The State of Fashion 2017
Have you ever wanted to have a complete picture of the world’s fashion industry? This is what you do get in the two latest and first reports by McKinsey. TextileFuture is very proud to present their findings. The first report is entitled “The State of Fashion 2017”, and the second report is about “Style that’s sustainable: A new fast-fashion formula”
The State of Fashion 2017 by McKinsey was created to provide a comprehensive view of the fashion industry—one whose coverage remains fragmented and not systematically reported. Its principal aim is to lay out the interconnectedness of the entire fashion ecosystem across market segments and product categories by distilling the industry’s current and projected performance, and addressing the factors shaping and driving fashion today and in the year to come.
To accomplish this, the report relies on extensive qualitative and quantitative analyses, drawing on industry and proprietary sources, including executive interviews, the new BoF-McKinsey Global Fashion Survey, the McKinsey Global Fashion Index, which tracks industry sales, operating profit, and economic profit (value creation) and McKinsey’s FashionScope, a city- level growth forecasting tool for the fashion industry.
The report is split into two sections: Section One provides a review of the industry in 2016, highlighting the industry’s performance across sales, operating profit (EBITA), and economic profit—a measure of value-add that takes into account both the explicit and implicit costs of generating income—and recapping the ten key themes that shaped 2016; Section Two provides an outlook for 2017, forecasting for the first time expected growth for the fashion industry across market segments and product categories, highlighting the top priorities for executives, and defining the ten trends that we believe will set the agenda for the industry over the next 12 months.
In order to present a full picture of the ecosystem and bring to life the complex and multifaceted aspects of the industry, the report also includes a series of deep dives and executive inter- views on some of the most exciting developments, including the growth of Russia’s fashion market, the new wave of digitisation of the supply chain, and the rise of new consumer capitals in China, the Middle East, and Latin America.
Fashion is one of the world’s most important industries, driving a significant part of the global economy. In 2016, the industry is projected to reach a staggering USD 2.4 trillion in total value. If it were ranked alongside individual countries’ GDP, the global fashion industry would represent the world’s seventh largest economy.
And yet, for some observers, fashion is still regarded as simultaneously frivolous and indulgent; and many of the sources of information about the industry are fragmented, incomplete, or unreliable.
Now, McKinsey & Company and The Business of Fashion (BoF) are aiming to close that gap. This first State of Fashion report lays the foundation for rigorous in-depth research and analysis of the global fashion industry, focusing on the themes, issues, and opportunities impacting the sector and its performance.
Over the last few months, we have put together a global network of experts, research and analysis from to bring you a report that makes sense of the challenges and opportunities across all of fashion’s market segments – from mass global discount retailers to exclusive luxury brands – as well as specific product categories and geographies.
An author’s introduction
The aim of the two authors Imran Amed and Achim Berg is threefold: first, to establish a common understanding of the forces that are shaping the industry the most; second, to shed some clarity and transparency on the industry’s performance; and third, to look ahead and set the agenda for the topics that should be top of mind for business and creative leaders in 2017, to form the basis of the discussions and conversations we are having at VOICES, BoF’s new annual gathering for big thinkers taking place from December 1-3, 2016.
Achim Berg is a senior partner in McKinsey’s Frankfurt office, Leonie Brantberg is an associate partner in the London office, and Saskia Hedrich is a senior expert in the Munich office. Imran Amed is the founder, editor-in-chief, and CEO of the Business of Fashion
By bringing together our two organisations, we have pooled resources to draw on BoF’s industry expertise and insider access alongside McKinsey’s functional, analytical and industry insight to offer a rare blend of quantitative rigour and sharp-eyed qualitative insights about the fashion sector.
To inform our analysis, we surveyed senior industry executives from around the world and conducted in-depth interviews with some of the most influential and forward-thinking people in the industry. Our collective knowledge creation is unique and an integral part of this report, and the insights we share will be relevant to everyone who engages in the business of fashion, whether in the boardroom, as an entrepreneur building a start-up, or even as an informed shopper on the high street.
With this report, we also unveil a new industry benchmark: the McKinsey Global Fashion Index (MGFI). With a database of over 450 different fashion companies, this index will allow for analysis and comparison of how a fashion company is performing against others in its market segment, product category, and even operating model. Over time, the data set will grow and become ever more valuable as a source of insight into both the pressures impacting fashion, as well as the opportunities and new sources of revenue and innovation that will emerge from the world’s increasingly turbulent fashion markets.
For creative leaders and business executives, this has arguably been the most uncertain operating environment in living memory. However, we hope that with new resources like The State of Fashion and the McKinsey Global Fashion Index, the global fashion community will be in a stronger position to face challenges in the market, and plot a path to a successful future.
The principal authors Imran Amed, Achim Berg, Leonie Brantberg, and Saskia Hedrich from McKinsey. Here these present an executive summary of their work:
After a tough 2016, growth in the USD 2.4 trillion industry may accelerate next year, according to the first joint report from McKinsey and the Business of Fashion.
Fashion is one of the past decade’s rare economic success stories. Over that period, the industry has grown at 5.5 % annually, according to the McKinsey Global Fashion Index, to now be worth an estimated USD 2.4 trillion. In fact, not only does it touch everyone, but it would be the world’s seventh-largest economy if ranked alongside individual countries’ GDP.
Yet 2016 was one of the industry’s toughest years. Terrorist attacks in France, the Brexit vote in the United Kingdom, and the volatility of the Chinese stock market have created shocks to the global economy. At the same time, consumers have become more demanding, more discerning, and less predictable in their purchasing behaviour, which is being radically reshaped by new technologies. It’s against this backdrop that McKinsey has teamed with the Business of Fashion to shine a light on the fragmented, complex ecosystem that underpins this giant global industry.
2016: A year to forget
Our first The State of Fashion report finds that it’s not only external shock waves that have roiled the industry. Companies have also been looking inward, implementing changes to the core operations that are reshaping the entire fashion system, from shortening the length of the fashion cycle to integrating sustainable innovation into the core product-design and manufacturing processes. Perhaps unsurprisingly, 67 % of executives said conditions for the fashion industry have worsened over the past 12 months.
This fact is clearly borne out in the industry’s financial performance. Sales growth seems set to slow to a mere 2 or, at most, 3 % by the close of 2016, with stagnating profit margins. Speculation and uncertainty over the repercussions of the US election outcome could further dampen consumer sentiment and affect sales. This is in stark contrast to the fashion industry’s performance over the previous decade, which saw the industry expand at 5.5 % annually.
Yet this sluggish overall growth masks some big winners: affordable luxury, value, and athletic wear.
With respect to sales growth, the affordable-luxury and value sectors have outperformed all other segments by one to one-and-a-half percentage points. This is consistent with their compound annual growth rate (CAGR) over the past three years, which has been 9 % for affordable luxury and 6 % for value, the highest of any segment since 2013.
Affordable-luxury players benefited from consumers trading down from luxury, particularly among Chinese consumers. However, their profit margins are expected to decline, especially after 2016, because of a pricing-arbitrage disadvantage across geographies and fluctuating foreign-exchange rates.
The value segment continued to grow in 2016, particularly as a consequence of large global players expanding geographically. With its clearly defined value proposition, the value segment has been taking share from discount this year.
The outlook into 2017
All things considered, we expect fashion-industry growth will increase to 2.5 to 3.5 % in 2017, although the days when the industry outpaced GDP growth by as much as two percentage points seem over. A return to the riches of the previous decade appears unlikely. But equally, there is no call for rags just yet.
Performance will vary depending on the individual dynamics of specific market segments and categories. Value and affordable luxury will probably be the big winners, both outpacing the industry average at a projected 3.0 to 4.0 % and 3.5 to 4.5 % growth, respectively. That said, almost all other market segments should see a slight improvement in sales growth of half to one-and-a-half percentage points. Only the discount segment is likely not to be part of the recovery trend.
Product categories are expected to grow in line with the overall industry average, but the biggest winners will be those companies with coherent channel strategies and clear value definitions. Athletic wear is set to become the absolute category champion, maintaining 6.5 to 7.5 % sales growth, although it will be unable to reproduce the double-digit growth of the past. The affordable-luxury segment seems likely to continue benefiting from consumers trading down from luxury, while signs point to the continued growth of the value segment as large global players expand internationally.
In short, the industry next year has an opportunity to stabilize and reset, and success stories will probably be written by those already planning for the year ahead. They should bear in mind the three trends that we believe will shape the 2017 fashion industry: the global economy, consumer behaviour, and the fashion business model.
Economically, we see a number of trends that will shape the industry, including fashion’s response to intensifying volatility, continued challenges in China, and the rise of urban centres. To address consumer behaviour, players will have to learn to serve shrewder and more-demanding customers and adjust to a shifting demographic profile. Finally, 2017 will also be a critical year for the fashion business system, with developments expected around the fashion cycle, technological advancements, and a shake-up in the ownership of fashion companies, as players restructure, and industry outsiders step up their activities in the fashion sector.
The bottom line is that amid this uncertainty and change, our analysis suggests cautious optimism is warranted. It’s a sentiment shared by industry executives: 40 percent expect conditions for the industry to improve in the year ahead. As with everything in this fast-moving sector, we’ll just have to wait and see.
This is an edited excerpt from the first joint report from McKinsey and the Business of Fashion, The State of Fashion the full report can be downloaded here
The authors wish to thank Robb Young, the Business of Fashion’s global markets editor, for his contribution to this article.
Style that’s sustainable: A new fast-fashion formula
By Nathalie Remy, Eveline Speelman, and Steven Swartz of McKinsey
Nathalie Remy is a partner in McKinsey’s Paris office, Eveline Speelman is a consultant in the Amsterdam office, and Steven Swartz is a partner in the Southern California office. Steven Swartz is a partner in the McKinsey Center for Business and Environment and leads its Sustainable Enterprise service line, which pulls together McKinsey’s expertise across energy, water, clean technologies, operations and other disciplines to help clients develop and implement sustainability strategies that span the entire value chain.
Stylish, affordable clothing has been a hit with shoppers. Now companies are trying to reduce its social and environmental costs.
The early 21st century has been good to the apparel industry. Thanks to falling costs, streamlined operations, and rising consumer spending, clothing production doubled from 2000 to 2014, and the number of garments purchased each year by the average consumer increased by 60 percent. Fast fashion has been a particularly hot segment and a source of enviable growth for some clothing companies. By compressing production cycles and turning out up-to-the-minute designs, these businesses have enabled shoppers not only to expand their wardrobes but also to refresh them quickly. Across nearly every apparel category, consumers keep clothing items about half as long as they did 15 years ago. Some estimates suggest, that consumers treat the lowest-priced garments as nearly disposable, discarding them after just seven or eight wears.
The fact remains, however, that innovation in the way clothes are made has not kept pace with the acceleration of how they are designed and marketed. Fast fashion is now a large, sophisticated business fed by a fragmented and relatively low-tech production system. This system has outsize environmental effects: making clothes typically requires using a lot of water and chemicals and emitting significant amounts of greenhouse gases. Reports also continue to emerge about clothing-factory workers being underpaid and exposed to unsafe—even deadly—workplace conditions, particularly when handling materials like cotton and leather that require extensive processing. Without improvements in how clothing is made, these issues will grow proportionally as more clothes are produced.
So far, sales increases suggest that most shoppers either overlook or tolerate the social and environmental costs of fast fashion. But some companies aren’t waiting for a consumer backlash. They have begun to remedy the largely unseen impact of the fast-fashion business. In this article, we consider how apparel businesses can resolve challenges in two major segments of their value chain: the heavy resource demands and difficult labour issues in the production process, and the excessive waste associated with disposing of unfashionable or worn-out garments.
Fast fashion, serious consequences
Apparel sales have risen dramatically in recent years, thanks to several trends that appear likely to continue. Businesses have aggressively cut costs and streamlined their supply chains. This has caused the price of clothing to fall relative to the prices of other consumer goods (Exhibit 1). Shorter lead times for production have also allowed clothing makers to introduce new lines more frequently. Zara offers 24 new clothing collections each year; H&M offers 12 to 16 and refreshes them weekly. Among all European apparel companies, the average number of clothing collections has more than doubled, from two a year in 2000 to about five a year in 2011.
The slow rise in clothing prices, compared with other consumer goods, has made clothing more affordable.
Shoppers have responded to lower prices and greater variety by buying more items of clothing. The number of garments produced annually has doubled since 2000 and exceeded 100 billion for the first time in 2014: nearly 14 items of clothing for every person on earth. While sales growth has been robust around the world, emerging economies have seen especially large rises in clothing sales, as more people in them have joined the middle class. In five large developing countries—Brazil, China, India, Mexico, and Russia—apparel sales grew eight times faster than in Canada, Germany, the United Kingdom, and the United States.
Even after this increase, the average developing-country resident purchases a fraction of the clothing that his or her developed-world counterpart buys each year. Overall clothing sales could rise significantly if developing-country consumers choose to buy more clothing as their purchasing power increases. We estimate that if 80 % of the population of emerging economies were to achieve the same clothing-consumption levels as the Western world by 2025, and the apparel industry does not become more environmentally efficient, then the environmental footprint of the apparel industry will become much larger (Exhibit 2).
As consumer spending increases, especially in emerging economies, the clothing industry’s environmental impact could expand greatly.
So far, clothing companies have been unable to match their sales gains with commensurate improvements in environmental and social performance. Cotton, accounting for about 30 percent of all textile fibre consumption, is usually grown using a lot of water, pesticides, and fertilizer. Since countries with large fabric- and apparel-making industries rely mainly on fossil fuels for energy production, we estimate that making 1 kilogramme of fabric generates an average of 23 kilogrammes of greenhouse gases.
In addition, many clothing companies face problems with labour conditions throughout their supply chains, including child labour, low wages, and health and safety hazards. Rooting out these problems will require businesses to measure sustainability performance across the entire supply chain, set goals for improvements, help suppliers to reduce their impact, and hold suppliers accountable if they don’t.
he sustainability impact of clothing continues to mount after consumers leave the store with newly purchased apparel. Washing and drying 1 kilogram of clothing over its entire life cycle, using typical methods, creates 11 kilograms of greenhouse gases, according to our estimates—an amount that companies could reduce by altering fabrics and clothing designs. The post-purchase choices that consumers make, such as whether to wash clothes in cold, warm, or hot water, also make a big difference.
When it comes to disposing of clothing, current technologies cannot reliably turn unwanted apparel into fibres that could be used to make new goods. Recycling methods such as shredding or chemical digestion work poorly. And there are not markets large enough to absorb the volume of material that would come from recycling clothes. As a result, nearly three-fifths of all clothing produced ends up in incinerators or landfills within a year of being made. Germany outperforms most countries by collecting almost three-quarters of all used clothing, reusing half and recycling one-quarter. Elsewhere, collection rates are far lower: 15 % in the United States, 12 % in Japan, and 10 % in China.
A sustainable design for the fast-fashion value chain
Mitigating the sustainability impact of the fast-fashion business will likely require action across the industry. Some apparel companies have formed coalitions to tackle environmental and social challenges together, which helps to accelerate change and to mitigate the risks of working on these challenges alone. For example, 22 apparel brands belong to a coalition called Zero Discharge of Hazardous Chemicals to improve and expand the use of nontoxic, sustainable chemistry in the textile and footwear supply chain. The Better Cotton Initiative involves more than 50 retailers and brands and nearly 700 suppliers in setting standards for environmental, social, and economic responsibility in cotton production.
A few apparel businesses have begun tackling sustainability challenges on their own. H&M and Levi’s have each partnered with I:CO to collect clothing and footwear for reuse and recycling. I:CO provides collection bins, sorts the items so anything wearable can be sold, and recycles what is left. Patagonia not only collects used clothing in its stores and through the mail but also offers repair services so its customers can extend the lives of their garments. And retail chain C&A, recognizing the environmental effects of cotton farming, has launched an effort to purchase only organic cotton by 2020.
We see additional steps that companies can take to remove some of the social and environmental risks that are commonly part of the fast-fashion model:
– Develop standards and practices for designing garments that can be easily reused or recycled. The Sustainable Apparel Coalition has created an index for measuring the full life-cycle impact of clothing and footwear products.
– Invest in the development of new fibres that will lower the environmental effects of production and garment making. In 2016, the Walmart Foundation awarded grants of nearly USD 3 million to five US universities to support research on improving the sustainability and efficiency of textile manufacturing.
– Encourage consumers to care for their clothes in low-impact ways. Washing garments in hot or warm water and drying at high heat or for longer than needed uses a lot of energy. Clothing makers and retailers can help steer consumers toward clothing-care practices that have a smaller environmental toll and keep garments in good shape for longer.
– Support the development of mechanical- and chemical-recycling technologies. The fibres produced by mechanical recycling, for example, are shorter and lower in quality than virgin fibres and therefore less useful to apparel makers. Chemical recycling could improve on this as the technology advances.
– Establish higher labour and environmental standards for suppliers and set up mechanisms to make supply chains more transparent. For example, the software company EVRYTHNG and packaging maker Avery Dennison have together launched an effort to tag clothing so consumers can trace how individual items were produced all along the supply chain.
– Provide suppliers with guidance and resources for meeting new labour and environmental standards and hold them accountable for performance shortfalls. Walmart, for example, has made a public commitment that by 2017, 70 % or more of the products it sources directly from suppliers will come from factories with energy-management plans. The company offers its suppliers software tools to help them find opportunities for using energy and other resources more efficiently.
Global demand for clothing looks set to increase significantly over the coming decade, as millions of people in developing countries enter the middle class and spend more on apparel. While this presents a tremendous opportunity for fashion companies, it may be a risky one for companies that choose not to grapple with the social and environmental risks of low-cost, resource-hungry production processes. Those risks could become even more pressing over time: as the millennial generation gains purchasing power, their high expectations that businesses will operate in a sustainable manner could have a big influence on shopping trends. Production methods that are more sustainable may cost slightly more, but they can also spur innovation and protect businesses from supply-chain shocks and reputation risks, resulting in greater resilience and profitability.