Adapted From Report on Global Fashion Industry by McKinsey & Co and Business of Fashion. Read the full report here – https://www.mckinsey.com/~/media/McKinsey/Industries/Retail/Our%20Insights/The%20state%20of%20fashion%202020%20Navigating%20uncertainty/The-State-of-Fashion-2020-final.ashx
In Troubled Times, Fortune Favours the Big and the Bold.
Fashion leaders are not looking forward to 2020. The prevailing mood among respondents to our executive survey is one of anxiety and concern. In contrast to last year, when there were pockets of optimism in North America and within the luxury segment, we now see pessimism across all geographies and price points. To make matters more complicated, although we know that external shocks will continue, we don’t know what form they will take. Even without the economic headwinds,these would be challenging times. The McKinsey Global Fashion Index (MGFI) forecasts that global fashion industry growth will slow further — down to 3 to 4 percent — slightly below predicted growth for 2019. Fashion players are under pressure to be digital-first and fully leverage new technologies, to improve diversity across their assortments and organisations and to address growing demand for the industry to face the sustainability agenda head-on. Yet not all companies are created equal. Polarisation persists and the “Super Winners” — the top 20 players by economic profit — account for more than the combined economic profit of the entire industry. Not only are they highly value-creating and of immense scale, but they often pioneer innovation in the industry through their product ranges and interaction with consumers. They are also best positioned to attract the industry’s limited resources and talent, while others risk getting left behind. A growing proportion of publicly traded fashion companies are actually “value destroyers” that rack-up negative economic profit. In a “winner takes all” market, the implications for laggards are troubling.
Successful companies will be the ones that make moves early, focus on boosting earnings over revenue growth, and work out how to improve productivity while ensuring operational and financial flexibility. Volatility is here to stay, so fashion companies should take steps to become more resilient, build a profound understanding of the risks they face and consider strategic actions to minimise them. Successful companies will be the ones that make moves early, focus on boosting earnings over revenue growth, and work out how to improve productivity while ensuring operational and financial flexibility. Crucially, all this will
require leaders who make quick decisions in an environment of great uncertainty. The good news is that for companies that do display resilience and resolve, additional rewards are there for the taking beyond 2020. While China continues to present a lucrative opportunity for many global and local fashion players, some companies are at risk of becoming over-reliant on the market. We see further potential to explore markets beyond China, including India, Southeast Asia, the Middle East and Russia.
To better address consumer themes next year, fashion players should focus on clearly understanding how to best use new social media channels and functions, how to optimise their store networks and experience, and how to best deliver industry change toward greater sustainability. Both R&D and innovation will play vital
roles in delivering short-term sustainability targets and in reinventing fashion’s economic model for longer term transformation. Consumers and employees will continue to demand more from purpose-driven companies that champion their values — from climate change consciousness to diversity and inclusion. Nonetheless, threats remain for incumbents across the industry who don’t respond or adapt fast enough. Facilitated by e-commerce marketplaces linking them direct to global consumers, Asian players will intensify their competition with western brands through cross-border channels. Meanwhile, digital pure players that pioneer new business models may prove exciting as new paths to profitability emerge,but other tech players will begin to falter. And as industry-wide digitisation progresses, the need for reinvention has even reached showrooms and trade fairs.
While 2020 is not expected to be easy, it will be significantly more challenging for some companies than for others. Indeed, the year ahead will require fashion companies to deliver meaningful change across the value chain and on multiple fronts while mitigating risk and managing uncertainty. But, for the fortunate few, there will also be opportunities to capture.