The Business of Fashion and McKinsey & Company have now released The State of Fashion 2021, focusing on the themes, issues and opportunities impacting the sector. Download fashion’s most authoritative report here.
LONDON, United Kingdom — 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. As an industry, we are 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 disorientating 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, analysing surveys, data and expert interviews to provide insight for fashion professionals as they embark on the 12- to 18- month period after the dust settles.
The Black Swan and Fashion
Covid-19 could spur the biggest economic contraction since World War II, hitting every sector from finance to hospitality. Yet fashion, due to its discretionary nature, is particularly vulnerable. The average market capitalisation of apparel, fashion and luxury players dropped almost 40 percent between the start of January and the 24th of March 2020 — 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 hit, entails joblessness or financial hardship for people across the value chain — from those harvesting the fibres used to make textiles to shop assistants selling the finished fashion product.
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. For the personal luxury goods industry (luxury fashion, luxury accessories, luxury watches, fine jewellery 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. If stores remain closed for two months, McKinsey analysis approximates that 80% 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% 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 US. 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, India, Cambodia, Honduras and Ethiopia, extended periods of unemployment will mean hunger and disease.
The crisis is affecting our 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 the US and Europe believing that their financial situation will be impacted negatively for more than two months.
It is apparent that the fashion industry is just at the beginning of its struggle.
Though 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 blows to both supply and demand, the pandemic has brewed a perfect storm for the industry: a highly integrated global supply chain means companies have been under immense strain as they 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 prioritise necessary over discretionary goods, hit brands’ bottom lines and depleted cash reserves. Even online sales have declined 5 to 20 percent across Europe, 30 to 40 percent in the US and 15 to 25 percent in China.
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. We expect a period of recovery to be characterised by a continued lull in spending and a decrease in demand across channels. As noted in our previous reports with themes 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” 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 fashion with a chance to reset and completely reshape the industry's value chain.
The coronavirus also presents fashion with a chance to reset and completely reshape the industry’s value chain — not to mention an opportunity to reassess the values by which we measure our actions. We expect that themes of digital acceleration, discounting, industry consolidation and corporate innovation will be prioritised once the immediate crisis subsides. Even after witnessing waves of insolvencies, industry leaders will need to get comfortable with uncertainty and ramp-up their future-proofing efforts as the potential for further outbreaks and lockdowns loom.
This will also be a time for collaboration within the industry — even between competing organisations. 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 landlords should also find ways to share the burden.
This joint report by The Business of Fashion and McKinsey & Company is an effort to advance the discussion beyond crisis management and immediate contingency planning, by outlining the areas where the 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 post-coronavirus world.
The five themes that will set the agenda once the dust settles are:
1. Survival Instincts
Recovery from the pandemic will coincide with a recessionary market, compelling fashion players to ramp up resilience planning and adapt their operating models. Companies surviving the immediate crisis will have made bold and rapid interventions to stabilise their core business before seeking out new markets, strategic opportunities and future pockets of growth in a global fashion industry undergoing dramatic transformation.
2. Discount Mindset
As deep discounting plagues retailers for the remainder of 2020, a decade-long build-up of bargain shopping culture will be exacerbated by a rise in anti-consumerism, a glut in inventory and cash-strapped consumers looking to trade down or turn to off-price channels. To reach increasingly frugal and disillusioned consumers, brands must find inventive ways to regain value and rethink their broader business mission.
3. Digital Escalation
Social distancing has highlighted the importance of digital channels more than ever and lockdowns have elevated digital as an urgent priority across the entire value chain but, unless companies scale up and strengthen their digital capabilities in the recovery phase of the crisis, they will suffer in the longer term. Consumers will continue to demand more in this space and brands must act fast to deliver.
4. Darwinian Shakeout
The crisis will shake out the weak, embolden the strong and accelerate the decline of companies that were already struggling before the pandemic, leading to massive waves of consolidation, M&A activity and insolvencies. To secure their future, companies must adapt to the new market environment by evaluating divestment and acquisition opportunities to strengthen their core and capture whitespaces that emerge from the reshuffle.
5. Innovation Imperative
To cope with new restrictions, mitigate the damaging impact of the pandemic and adapt to economic and consumer shifts, companies must introduce new tools and strategies across the value chain to future-proof their business models. Fashion players must harness these innovations and scale up those that work in order to make radical and enduring changes to their organisations — and to the wider industry — after the dust settles.