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Agenda-setting intelligence, analysis and advice for the global fashion community.

The State of Fashion 2021 Report: Finding Promise in Perilous Times

The fifth annual State of Fashion report by The Business of Fashion and McKinsey & Company forecasts the continuation of tough trading conditions next year, forcing companies to find their ‘silver linings strategies.’ Download the full report to understand the 10 themes that will define the global fashion industry in 2021 and how to navigate the currents they create.
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Illustration by Martin Nicolausson for BoF.
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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 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 decision- making, 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.

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.

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.

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.

The 10 fashion industry themes that will set the agenda in 2021:

1. Living with the Virus

The Covid-19 crisis has impacted the lives and livelihoods of millions of people, while disrupting international trade, travel, the economy and consumer behaviour. To continue to manage unprecedented levels of uncertainty in the year ahead, companies should rewire their operating models to enable flexibility and faster decision-making, and balance speed against discipline in the pursuit of innovation.

2. Diminished Demand

Following the deepest recession in decades, the global economy is expected to partially recover next year but economic growth will remain diminished relative to pre-pandemic levels. Since demand for fashion is also unlikely to bounce back due to restrained spending power amid unemployment and rising inequality, companies should seize new opportunities and double down on outperforming categories, channels and territories.

3. Digital Sprint

Digital adoption has soared during the pandemic, with many brands finally going online and enthusiasts embracing digital innovations like livestreaming, customer service video chat and social shopping. As online penetration accelerates and shoppers demand ever-more sophisticated digital interactions, fashion players must optimise the online experience and channel mix while finding persuasive ways to integrate the human touch.

4. Seeking Justice

With garment workers, sales assistants and other lower-paid workers operating at the sharp end of the crisis, consumers have become more aware of the plight of vulnerable employees in the fashion value chain. As momentum for change builds alongside campaigns to end exploitation, consumers will expect companies to offer more dignity, security and justice to workers throughout the global industry.

5. Travel Interrupted

The travel retail sector remains severely disrupted and destination shopping suffered throughout 2020. With international tourism expected to remain subdued next year and shoppers experiencing further interruptions to travel, companies will need to engage better with local consumers, make strategic investments in markets witnessing a stronger recovery and unlock new opportunities to keep customers shopping.

6. Less Is More

After demonstrating that more products and collections do not necessarily yield better financial results, Covid-19 highlighted the need for a shift in the profitability mindset. Companies need to reduce complexity and find ways to increase full-price sell-through to reduce inventory levels by taking a demand-focused approach to their assortment strategy, while boosting flexible in-season reactivity for both new products and replenishment.

7. Opportunistic Investment

Performance polarisation in the fashion industry accelerated during the pandemic as the gap widened between the best-performing companies and the rest. With some players already bankrupt and others kept afloat by government subsidies, we expect M&A activity to increase as companies manoeuvre to take market share, unlock new opportunities and expand capabilities.

8. Deeper Partnerships

By exposing the vulnerability of procurement partners, the weakness of contracts and the risks of a concentrated supplier footprint, the crisis accelerated many of the changes that companies were already making to rebalance their supply chain. To mitigate future ruptures, fashion players should move away from transactional relationships in favour of deeper partnerships that bring greater agility and accountability.

9. Retail ROI

Physical retail has been in a downward spiral for years and the number of permanent store closures will continue to rise in the post-pandemic period, compelling fashion players to rethink their retail footprints. Amplified by a potential power shift from landlords to retailers and the need to seamlessly embed digital, companies will need to make tough choices to improve ROI at store level.

10. Work Revolution

Prompted by fundamental changes in the way companies worked during the pandemic and the need to drive performance in the years to come, an enduring new model for work is likely to emerge. Companies should therefore refine their blends of remote and on-premises work, invest in reskilling talent and instil a greater sense of shared purpose and belonging for employees who continue to reconsider their own priorities.

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