The State of Fashion 2021 – In search of promise in perilous times

To show you how actual the Newsletter of TextileFuture is, we publish an executive summary of the collaborative report between McKinsey and BOF (Business of Fashion) on “The State of Fashion 2021 – In search of promise in perilous times” that was published just a week ago.

Even though McKinsey published the State of Fashion report every year, it is a first time collaboration with BOF and there are some new findings. In order to find all details, we add the possibility to load down the full report.

We do consider the collaborative issue of the report as particularly well written and illustrated and we feel sure that you will love the conclusions drawn.

Here starts the summary

The State of Fashion 2021: In search of promise in perilous times

The authors of this article are Imran Amed (founder, editor in chief, and CEO of the Business of Fashion, and an alumnus of McKinsey’s London office), Anita Balchandani (a partner in the London office), Jakob Ekeløf Jensen (a consultant in the London office), Achim Berg (a senior partner in the Frankfurt office), Saskia Hedrich (a senior expert in the Munich office), and Felix Rölkens (an associate partner in the Berlin office).

The authors wish to thank Sarah Andre, Sonja Penttilä, and Robb Young for their contributions to this article.

With the COVID-19 pandemic dominating thoughts and minds, fashion executives are planning for a range of scenarios and hoping for a speedy global recovery. However, amid increasing pressure on performance, shifting consumer behaviors, and accelerating demand for digital, there is an imperative to act decisively to prepare for the next normal.

The cover of the Fashion Report

After a year in which the fashion industry posted record-low economic profits, business leaders are on the front foot, seeking to innovate while continuing to engage their core constituencies. Given the disruptions of recent months, many companies are reconnecting with their supply chains, making tough decisions—for example, about ROI at store level—and ramping up omnichannel services. The beauty segment, covered for the first time this year in our The State of Fashion 2021 report, has remained relatively insulated from the pandemic, offering consumers a comforting pick-me-up in challenging times. As we move toward recovery, companies in the beauty segment have a chance to align with shifting category and regional opportunities.

Those are some of the findings from our latest report, The State of Fashion 2021, written in partnership with the Business of Fashion (BoF). The report, the fifth in our annual series, drills down into the major themes affecting the fashion economy and assesses a range of possible responses. Reflecting our conversations with industry leaders over recent months, it examines the ten key trends likely to shape the business over the coming year. Our latest reading of the our global fashion index, meanwhile, reveals new insights into company performance by category, segment, and region.

Silver linings

The sober mood among fashion executives surveyed in last year’s report has evolved over recent months into a strong determination to manage the industry through the COVID-19 pandemic. Our calculations, based on the changes in market capitalizations over time in our index on global fashion, suggest that the industry’s economic profit will fall by 93 percent in 2020 after rising 4 percent in 2019 (Exhibit 1). That translates into a significant increase in the number of companies that are “value destroyers,” which we expect will rise to 73 % of those in the index in 2020, compared with 60 % in 2019.

Still, there are silver linings among the clouds. While the crisis has visited a devastating impact on businesses and jobs, it may also have accelerated responses that can lead to positive outcomes. Indeed, many fashion companies have taken time during the crisis to reshape their business models, streamline their operations, and sharpen their customer propositions.

Looking forward, our base case is cautiously optimistic, with the virus more effectively controlled over the coming year, thanks to a strong public-health response. 1 At the same time, government interventions will partially offset economic impacts, and global travel will pick up, alongside the possibility of larger social gatherings. In that scenario, we would see markets such as China recovering strongly. We predict a 5 to 10 % sales growth in China in 2021 compared with 2019. Europe, on the other hand, will probably continue to feel the effects of subdued tourist arrivals, leading in 2021 to a 2 to 7 % sales decline from 2019. Moreover, precrisis levels of activity are unlikely to return before the third quarter of 2022. We expect a similar trajectory in the United States, with sales down 7 to 12 % next year compared with 2019, and only a modest recovery before the first quarter of 2023.

Where there is positive momentum, the primary driver will continue to be digital channels, reflecting the trend established before the COVID-19 crisis and the reluctance of people in many countries to gather in crowded environments. Indeed, recent data show that we have vaulted five years forward in consumer and business adoption of digital in a matter of months. Around the globe, we expect more than 20 % annual digital growth in 2021 (with 30 % in Europe and the United States) compared with 2020. 2 Other positive trajectories will include the growing influence of platform propositions as customers warm to marketplace experiences and renewed appetite among both brands and consumers for local engagement—the personal touch that reflects the priorities of many.

Against this background, fashion-industry fortunes are highly polarized. Given the disruptions in financial year 2019, it was not possible for us to calculate our annual list of 20 “super winners” accurately. Instead, we referenced our 2018 list to gauge the fortunes of the elite group. Perhaps unsurprisingly, investors this year had more confidence in the top 20 than in other companies, and super winners were less badly hit by the April stock market sell-off than their peers were (–26 % from December, compared with –33 % on average). By the time the Northern Hemisphere went on its August vacation, the super winners had recovered on aggregate to just 5 % below precrisis levels.

Companies that have performed the best over recent months tended to share at least one of two key characteristics (Exhibit 2). Many have had a strong Asia–Pacific focus, reflecting the economic strength of the region and the relatively lower impact of the pandemic there, and many have offered a compelling digital proposition. E-commerce players, such as ASOS, FARFETCH UK, Revolve, and Zalando, have consistently outperformed in 2020, as locked-down customers turned to digital devices to shop. By August, such digital-first players were trading 35 % higher, on average, than they did in December 2019.

Given the standout performance of digital channels in the current environment, we expect digital to remain king in 2021. Indeed, some 22 percent of executives say it will be the key momentum driver in the coming year—a percentage point less than the proportion that cites “uncertainty” and slightly more than the 20 % that pick “challenging.” 3

Ten themes for 2021

As the world recovers from the COVID-19 pandemic, what will be the defining themes in the business of fashion? Our discussions with industry executives suggest that the key drivers will include shifting consumer behaviors (in relation to digital channels, social-justice concerns, and a reluctance to travel), opportunistic investment, and the need to build more efficient, simple, and demand-focused operating models (Exhibit 3).

As decision makers continue to manage uncertainty, the most successful will be those that get a grip on the trends shaping the fashion landscape. That means focusing on an omnichannel perspective, of course, but also emphasizing the importance of sustainability through the value chain. Consumers (and increasingly, investors) will reward companies that treat their workers and the environment with respect, and the deeper relationships that emerge will bring benefits in agility and accountability.

Physical retail has been under historic levels of pressure. In the United States alone, some 20000 to 25000 stores were expected to close in 2020, more than double the number that did so in 2019. With the pandemic adding to the segment’s woes, many brands have embarked on strategic reviews or have compressed multiyear transformations into just a few months. In 2020, Nike announced the acceleration of its digital strategy and investment in its highest potential areas, which it said would lead to job cuts in stores. 4 Zara said that it plans to cut 1200 stores over two years and invest EUR 2.7 billion in store-based digital. 5 Still, we do not believe the curtain is falling on physical channels. Instead, from the wreckage of 2020, a sleeker, more focused offering will emerge. That offering will combine the best of human and automated services—the beginning of a truly “bionic” customer experience.

We see brands rethinking store formats and leveraging data and analytics to predict footfall, manage assortments, and built personalized offerings. Flagship stores will be branded as discovery zones and tasked with creating emotional connections with customers. We have already seen Burberry and Nike, as well as digitally native ARIAS New York, invest in hybrid spaces and deploy technologies such as apps and body scans to create more compelling experiences. At the same time, we are likely to see more nuanced assessments of store ROI based on a combination of digital and physical lenses. With companies in China leading the way, brands will engage even more closely with social media to offer shoppers exclusive content and personalized experiences.

Strategically, there will be an imperative in 2021 to manage commercial opportunities actively and to be acute in picking winning segments, markets, and channel combinations. With tourism in the doldrums, domestic outlets will become more important than ever. We also expect to see a rise in M&A activity as companies take advantage of low valuations and grab share in fast-growing markets.

There is little doubt that 2021 will continue to be tough for many as the COVID-19 pandemic tracks an uncertain trajectory. The task for decision makers, therefore, is to find silver linings, knowing that times of change are inherently rich with opportunity. Fashion companies that double down on strategy, align with key trends, and reflect an evolving consumer landscape are likely to emerge from the crisis stronger, leaner, and ready to thrive in the next normal.

The full report can be downloaded here

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