENTS, EXPECTATIONS FOR THE CONDITION OF THE FASHION INDUSTRY IN 2021 RELATIVE TO 2020 Worse
BY SEGMENT 39
Luxury
30 23
41
Better
31
55
Mid-market Value
Same
22
23
36
BY GEOGRAPHY 47
Europe
23
41
North America
35
36
Asia
30 24
20
44
SOURCE: BOF – MCKINSEY STATE OF FASHION 2021 SURVEY
Exhibit 2:
Fashion executives expect Covid-19 and the economic crisis to be the biggest challenge in 2021 and digital to be the biggest opportunity TOP THREE ANSWERS, % OF RESPONDENTS WHO MENTIONED THE WORD
Covid-19 and the economic crisis
45 Digital Changing consumer demand and behaviour Physical retail and store footfall
18
7 Biggest challenge for the fashion industry
30
Market share gain
8
Sustainability
10
Biggest opportunity for the fashion industry
SOURCE: BOF – MCKINSEY STATE OF FASHION 2021 SURVEY
13
The State of Fashion 2021
INDUSTRY OUTLOOK
interventions will partially offset economic impact and global travel will pick up along with the possibility of larger social gatherings. The global growth outlook for fashion sales in this scenario determines that recovery would be achieved by the third quarter of 2022, with China leading the way with 5 to 10 percent sales growth in 2021 compared to 2019. Europe, on the other hand, would expect to continue to see lower sales in 2021 as international tourists stay at home, with sales down 2 to 7 percent compared to 2019. With footfall remaining low, pre-Covid levels of activity in Europe are unlikely to return before the third quarter of 2022. This scenario includes a similar trajectory for the US, with sales down 7 to 12 percent in 2021 compared to 2019, and recovery to pre-Covid sales only expected by the first quarter of 2023. The primary driver of growth in the coming year will continue to be digital channels, reflecting the fact that people in many countries remain reluctant to gather in crowded environments. The Earlier Recovery scenario anticipates dynamic digital growth across geographies in 2021 compared to 2019, with more than 30 percent online growth in Europe and the US and over 20 percent growth in the already highly digitised Chinese market.2
The primary driver of growth in the coming year will continue to be digital channels, reflecting the fact that people in many countries remain reluctant to gather in crowded environments. However, less favourable recovery scenarios must also be considered if there is a delay to a widely available vaccine. In this case, the virus would persist in some regions and new waves of lockdowns could take hold, accompanied by only partially effective government responses and ongoing travel restrictions, further embedding the consumer behaviour developed during the pandemic. If this more pessimistic Later Recovery 14
scenario were to materialise, a deeper dip in sales in 2021 and slower global economic recovery would be anticipated. In this case, the US would see sales decline by 22 to 27 percent in 2021 compared to 2019, and pre-Covid performance in the country would not return until after 2025. Although significantly impacted, Europe would fare slightly better than the US overall in this scenario, with sales down 14 to 19 percent compared to 2019. However, the European luxury segment would suffer a considerable hit. If new lockdowns were to be implemented and travel restrictions persist, luxury sales in Europe could drop up to 40 percent and only recover to their pre-crisis level by the third quarter of 2023. There are, of course, a multitude of intermediate scenarios in between the two ends of the spectrum, each containing a combination of positive and negative effects set against the backdrop of an industry striving to recover its equilibrium. However, in all cases, we anticipate significant variation between geographies, with as much as a two- to four-year lag between fast- and slow-recovering markets. On top of subdued sales, we expect industry players will see deep and long-lasting changes to both consumer demand and ways of working. Among potential short-term challenges, brands will need to manage a category shift towards casualwear and the continuing pressure on luxury, as well as shorter production cycles and cash constraints that lead to a slowdown in investments. Set against this backdrop, the strategic outlook among business leaders is uneven, reflecting the diverse trends the industry faced even before the pandemic. Across all value segments, a larger proportion of executives in the BoF-McKinsey State of Fashion 2021 Survey are pessimistic rather than optimistic about the year ahead, but 32 percent of respondents still expect the industry to evolve positively next year.3 In line with pre-crisis attitudes, 31 percent of executives in the luxury segment and 36 percent in the value segment have a positive outlook for 2021, while only