This article appeared first in The State of Fashion 2021, 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.
The pandemic has had a destructive impact on the global economy. It is now certain that there will be an exceptional slowdown in economic growth in 2020, with the International Monetary Fund predicting that global GDP will be 6.5 percent lower than its pre-pandemic projection, with variability across regions. At the same time, governments are accumulating huge debts. In just one year, global public debt stocks are projected to jump by an astonishing 13 percent to 96 percent of gross world product, with longer-term effects likely to be tax rises, restricted spending and slower growth. Furthermore, few economists predict a recovery to pre-crisis levels before the third quarter of 2022, and even that prediction is riddled with uncertainty.
Recovery will likely fall somewhere between bullish and bearish scenarios for 2021, based on McKinsey Global Institute analysis in partnership with Oxford Economics (based on information available September 2020). In a more optimistic future scenario, the global economy could return to 2019 levels of activity by the third or last quarter of 2021, with differentiated growth trajectories across regions. In more pessimistic future scenarios, recovery will take longer and businesses will face continued volatility in supply and demand for multiple years.
More than 80 percent of leaders at consumer and retail companies report they are now making and implementing major decisions faster than before.
One segment hit particularly hard by the crisis has been international travel, which has almost ground to a halt in some geographies. The severity of the impact was summed up by Procter & Gamble (P&G) Vice Chairman Jon Moeller, when he told investors on an earnings call in April 2020 that the travel retail business in Asia — which underpins P&G brands like SK-II — was simply “gone.” For fashion and beauty players that are reliant on the travelling consumer, there will continue to be concern next year. International tourist arrivals are expected to contract by 60 to 80 percent in 2020 and McKinsey forecasts that international tourism will remain subdued until 2023 or 2024.
Cross-border trade also continued to slow significantly in 2020, with port and airport closures disrupting flows, which adds to challenges caused by ongoing trade tensions and tariff disputes, including the deteriorating relationship between China and the US and the unknown impact of Brexit on UK-EU flows.
In the wake of these crosscurrents, the fashion industry will continue to face a period of unprecedented challenges. With that in mind, resilience should be at the top of executives’ agendas. History reveals just how important it is during times of crisis.
In the aftermath of the 2008 financial crisis, companies that were able to foster resilience through operational and financial flexibility generated higher total returns to shareholders. According to McKinsey analysis, this manifested across four key levers. The first was investment in top-line growth as early as possible, which accelerated the rebound and led to revenue increases of up to 30 percent compared with those of non-resilient players. Second, companies that addressed key structural costs were able to achieve higher productivity — resilient players reduced operating costs by as much as threefold. Third, a methodical approach to acquisitions and disposals led to better performance: specifically, divesting and investing early in the recovery paid dividends. Finally, deleveraging was a consistently productive strategy, with less indebted companies faring better than their peers.
The four levers can also be seen through the twin rubrics of agility and discipline. Fashion companies that adopt these overarching principles and turn them into concrete strategies are likely to emerge from the crisis in better shape. Indeed, many are already doing so. More than 80 percent of leaders at consumer and retail companies report they are now making and implementing major decisions faster than before. In March 2020, US jewellery brand Kendra Scott rapidly transformed its 108 US stores into fulfilment centres — a response to strains on existing centres due to social distancing measures. British retailer John Lewis announced in the summer it would open concessions with fast-growing indoor spinning brand Peloton, rapidly responding to the at-home fitness trend that boomed during the pandemic.
As the crisis continues to unfold, brands must shape their strategies by quickly grasping which trends will remain after recovery and which will dissipate. In any event, investment in data and analytics is likely to reap benefits. Armed with customer insights, companies can reset their long-term strategies and redirect investment into opportunities that will outlast the pandemic.
According to our BoF-McKinsey State of Fashion 2021 Survey, the most fertile ground for these opportunities will be in the areas of digital and sustainability, which were chosen by 30 percent and 10 percent of executives respectively.
The emphasis on sustainability is also reflected in consumer sentiment. More than three in five consumers in a McKinsey survey ran in May 2020 said brands’ promotion of sustainability was an important factor in their purchasing decisions. In response, numerous companies are stepping up their sustainability efforts. Timberland is aiming to source all of its natural materials from regenerative agriculture by 2030, while British department store Selfridges has unveiled bold new sustainability goals, promising to stop stocking products that are not compliant with its new sourcing standards by 2025, and Allbirds has started labelling the carbon footprint of each of its products.
In 2021, we expect winning brands to be those that can define clear, long-term ambitions, while demonstrating enough flexibility, speed and agility to navigate an uncertain short-term future. Brands should reshape their operating models to adapt to the faster pace of change and sustain those effective new working practices that have emerged from the crisis. Since adaptability will be key to all of this, brands should identify the threats to their businesses and prepare strategic responses across multiple scenarios in order to counter uncertainty and facilitate fast decision-making. Building cross-functional teams that are informed by strategic priorities will give brands the necessary agility to respond quickly and capture market opportunities.
Fashion executives need to set aside their traditional approaches to budgeting and strategic planning to maximise their organisation’s responsiveness in the months ahead. Leaders should systematically assess the impact of strategic initiatives launched since the start of the pandemic and re-evaluate their initial assumptions about factors like sales and volumes based on real-time results. Learnings from 2020 should be used to stress-test plans for 2021 and identify key priorities for all potential future scenarios. To support this fresh perspective on planning, fashion leaders will have to reimagine budgeting from a zero-base approach, with pre-defined funds allocated to different possible scenarios. While brands should cut down on secondary spending where possible, leaders should be careful not to trim key growth investments, notably digital ones, in order to remain relevant both during and after the downturn.
We expect in the coming year that leading fashion executives will step up their execution excellence and delegate decision-making more efficiently to ensure better accountability. The pandemic has already prompted some players to recalibrate chains of command, simplifying decision-making and enabling greater autonomy down the hierarchy and to regional centres. And in an increasingly uncertain world, fashion executives should also ensure continuous dialogue and information-sharing with employees and shareholders, fostering communication across the organisation.