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The US-China Tariff War: Assessing the impact on Apparel, Footwear, Furniture Brands + Retailers
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Here starts Today’s TextileFuture Newsletter:
The fashion world offers so many different aspects having an effect not only on clothing, but it involves also fabrics, the supply chain and retail among many others, this is why we do continue to offer the latest findings in our TextileFuture Newsletters. Today’s feature is based upon a paper, based upon a survey from McKinsey. The guest authors are Achim Berg, Miriam Heyn, Elizabeth Hunter, Felix Rölkens, Patrick Simon, and Hannah Yankelevich, all from McKinsey.
Achim Berg is a senior partner in McKinsey’s Frankfurt office; Miriam Heyn is a partner in the Berlin office, where Felix Rölkens is a consultant; Elizabeth Hunter is an associate partner in the Toronto office; Patrick Simon is a partner in the Munich office; and Hannah Yankelevich is an associate partner in the Minneapolis office.
A new survey takes stock of apparel companies’ go-to-market processes. The findings have implications for product design, development, and delivery.
As consumers of fashion, most of us have changed our habits dramatically as digital and social technologies have transformed the way we shop, spot trends, and share ideas and passions. Ten years ago, we might have spent hours browsing around in fancy stores—or stuck to a few favoured brands for the sake of time and simplicity. Today, we are just as likely to browse and shop from our cell phones, which give us instant access to the looks and recommendations of friends and acquaintances around the world. This has made us much more open to try new brands but also much more impatient about getting the styles we want right now.
Producers of fashion, however, have been struggling to keep up with consumers. Most apparel companies have not significantly changed the way they run their businesses in decades: fashion largely remains a creatively driven “art.” As demonstrated in the State of Fashion reports published by the Business of Fashion and McKinsey, apparel executives are well aware of the need for transformation. The executives surveyed for the 2016 and 2017 reports identified “value chain improvement and digitization” as two of their top challenges.
That means melding the “science” of highly effective processes with the creative “art” of fashion is necessary to bring the best of the best to consumers when they want it. Getting that right is crucial, as fashion is increasingly a winner-takes-all industry. Our 2017 report showed that in 2016, the top 20 percent of companies generated a staggering 144 percent of economic profit in the industry.
These challenges prompted us to develop our new report, Measuring the fashion world: Taking stock of product design, development, and delivery, focused solely on go-to-market processes—the heart of an apparel organization. It proposes a common set of metrics with which the fashion world can measure its progress and assess its core processes. Drawing on those metrics, the report creates transparency on where apparel companies stand today and suggests how they can shape nimble, digitally enabled go-to-market processes and use them to win in the new world of fashion. The insights presented here reflect the perspectives of 54 key executives involved in the Apparel Go-to-Market Process Survey conducted by McKinsey in 2018. Together, these executives are responsible for more than USD 110 billion in revenue.
Improving go-to-market processes: A high priority for executives
About the survey
The findings presented in this report are derived from a survey conducted by McKinsey with leading apparel players. The survey reflects the perspectives of 54 key apparel executives, including MDs, chief merchandising officers, chief supply-chain officers, and others involved in the go-to-market process. The survey respondents cover the full spectrum of the market across five continents.
Within the sample of companies, most were hybrid apparel players, but the sample also included vertically integrated players, multibrand retailers, and multibrand pure e-commerce players. Likewise, the sample included companies operating across all price segments—from affordable luxury or premium to the value or discount market. Smaller companies (those with an annual revenue below USD 500 million a year) made up around half the sample, while large companies (USD 500 million to USD 2.5 billion) and very large companies (over USD 2.5 billion) each made up about a quarter of the sample. Half the respondents were based in Europe, a third in North America, and the remainder spread across Asia, Australia, and Latin America.
In the survey, executives shined a spotlight on both the transformation efforts under way in the industry and the challenges they still face (see sidebar “About the survey”). An overwhelming 98 % of them said it was a priority to improve go-to-market processes and disciplines, and 59 % said they had already appointed a dedicated team to manage these processes. Yet their efforts to reinvent their operating models still have a long way to go. For example, 92 % of respondents from large fashion companies (those with annual revenue of more than USD 2.5 billion a year) admitted that their companies struggled to make timely decisions and stick to deadlines—and the majority of respondents said they were still too slow in bringing new products to market. In addition, over 70 % faced challenges in accurate demand planning and forecasting and said their companies still lacked the necessary digital tools and capabilities (Exhibit 1).
How will fashion executives close the gap between their go-to-market aspirations and today’s reality? Our survey provides helpful tips on the way forward. We asked participants to identify their greatest priorities for improvement in 16 different aspects of the apparel go-to-market process (Exhibit 2). The most cited priority was reducing speed to market, stated by more than half of all respondents as a top-three goal. Other key priorities included improving demand forecasting, increasing digital presence, and reducing markdowns. The vast majority of respondents said their companies were already working hard in each of these areas, and most of the rest said they planned to drive progress in these areas within the next 12 months. Yet executives recognize that each of these topics is complex and challenging, and success is by no means guaranteed.
Accelerating speed to market, bridging art and science through merchandising, and mastering digital and analytics are key priorities for apparel companies.
In our report, we break down these priorities and challenges into three critical improvement factors for the apparel go-to-market process: accelerating speed to market, bridging art and science through merchandising, and mastering digital and analytics. We consider each factor individually and discuss the reasons these areas are so critical, highlight the challenges companies face, compare performance throughout different segments of the industry, and lay out the transformation agenda required to achieve sustainable impact. The rest of this article, culled from the report, focuses on the first factor, accelerating speed to market.
Catching up with consumers by accelerating speed to market
We were not surprised that speed to market was identified as the top priority by most of the fashion executives in our survey sample. Indeed, concern about speed has been a constant theme in our discussions throughout the industry. We explore the reasons this topic is so relevant to fashion companies—and highlight the dangers involved with failing to accelerate speed to market. We also compare performance across different segments of the industry, highlighting the structural differences in the industry that drive the distinct paces in go-to-market processes.
Why speed to market matters
Why the need for speed in the fashion industry? There are two drivers, one external, and one internal making this topic so critical for fashion companies. The external driver is fashion risk—the risk of launching the wrong product in the market or missing a trend completely.
There are many reasons products might fail to resonate with consumers. These include lack of trendiness, the wrong product category mix, fit, materials, colours, and simply timing to market. Whatever the reason, the result is lower overall sales, higher markdowns, as well as ripple effects, such as higher inventory levels and missed opportunities.
There are two ways in which this risk can be mitigated effectively through a shorter time to market. The first, a forward-looking approach, entails getting “closer” to the market. A shorter time to market means less time between the start of product development (that is, when the first collection-defining decisions, such as concept, range plan, and first sketch designs are made) and the launch of the product in the market. The shorter this time span, the lower the risk of incorrectly anticipating what the market will want by the time the product hits the shop floor. For example, companies will have access to more accurate information on trend forecasting and consumer insights and will be better able to anticipate trends and demand patterns. Even a fully artistic design is more likely to resonate with consumers when it is created closer to the launch date. In addition to faster preseason development, companies can improve their in-season reactivity, or their ability to respond quickly when they spot a missed trend or need to replenish a sell-out product. In all cases, time is of the essence when meeting consumer demand.
The second, backward-looking approach entails making strategic use of data from a rich set of sources—including a company’s own sales, competitors’ product launches, and runway and fashion trends on social media. The shorter the speed to market, the longer the time frame between the start of sell-out of the past mirror season and the start of design of the new season. This means that there is more data available on the performance of the previous season, providing key insights on planning the new season. For example, a company’s product category performance (for example, in T-shirts) in one season will help merchandising departments identify which product categories to push in the new season.
The special case of sportswear
The sportswear companies in our survey sample had significantly longer timelines than other companies and averaged 75 weeks for the full end-to-end, go-to-market process. Sportswear companies’ overall creation, sell-in, and production timelines are much longer than those of other apparel firms. Why the big difference? These long timelines reflect seasonal processes that are typical of footwear and complex performance products. Due to the focus on coherent marketing and storytelling, sports companies develop apparel often together with these longer-lead-time products to then have a clearly synced go-to-market proposition—both with regard to product and storytelling approach.
Although sports companies have relatively long go-to-market timelines for their seasonal processes, they show considerable sophistication in all segmented processes. Among the sports companies from our sample, 86 % of them report having fast-track and never-out-of-stock processes, while 71 % have read-and-react processes—putting them way ahead of the typical apparel player. This clearly shows that sportswear companies are counterbalancing their longer lead time in innovative development with effective approaches to associating trends and relevance with their product lines.
In some fashion companies, such as sporting-goods players, speed to market can exceed one year. In these cases, no mirror-season data is available at the start of design. This poses a real challenge to brands with rapidly evolving aesthetics and a high emphasis on fashion; although, it may be less of a challenge for brands with more stable basics. Overall, there is no one-size-fits-all answer to the questions: “How do we stay thoughtful while being fast?” and “What is fast enough?” The answer depends on the company and product type. Therefore, companies in every part of the industry have opportunities to accelerate.
The internal driver of the need for speed is economics. In fashion, time really is money. Longer processes mean that the personnel working on the collection in all sections of the go-to-market process spend more time developing each collection, thus creating a chain reaction of inefficiencies. For example, long processes lead to higher overlap, with designers working on several collections in parallel at any given moment. By reducing such overlap, thus reducing overall speed to market, companies can distribute the workload more evenly over time and focus solely on the product at hand. This also means they can avoid hiring additional freelancers to aid in times of high workload.
A further benefit of improved speed to market is that it requires teams to work in a more focused way. Such focus can lead to more targeted and structured collections with fewer yet more robust styles, options, or pieces. This, in turn, can result in lower production complexity, for instance, larger order quantities per style—thereby reducing costs. A more structured process with greater discipline also means smoother collaboration with suppliers. Today, however, internal inefficiencies in apparel companies often have negative effects on suppliers.
Who sets the pace? Structural differences in speed to market
Not all fashion players are equally nimble—nor should they expect to be. We examined the seasonal go-to-market processes in several types of apparel firms and found key structural differences in pace throughout business models as well as across price segments. In the industry, we see four distinct business models (Exhibit 3). These include hybrid players such as Nike, Ralph Lauren, and Tommy Hilfiger, which serve wholesale customers alongside their own retail and e-commerce arms; vertically integrated players, such as Primark, which focuses on retail operations; and pure-play online retailers, such as ASOS, Net-a-Porter, Tmall, and Zalando.
Brands and retailers in the industry can be clearly differentiated based on their operating model.
Our analysis of structural differences in speed to market has yielded three key insights for executives:
- Vertically integrated players set the pace.
- A balance must be struck between quality and time.
- Process segmentation is critical.
Vertically integrated players set the pace
We find that vertically integrated players are 36 % faster on average than hybrid players in the overall duration of the go-to-market process. The hybrid apparel players in our survey sample averaged 44 weeks for the end-to-end process, compared to 28 weeks for vertically integrated apparel players (Exhibit 4). The vertically integrated players therefore produce their products much closer to the trend.
Vertically integrated apparel players have 36 % faster go-to-market timelines than hybrid apparel players.
To support this analysis, we set out a clear series of tasks corresponding to the creation of each seasonal fashion collection, from official kick-off of product design and development to release, when the product first hits the shop floor or becomes available through e-commerce channels (Exhibit 5).
The seasonal apparel go-to-market process has four distinct process steps.
Vertically integrated players’ speed advantage is driven strongly by the absence of a sell-in phase. The duration of the production and logistics phase, in contrast, lasts 17 to 18 weeks, for companies with or without wholesale.
A more surprising finding is that vertically integrated players have a distinct advantage in the product-creation and design-and-development phase. On average, these players take only 11 weeks to complete this phase, whereas hybrid players take an average of 24 weeks. One reason for this difference is the feedback loops that hybrid players have with their wholesale customers. Hybrid players are often very closely linked to their wholesale accounts, actively involving them in developing collections, and this may prolong the go-to-market process.
Furthermore, hybrid players need to incorporate production of sophisticated wholesale samples into their timelines, thus making them longer than those of vertical players. However, it is not only the business model but also the price segment in which players operate that defines how fast they go to market.
A balance must be struck between quality and time
For hybrid and vertically integrated apparel players, we see a clear correlation between go-to-market speed and price segment (Exhibit 6). Hybrid affordable luxury and premium segment players take on average around 46 weeks to complete the end-to-end process, while the midmarket segment requires only around 35 weeks.
The value and discount segment has the shortest go-to-market timelines.
A similar differential can be observed in vertically integrated players. While the midmarket segment has an overall go-to-market time of 32 weeks, value and discount companies have an average go-to-market time of only 27 weeks. These value players are especially fast in the design phase, which takes them an average of ten weeks to complete; the nimblest players take as little as one week. While this difference in speed is impressive, it is not altogether surprising. That is because players in lower-price segments design for high volume and have historically placed an emphasis on speed because this segment and price point are also where fast fashion originates. Players in this segment often take a fashion-follower approach, utilizing successful designs they see in the market and bringing them into their stores at lower prices. It is worth emphasizing that value players achieve high speed to market even though they typically ship products from low-cost manufacturing countries to the shop floor in their primary consumer markets.
Renewed optimism for the fashion industry
As we discuss below, however, the seasonal process is not the only driver of speed to market. Increasingly, apparel companies are using a series of segmented processes—some of them more quickly than others—to accelerate their overall speed to market.
Process segmentation is critical
The days when fashion companies relied on a single, one-size-fits-all go-to-market process are long gone. Instead, companies are using a segmented approach to create their products. We identify four segmented-apparel go-to-market processes, or “tracks,” as they are referred to in industry parlance. Each serves a clear purpose or defines a particular business model:
- The seasonal collection process is the “bread and butter” business of most apparel players—it typically applies to the majority of their products, which are developed at a standard pace and launched in-store for specific, limited-time fashion seasons.
- Read and react, or in-season replenishment, allows companies to react to positive sellout results through the quick additional production of high-selling pieces in the collection.
- Fast track, or the additions process, involves the quick design, development, and production of new products outside the normal go-to-market process. It offers companies the opportunity to react to missed-trend opportunities.
- Never out of stock (NOOS), or core replenishment products, focuses on creating the base of a company’s product range over a longer period of time. It involves standard products that are not season specific, but are always available and continuously replenished as a permanent element of the assortment. These products often depend on enablers, such as fabric platforming.
Our survey shows that three-quarters of products in the industry are still produced in seasonal processes. However, just over half the companies in our sample also use read-and-react or fast-track models, and nearly two-thirds use a NOOS model to create basics and best sellers on a continuous basis. The trend is clearly moving toward greater use of segmentation. But what about the companies that are not yet using segmented processes? Among those that use only the standard, seasonal-collection process, around 90 percent of respondents said read and react, fast track, and the NOOS processes would be beneficial for their company’s overall performance (Exhibit 7).
Segmented go-to-market processes are very beneficial for the business.
Again, there are some important differences between different types of players when it comes to process segmentation. The share of companies with NOOS processes is higher for hybrid players (70 %) than it is for vertically integrated players (57%). On the other hand, read-and-react processes are far more prevalent among vertically integrated players (64%) than among hybrid players (40 %). This is likely because players without wholesale have more control of their sell-out channels, and thus also have the power and incentive to quickly replenish in-store products throughout the season. Their overall business model is more focused on fast fashion, identifying trends and sell-out quickly, and fulfilling those demands.
The use of the different segmented processes also varies according to price positioning. Among value and discount players, 67 % have adopted a read-and-react model, compared to 42 % of affordable luxury and premium players. Conversely, 71% of these high-end players and only 42 % of the value and discount segment use NOOS.
This is partially explained by the inherent goals of each type of company. As the products of high-end players are intended to last longer, they are often trans-seasonal and created in NOOS programs. Such products are often basic signature garments that define the brand, such as polo shirts or chino trousers.
We hope the insights in this article, and the broader report that underlies it, will enable executives to inspire discussions on their company’s go-to-market processes, capture efficiencies, and level their performance with that of their best-in-class peers and beyond. Most of all, we hope that the insights will help fashion executives to catch up with the speed, digital fluency, and global imagination of today’s consumers.
Download the full report on which this article is based, Measuring the fashion world: Taking stock of product design, development, and delivery (PDF–4MB).