LONDON, United Kingdom — After a tough but improving 2017, a continued recovery is on the horizon for 2018. The McKinsey Global Fashion Index projects global fashion industry sales to grow by 3.5 to 4.5 percent in 2018. But this growth is not spread evenly across all regions or segments. Growth is being driven by emerging markets, where executives in Asia-Pacific, emerging European countries, and Latin America responding to the BoF-McKinsey Global Fashion Survey, are more positive about the overall business outlook.
With the insights gleaned from our survey, interviews with fashion industry executives and experts and research throughout the year, we have identified ten major trends that we expect to shape the fashion industry in 2018. These ten trends fall into three main categories: the global economy, consumer shifts, and changes in the fashion system. All in all, 2018 will be another challenging year for fashion players – but, for those willing to help design the new features of the modern fashion system and lead the way through it, 2018 will also offer plenty of excitement.
Gone are the days when Western markets were the global economic stronghold. Economic growth is shifting from mature regions in the West to emerging markets in the South and East. According to McKinsey FashionScope, by 2018 more than half of apparel and footwear sales will originate outside of Europe and North America. Rapidly growing cities in emerging markets are particularly important growth centres for the fashion industry. Many incumbents with developed countries as their core markets face a stagnating sales outlook and profitability, and must seek new pockets of growth.
Furthermore, adoption of disruptive technologies like advanced robotics, mobile internet, advanced analytics, virtual- and augmented reality and artificial intelligence is accelerating, with the potential to disrupt entire industries – including fashion. And with increased digital cross-border trade, it becomes harder for “local heroes” with an average value proposition to compete when anyone who is best at what they do could in theory become a global champion.
The global fashion industry is moving into a decisive phase of digital adoption by the mainstream consumer, and online sales of apparel and footwear is projected to grow rapidly not the least in emerging markets. On average, consumers in Southeast Asia spend about eight hours a day online; from social media to video streaming and shopping amongst other things. The modern shopper’s comfort with digital channels and content has changed the consumer purchase journey from a traditional linear model, to a complex journey across online and offline touchpoints. But regardless of touchpoint, consumers expect a consistent brand experience at all times.
Digital-first e-commerce companies from Amazon to Zappos, and Alibaba to Net-a-Porter are continuing to raise the bar – not least for fashion companies aspiring to provide an even-more-premium experience. Many consumers today expect perfect functionality and immediate support at all times. They are becoming habituated to rapid delivery times as players are constantly competing to expedite products more quickly, as we have seen through the partnership between Farfetch and Gucci, which offers delivery in selected cities from the store to a customer’s home in 90 minutes or less. Customer attention is also tuned to new communications channels. In the Philippines, Brazil and UAE, social media users report that they are now spending more than three hours per day on average on these platforms. This has a profound impact on fashion, as purchase decisions are influenced by social media, peer reviews and influencer.
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. But while they are very price sensitive, they also base more of their purchasing decisions on whether a company’s practices and mission align with their values. This is a generation that has higher expectations on what a company should be able to deliver: convenience, quality, values orientation, newness — and price.
The fashion system
Hand-in-hand with the online movement, many fashion companies are experiencing a steep decline in brick-and-mortar traffic. They are simultaneously looking for ways to reduce store operating costs, re-evaluate store networks and innovate the in-store experience to attract customers. The digital shift has hit some harder than others. For example, US department store sales have fallen drastically in recent years and mall closures are expected to increase. Sluggish sales in the department store channel, combined with a desire to improve margins and control brand presentation, markdowns and customer data, are causing brands to move to direct-to-consumer-models. While many fashion players are working hard to deliver a seamless, integrated shopping journey across touchpoints, the hurdles remain high with complex technology implications, as well as operational, logistical, organisational and governance headaches. Furthermore, omnichannel efforts have often proved difficult to deliver profitably. Meanwhile, the fashion industry is being disrupted by innovative business models. Examples range from data-driven subscription-based services like Stitch Fix, to sharing economy startups such as VillageLuxe and peer-to-peer selling at Grailed.
The proliferation of data and exponential increases in technology performance have opened the door to the use of big data. The use of rich data and granular customer insights to inform decisions offers business opportunities across the fashion value chain, in areas ranging from dynamic pricing to optimised product replenishment. While the benefits of leveraging data can be significant, new challenges also arise, such as protecting customer data and privacy.
The fast pace of the industry is shaking up the fashion system. Sales of the traditional fast fashion-sector have grown rapidly, 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 the time from design to shelf, including the recent announcement from Gucci that it will focus on supply chain optimisation and responsiveness (Exhibit 5). This “need for speed” is driven partly by social media bringing fashion trends to more consumers at a faster pace than in the past. Industry leaders are also pushing up standards as analytics and customer insights enable them to meet customer needs better and improve responsiveness. But speed and flexibility bring new challenges. Shortening lead times requires major changes to the traditional business model and supply chain setup, and a shift in focus to a customer-centric model – with the customer as the principal driver of design, production and merchandising. How fashion companies play today varies widely. Companies still playing by the old rules, with prolonged end-to-end product development processes, face increased fashion risk and excess inventory if they are not able to match customer demand. But others are building agile supply chains supported by higher-quality consumer insights. Fashion players that lead on speed are pushing the limits of their creative process and are performing supply chain acrobatics, with the frontier being close to a real-time supply chain fed by “test and learn” and data analytics.
THE 10 TRENDS THAT WILL SET THE AGENDA FOR THE GLOBAL FASHION INDUSTRY IN 2018
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 towards what is within their control.
Despite the rise of nationalism, isolationist rhetoric and reshoring, globalisation will not stall. A new phase of globalisation characterised by the exponential growth of cross-border bandwidth, connectivity and digital data flows will alter the global playing field and give certain players a competitive edge.
With two thirds of the world’s e-commerce unicorns, more than half of global online retail sales, and countless digital and tech innovations, Asia is no longer waiting for Western companies to step up. Asian players will assert their power and leadership even more through pioneering innovations and global-scale investment and expansion.
Personalisation 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 personalise experiences. The fashion companies that flourish will re-focus on their strengths.
Consumers will increasingly look to online platforms as the first point of search, attracted by their convenience, relevance and breadth of offering. Whether mass, specialist or premium, platforms will continue to grow in scale and reach compelling fashion brands to find ways of engaging more with these powerful sales channels. The question for fashion brands is no longer “if” but “how” to collaborate with big online platforms.
As consumers’ obsession with mobile grows, the end-to-end transaction will also move to mobile. With an overabundance of mobile payment solutions already available globally, consumers will expect fashion companies to cater for increasingly convenient mobile transactions.
7. AI gets real
Leading innovators will reveal the possibilities of artificial intelligence across all parts of the fashion value chain, exploring new ways of creating value for those employed in the fashion industry. AI enhancements will go beyond the traditional areas of machine tasks into creative and customer interaction processes, blurring the line between technology and creativity.
Sustainability will evolve from being a menu of marketing-focused CSR initiatives to an integral part of the planning system where circular economy principles are embedded throughout the value chain. More fashion brands will plan for recyclability from the fibre stage of the supply chain and many will harness sustainability through tech innovation in order to unlock efficiency, transparency, mission orientation and genuine ethical upgrades.
Off-price sector growth continues to be driven by the notion that it provides a solution to challenges like excess stock and slow growth, but the US market serves as a warning about saturation and possible sales cannibalisation. As Europe and Asia get hooked on the myth of an off-price ‘panacea,’ the fashion industry could be put at risk of margin erosion unless companies carefully consider their off-price channel strategies.
10. Startup thinking
Due to an urgent and intense need for innovation across the industry, a growing number of fashion companies will aim to emulate the qualities of startups such as agility, collaboration and openness. Traditional and heritage players will continue to be compelled to open their minds up to new types of talent, new ways of working, new kinds of partnerships and new investment models.