The Business of Fashion
Agenda-setting intelligence, analysis and advice for the global fashion community.
Agenda-setting intelligence, analysis and advice for the global fashion community.
This article first appeared in The State of Fashion 2022, an in-depth report on the global fashion industry, co-published by BoF and McKinsey & Company. To learn more and download a copy of the report, click here.
When the president of the World Bank appeared at a virtual press conference in October 2021 for the organisation’s annual meeting, his account of the growing inequality gap was unambiguous. “As you know, the world is suffering from a dramatically uneven recovery. Inequality is worsening across country groups,” said David Malpass, referring to the different recovery speeds and trajectories of higher-income and lower-income countries from the impacts of the Covid-19 pandemic.
Since countries with stronger healthcare systems and economic resilience are likely to outperform others in 2022, business performance will vary across many of the consumer markets, operating hubs and sourcing regions that underpin the global fashion industry. But fashion companies will need to do more than just take these differences into account as uneven recoveries across countries will be exacerbated by uneven recoveries within countries.
Indeed, the recovery picture is far more diverse, complex and nuanced at the sub-national level, complicated by disparities in each domestic context. Within countries, some provinces, states, regions and cities were impacted unevenly by the pandemic or saw economic gaps between them widen as a result.
In the UK, for example, the pandemic has made the country’s “North-South divide even worse,” according to a report by the Centre for Cities, a London-based think tank. The health and economic impact of the crisis has made it “four times harder” to narrow the divergence between people’s living standards in the North and Midlands regions and those in the South, with cities like Birmingham and Hull therefore predicted to face greater challenges than others.
Fashion companies considering their expansion priorities in a given market or refining their assortment mix across an existing retail footprint would be wise to keep such shifts in mind.
A similarly uneven picture has emerged across cities and regions in many other countries. In Brazil, longstanding economic disparities between certain states have heightened since the onset of the pandemic, such as significantly higher poverty levels in the states that make up the North and Northeast regions compared to wealthier states in the South and Southeast.
According to Carlos Jereissati Filho, outgoing chief executive of Iguatemi Empresa de Shopping Centers, a retail group which owns malls across Brazil, international brand partners that have noted these shifting patterns are now doubling down on certain states and cities.
“The luxury brands that have been in the market for a long time… are now seeing that Brazil is bigger than just states like São Paolo and Rio de Janeiro [in the Southeast region]. They’re seeing opportunities in the South region [where we have malls and outlets in Rio Grande do Sul and Santa Catarina states] and in the Central-West region of the country like Brasilia [where we have a mall in the Distrito Federal] and places where the cultural industries have been booming [in spite of the pandemic] and a lot of money is flowing into like Goiânia [in Goiás state],” he said.
Different demographic groups within countries were also unevenly affected by the pandemic, with the nature of impacts influenced by factors such as socioeconomic group, occupation type, educational attainment, race, ethnicity, gender and others. Due to the intersectional nature of some of these characteristics, pre-existing inequalities between cohorts are often reinforced or exacerbated by a widening wealth gap, which can lead to more severe outcomes for affected groups.
In some countries, early discussions of “V-shaped” or “U-shaped” economic recoveries from the pandemic have largely given way to a “K-shaped” model, in which the wealthiest people saw a quicker economic recovery, and those at the lower end of the income spectrum saw their economic opportunities dwindle or stagnate. This has happened in both developing and advanced economies.
In the US, for example, poverty increased after some of the benefits that were part of a government relief package ended in 2020, according to data published in a joint report by researchers at three universities in December of that year. The authors noted a disproportionate impact on some groups and communities: “The increase in poverty in recent months was more noticeable for Blacks, children and those with a high school education or less,” reads the report. A disproportionate impact between different demographic groups has been observed around the world, in countries as diverse as Japan, Russia and Argentina.
“The most marginalised groups always get hit the hardest,” Wendy Edelberg, director of the Hamilton Project, an economic policy arm of the Washington DC-based Brookings Institution, told a US media outlet in 2021. “But what is so unusual is, for a lot of other groups, it’s not that they’re being hit less — it’s that they’re seeing no pain at all [or] they’re doing well,” she added. “For a lot of people, the crisis is over. It’s invisible to them.”
This is certainly not the case for the 97 million people around the world who were pushed into extreme poverty in 2020 by the pandemic, now living on less than $1.90 per day. Among the working poor are many who are employed by manufacturers and raw materials producers in the developing world that supply global fashion brands. Many have been at the sharp end of the Covid-19 crisis, increasingly vulnerable to factory closures and exploitation. According to analysis in the “BoF Sustainability Index,” a significant proportion of fashion companies’ commitments to pay workers living wages are not backed by concrete action.
Meanwhile, the number of people accruing extreme wealth during the pandemic period has risen precipitously. A record 493 people joined Forbes’ World’s Billionaires list in the year spanning March 2020 to 2021, amounting to the creation of a new billionaire every 17 hours on average. The growing number of people who are either very rich or very poor has meant that the global middle class, which had been an expanding demographic for many years, shrank by 54 million people in 2020.
These shifting dynamics clearly point to numerous moral imperatives for governments, societies and businesses in the years ahead. Yet, in addition to their collective and individual responsibilities to help tackle inequality across the countries where they operate, fashion companies must also prepare for the many potentially profound business implications that such disparities present. As they decide where and how to invest, leading fashion players will determine how unequal recovery speeds and trajectories affect them (see “Uneven Recovery”) in more granular terms.
Indeed, however useful a bird’s-eye view on the wealth gap may be for identifying living wage levels or distributing merchandise by value segment across countries, it obscures important detail about sub-national disparities. Decision-makers must weigh up risks and opportunities by studying subtly different and sometimes rapidly changing local market conditions across different subsets of society and different expanses of each country, which are influenced by a unique context of political, cultural, economic and historical factors.
Consider the following four snapshots which illustrate how uneven recoveries within countries could impact the global fashion industry in 2022.
The widening wealth gap could trigger policy changes that impact specific segments, such as the luxury sector in key markets like China.
Even in China, where comparatively effective early management of the Covid-19 pandemic allowed it to be one of the only major economies to experience growth in 2020, recovery has been uneven across different demographics.
Chinese President Xi Jinping’s calls to rein in “excessive incomes” can be seen as a direct result of widening inequality in the country, which has become more pronounced since the arrival of the pandemic. Like in many other countries, poor workers and small businesses bore the brunt of China’s Covid-related economic impact, with Gavekal Research estimating that the bottom 60 percent of Chinese households lost about $200 billion in income during the first half of 2020.
Meanwhile, the Hurun Research Institute reported that the collective wealth of the members of its 2020 China rich list — made up of 2,398 people with individual wealth of over 2 billion yuan (approximately $312 million) — increased more that year than in any other during the 22-year period the organisation has been compiling the list.
In China and other countries, growing inequality undermines the social contract between the government and its people, whose satisfaction rests partly on the belief that they will collectively continue to grow more prosperous.
Though some luxury analysts are concerned that new policy interventions to curb income inequality could be implemented which may hit the luxury market (an October 2021 China International Capital Corp report predicted, for example, that China would expand its consumption tax to cover more luxury consumer goods), others suggest that any impact on the bottom line is likely to be muted for most luxury brands.
The luxury sector’s ultra-wealthy VIP consumers, the likeliest target of any overt moves to curb perceived excesses, are defined by investment bank Jefferies as those who spend more than €100,000 ($117,000) a year on luxury goods. This cohort is estimated to comprise around 110,000 individuals, accounting for a quarter of total Chinese spending.
Though this is a significant proportion of the luxury market, it is not the main driver of luxury spend in China. Rather, that is the middle and upper-middle class, a cohort which expanded by 350 percent between 2009 and 2020. A push to lift more of China’s population into this group by promoting a so-called “olive shaped” economy (shrinking economic extremes at each end and growing the centre) could actually be positive for luxury sales in the long term, some analysts contend.
Still, as future policymaking plays out, analysts see 2022 as a pivotal year for luxury brands. Some may consider opportunities to shift marketing, distribution and product development in ways that align to consumers who are either less inclined to exhibit their wealth or prefer a more discreet experience.
Events in South Africa highlight how intersectional inequality can create a destabilising force for future high-growth retail markets.
Even before the pandemic, South Africa had one of the highest, persistent economic inequality rates in the world, with a consumption expenditure Gini coefficient, which measures the deviation from equal income distribution, of 0.63 in 2015 (0 represents perfect equality and 1 represents maximum inequality). According to Vuyokazi Futshane, author of a May 2021 report prepared for the United Nations about the intersection of inequality and recovery, “upward mobility [in South Africa] is greatly influenced by gender, race and class,” and “all of these dimensions of poverty and inequality have been heightened by the Covid-19 pandemic.”
South Africa has a “heavily racialised” labour market, according to a report by the country’s department of statistics, in which Black South Africans are not only the most likely to be unemployed, but also earn the lowest wages. Whites earn substantially higher wages than all other population groups.
Manifestations of this longstanding inequality have been felt in both direct, as well as a multitude of indirect, ways by fashion retailers. One recent example was the attack on shopping malls and other retail centres as part of looting and protests that began in July 2021. The unrest was nominally triggered by the jailing of former President Jacob Zuma, but it also signified the release of longstanding pent-up grievances felt by Black South Africans who have been hit hard by job losses and rising living costs as a result of the pandemic.
Despite a slowdown in GDP growth in recent years and a contraction of per capita income since 2014, international fashion retailers have continued to enter the South African market and, in some cases, have succeeded in taking market share from local chains. The middle class and lower-income groups in South Africa have been squeezed throughout the pandemic period, denting business at shopping centres, but hopes are high for a relatively fast recovery among some high-end mall executives.
According to Preston Gaddy, general manager of Sandton City and Nelson Mandela Square in Johannesburg — both of which emerged unscathed from the unrest, though Sandton City did close its doors for a period as a precautionary measure after consultation with police — the number of weekend shoppers between 2021 lockdowns bodes well for 2022. In an echo of other markets, repatriated spending on luxury goods has helped soften the blow during the pandemic.
“‘Mrs Sandton’ cannot go to the Champs-Élysées to buy her LV bag, so she’s been buying locally,” he said, referring to an archetypal customer at the shopping centre seeking brands like Louis Vuitton. “Global luxury brands are saying, ‘It might be a small dot on the edge of the African continent, but the numbers being posted by luxury retailers in South Africa [are] notable and we need to pay attention.’”
Gaddy said that brands from Adidas to Alexander McQueen have continued opening, expanding or investing in Sandton City. He believes more luxury entrants are eyeing South Africa as a gateway to the continent, a region which is increasingly on their radar. Others, however, are less certain that those who can afford to drive South Africa’s consumer comeback in 2022 and beyond can necessarily be counted on to do so.
“I think we are going to see a huge dent to confidence… and maybe [we’ll also see] another wave of emigrations,” explained Sasfin Bank senior equity analyst, Alec Abraham. “Where we could have had an uneven but something of a recovery in more discretionary categories in retail, the fear that many people experienced during those riots will certainly impact that recovery in 2022.”
A local approach to controlling India’s Covid-19 outbreak has led to uneven retail recovery speeds across different regions of the country.
In late 2021, the recovery of the Indian retail sector from the country’s devastating second wave of Covid-19 infections was still underway. According to Retailers Association of India (RAI) chief executive, Kumar Rajagopalan, recovery has been uneven, not only across income groups — income inequality has broadly been widening over the last 20 years in India — but also geographically.
Unlike in 2020, when India’s pandemic plan included a lengthy nationwide lockdown, lockdowns in 2021 were mostly rolled out and lifted on a state-by-state basis. With different durations and severities of restrictions, retailers across the country naturally experienced different economic impacts.
According to Rajagopalan, the South region of India, and most of the country’s North region, where malls and retailers were open for business “almost all the way through [the pandemic]” in some states, have seen a faster retail recovery in the wake of India’s second wave. By August 2020, an RAI survey showed the North had recovered 98 percent of retail sales (versus the same month in 2019) and the South had reached 97 percent.
However, in the country’s East region, “there have been some ups and downs,” he said, especially in the Northeast region, where persistently high Covid-19 case numbers resulted in more restrictions.
As one of the first states that went into lockdown and one of the last to emerge from Covid-19 restrictions, Maharashtra in India’s West region, which boasts one of India’s largest economies and is home to the city of Mumbai, initially lagged other regions in its recovery.
It is not yet clear how these divergent recoveries will play out in the year ahead. This is in part due to the dynamic and complex nature of income inequality and other disparities between people living in India’s regions, states and cities. However, there will almost certainly be perceptible differences which require diverse responses from global fashion companies as they decide how to invest across the country.
Overall, Rajagopalan says the “India story” is as compelling as ever for the broader retail sector: “India has a young population; its middle class is growing; per capita income is growing above the $2,000 level; all these stories are still there. If you consider [all that alongside the return of] government spending and employment… the market for retail should return to its full might in 2022.”
According to RAI’s September 2021 business survey, nationwide retail sales had already reached 96 percent of comparable levels in 2019, boosted by the beginning of India’s festive season, which runs through to December, and the return of weddings, many of which were postponed due to restrictions on people gathering.
Women’s employment-to-population ratios declined more than men’s during the pandemic but the impact of the gender gap on economic recovery will depend partly on local local market conditions like those in Saudi Arabia.
“Social and economic inequalities have been exacerbated, undermining women’s economic security and resilience against shocks,” said Michelle Bachelet, UN High Commissioner for Human Rights, explaining the reasons for a growing gender gap over the pandemic period in a 2021 address. “[Yet] the majority of socioeconomic Covid-19 responses adopted by states are surprisingly gender-blind, often failing to address the specific needs of women.”
The need to work from home and to home-school children has prompted many women to drop out of the labour force since the beginning of the pandemic. According to estimates by the International Labour Organization (ILO), women’s employment worldwide declined by 54 million in 2020.
There have been some anomalies, though. In Saudi Arabia, despite fears the pandemic would set back recent progress in labour force participation, the number of women in the country’s workforce actually grew 64 percent in the two years from late 2018 to the end of 2020, according to World Bank data. Though part of that timespan covers a period prior to the pandemic, economists at the international organisation have specifically noted evidence of a continued rise since the onset of Covid-19.
Though years of gender inequality and laws limiting Saudi women’s participation in society prior to reforms that started in 2016 mean the country is coming from a very low baseline in terms of female labour force participation, the recent lift in employment rates bodes well for the country, assuming it is accompanied by a more comprehensive female empowerment agenda. More working women is also good news for the fashion and retail industries.
Both industries have been beneficiaries of Saudi Arabia’s Vision 2030 master plan for economically diversifying the kingdom away from reliance on oil, spearheaded by Crown Prince Mohammed bin Salman Al Saud. Growth of the Saudi service sectors is a key pillar, particularly those that also boost domestic consumption and tourism. By 2020, 26 percent of Saudi women were working in the wholesale and retail sector, according to figures from the Brookings Institution.
An exodus of foreign workers during the pandemic and a relatively early retail reopening after the lifting of restrictions unlocked even more opportunities for women in the country. Saudi women are more likely to replace expatriate workers than Saudi men in some settings, according to Brookings, and they are also more likely to work in service sectors like fashion and retail. Though this is partly driven by their comparative willingness to work for lower wages, both Saudi women and men are paid significantly more than foreign workers.
While there are questions around how permanent the shift to local employees will be for blue collar and manual labour sectors, white collar jobs and those in the fashion and retail sectors are more likely to remain open to local women. The country’s overt “Saudisation” policy, which compels companies to allocate a certain proportion of jobs to native Saudis, should help encourage that.
“For the first time, brands [are employing Saudi women and therefore] have direct access to their female consumers via their teams… and the result is [that brands are] having more insight into the consumer behaviour of their target market,” explained Marriam Mossalli, founding partner and senior consultant of Jeddah-based luxury communications and marketing consultancy Niche Arabia.
Members of this new female workforce are also looking for new work-appropriate items for their wardrobes, a change she suggests more global fashion brands should note. “It’s not just attire [for women who] lunch anymore.”