Hello dear Readers,
Virginia F. Bodmer-Altura your publisher is back and is presenting to you the TextileFuture NEWSLETTER that will entail three subjects today of interest to you.
The first item is the latest finding on Bangladesh’s garment industry.
The second feature is covering a live interview on The postpandemic state of Fashion.
The third item will cover Retailers as ‘experience designers’: Brian Solis on shopping in 2030, a live interview with Brian Solis and a chance to see three related videos.
All of these features are based upon the latest findings of McKinsey and will create definitely your interests, because there are some stunning results!
Here starts the first item:
What’s next for Bangladesh’s garment industry, after a decade of growth?
By guest authors Achim Berg, Harsh Chhaparia, Saskia Hedrich, and Karl-Hendrik Magnus from McKinsey. Achim Berg and Karl-Hendrik Magnus are senior partners in McKinsey’s Frankfurt office, Harsh Chhaparia is a partner in the Gurugram office, and Saskia Hedrich is a senior expert in the Munich office.
The authors wish to thank the sourcing executives who generously contributed their time and perspectives for this article.
Over the last decade, the garment industry in Bangladesh has experienced an unprecedented blooming. Recently, however, pandemic pressure and shifts in global markets have brought stiff challenges. To meet them, the sector will need to innovate, upgrade and diversify, investing especially in flexibility, sustainability, worker welfare and infrastructure.
As Bangladesh celebrates 50 years of independence, global attention is focused on the remarkable economic and social progress the country has achieved in recent decades. Even with the setbacks of the COVID-19 pandemic, the South Asian nation is on track to become a middle-income country within the next few years.1
The ready-made garment (RMG) industry is a mainstay of this economic success story: Bangladesh is today one of the world’s largest garment exporters, with the RMG sector accounting for 84 percent of Bangladesh’s exports. This comes on the back of the sector’s rapid growth and modernization over the past decade—as well as the strides it has made in improving conditions for the country’s approximately four million garment workers.
However, the pandemic has stalled the sector’s progress at a crucial moment, just as global shifts in fashion sourcing threaten Bangladesh’s position in industry supply chains.
10 years ago, in 2011, we published our report, Bangladesh’s Ready-made Garments Landscape: The Challenge of Growth, for which we had collaborated with the Bangladesh German Chamber of Commerce and Industry. With this article we want to take stock of Bangladesh’s RMG sector— examining its growth to date, highlighting the big challenges it has navigated since then, and suggesting the transformative steps that are needed if the sector is to maintain and renew its economic vibrancy in the decade ahead. To support this stocktaking we have conducted a series of interviews with sourcing executives of leading global fashion brands and retailers.
From tragedy to transformation: Looking back at a decade of growth
The transformation of Bangladesh’s RMG sector over the pa st decade was catalyzed, in part, by a series of workplace tragedies that took the lives of more than 1,000 garment workers and made headlines around the world. The 2012 Tazreen factory fire and the 2013 Rana Plaza factory collapse highlighted massive problems in working conditions, led some international buyers to stop sourcing from Bangladesh, and prompted the United States to withdraw its preferential tariff agreement.
Today, Bangladesh’s RMG sector is a frontrunner in transparency regarding factory safety and value-chain responsibility, thanks to initiatives launched in the aftermath of the disasters—including the Accord on Fire and Building Safety in Bangladesh, the Alliance for Bangladesh Worker Safety, and the RMG Sustainability Council. These measures led to the closure of hundreds of unsafe, bottom-tier factories and the scaling-up of remediation activities in many others.
These steps helped restore Bangladesh’s attractiveness in the global apparel-sourcing market, leading to a decade of rapid growth. Ten years ago we forecasted a growth of 7 to 9 %. Indeed RMG exports from Bangladesh more than doubled, from USD 14.6 billion in 2011 to USD 33.1 billion 2019—a compound annual growth rate of 7 %.2 (It is worth noting that this growth was within the range we forecast in our 2011 report, a collaboration with the Bangladesh German Chamber of Commerce and Industry.) Over this period, Bangladesh’s RMG industry increased its share of global garment exports from 4.7 to 6.7 percent.3 This is within the range we forecasted in our report, however it also shows that the country has not captured the full potential we had foreseen ten years ago.
1 Tazreena Sajjad, “Bangladesh at 50: A nation created in violence and still bearing scars of a troubled birth,” The Conversation, March 12, 2021. https://theconversation.com/bangladesh-at-50-a-nation-created-in-violence-and-still-bearing-scars-of-a-troubled-birth-153846.
2 Export Performance / Bangladesh Garment Manufacturers and Exporters Association (BGMEA) compiled data by Export Promotion Bureau. https://bgmea.com.bd/page/Export_Performance
There were signs of a slowdown, with the second half of 2019 showing negative growth compared to 2018. Then COVID-19 struck: in 2020, global lockdowns triggered order reductions, cancellations, payment delays, and renegotiation of terms. As the pandemic threatened the lives and livelihoods of Bangladeshi workers, many smaller, less well-funded factories closed their doors, and competition for smaller orders increased. The value of Bangladesh’s RMG exports fell by 17 % in the first year of the pandemic, representing revenue losses of up to USD 5.6 billion.4
Our regular surveys of chief procurement officers (CPOs) in the fashion industry indicate that Bangladesh’s attractiveness as an apparel-sourcing destination remains potent—yet the country has faced increasing competition in recent years, which could compound the challenges of the pandemic. Although our 2019 CPO survey pointed to Bangladesh as the top global sourcing hotspot, Vietnam was close behind, and was the preferred sourcing country among US executives.5 Although comparable data for global exports in 2020 has not yet been published by the World Trade Organization, data from European and US imports indicate that Vietnam likely overtook Bangladesh in 2020—pushing Bangladesh’s RMG industry out of its position as the second-largest garment-exporting country in the world after China.6
While Bangladesh’s RMG sector remains a strong exporter to Europe’s fashion industry, and has grown its market share significantly over the past decade, this trend may not continue: the new preferential trade agreement between the European Union (EU) and Vietnam, launched in August 2020, could well lead to apparel exports from Vietnam outperforming Bangladesh’s. Among US apparel importers, Vietnam has outpaced Bangladesh’s RMG industry for some time; in 2020, Vietnamese apparel imports into the US were worth 2.5 times those from Bangladesh. As buyers from the US move sourcing out of China, Vietnam is proving to be the biggest winner.7 (Exhibit 1)
3 WTO Trade and tariff data.
4 Export Performance / Bangladesh Garment Manufacturers and Exporters Association (BGMEA) compiled data by Export Promotion Bureau. https://bgmea.com.bd/page/Export_Performance.
5 Fashion’s New Must-Have: Sustainable sourcing at scale, McKinsey Apparel CPO Survey 2019, McKinsey & Company, October 2019.
6 USITC; Eurostat.
Tackling the big challenges
Over the past decade, Bangladesh’s RMG sector has made impressive progress in tackling the challenges of growth—particularly in diversifying customers and products, improving supplier
and workforce performance, and strengthening compliance and sustainability.8 It is worth taking a closer look at the progress made in each of these areas, and considering what is required to build on it, while navigating the new challenges of the pandemic and the shifting global apparel- sourcing market.
A key strategy for the sector’s growth over the past decade has been to diversify customer countries and move to more complex products and value- added services. Bangladesh’s RMG sector has made progress in broadening its customer portfolio to manage risk and adapt to changing demand patterns in the global fashion market. However, Europe (62 percent of export value) and the US (18 percent of export value) remain Bangladesh’s
RMG industry’s leading customer markets, although dependency on the US has decreased. There is room to increase exports to nontraditional markets, particularly as traditional markets are showing lower growth in apparel retail sales.
Several sourcing executives we spoke to for this article highlighted the progress that Bangladesh’s RMG sector is making in diversifying and upgrading its product offerings. For instance, there is now greater capacity to produce garments made from synthetic fibers; manufacture more complex products such as outerwear, tailored items, and lingerie; and provide new washes, prints, and laser finishings. Entry into these new segments has been supported by the changing rules of origin for preferential trade with the EU, allowing for the use of imported fabrics. There also has been some increase in vertical integration of the supply chain, with the result that more suppliers are now able to offer lead times below the standard 90 days.
However, many of Bangladesh’s factories have not yet transitioned to providing these new offerings, and have shied away from the investment required to do so. The numbers show that T-shirts, trousers, and sweaters continue to dominate the country’s exports. In fact, Bangladesh’s top 10 products accounted for more than 55 percent of the country’s export value of apparel to the EU in 20199; the iconic cotton T-shirt accounts for around one-fifth of the value of Bangladeshi garment exports to Europe. Consequently, Bangladesh’s garment industry is facing palpable price pressure in basic product categories (Exhibit 2).
The country’s RMG sector is by no means homogenous, however. Bangladesh’s advanced manufacturers are characterized by a high degree of entrepreneurship and strategic management; these firms have made investments in productivity improvement, digitization, automation, and sustainability, and they operate according to international best practices. In contrast, the small operators that make up the majority of the market typically focus on CMT; they tend to lack financial security and lag in management capability, and have also been hit hardest by the pandemic.
Encouragingly, sourcing executives of leading global apparel brands and retailers have partnered with their Bangladeshi suppliers, helping them to improve efficiency and sustainability.
A second major challenge facing the sector has been worker empowerment and the gender gap. Digitization of wage payment has increased, and there have been marked improvements in employment rights. Though the gender gap remains an issue, when it comes to opportunities for career progression from entry level. There is greater focus on gender diversity, as well as opportunities for upskilling and career progression today. However, progress has been slow, and COVID-19 has highlighted, and perhaps exacerbated, the precarious position of many Bangladeshi apparel workers.
Turning to compliance, factory and occupational safety, and transparency, the Bangladesh garment sector has shown enormous improvement. Factory buildings not only have become safer, Bangladesh now has more green garment factories than any other country, although these factories’ share of the country’s apparel exports remains low.
8 We outlined these challenges in our 2011 report, Bangladesh’s ready-made garments landscape: The challenge of growth.
The sector’s participation in new initiatives regarding climate change and circularity have advanced the sustainability agenda, for example through the Circular Fashion Partnership, a multi- stakeholder initiative aiming to scale up recycling of production waste. Furthermore, more than 1,500 Bangladeshi companies are certified by the Global Organic Textile Standard, the second highest number in any country in the world.
Finally, infrastructure remains one of the biggest issues facing the RMG sector. For its apparel industry to prosper in the future, Bangladesh will need to strengthen transport, energy, and digitization infrastructure.
In the World Bank’s Logistics Performance Index, Bangladesh dropped from 79 in 2010 to 100 in 2018 in the overall ranking. By comparison, Vietnam improved its ranking from 53 to 39 over the same period. Several major infrastructure projects that are under development could significantly improve Bangladesh’s position. These include the Padma bridge, scheduled to open in 2021; and Bangladesh’s first deep-sea port, the Matabari development, which is expected to be functional by 2025, complete with a new container terminal.
Looking ahead: Transforming in a time of change
Bangladesh’s garment sector has every prospect of remaining one of the world’s largest RMG manufacturers, and continuing its impressive story of growth and improvement. However, the country’s apparel industry is facing headwinds, and will need to take decisive action in several areas if it is to prosper. It will need to rise to the challenges of competing without preferential trade access; meeting decreased demand from traditional customer markets; and making a fundamental shift toward a demand-driven and more sustainable sourcing model.10
10 For more on these trends, see our report Time for Change: How to use the crisis to make fashion sourcing more agile and sustainable, McKinsey & Company, May 2020. https://www.mckinsey.com/industries/retail/our-insights/time-for-change-how-to-use-the-crisis-to- make-fashion-sourcing-more-agile-and-sustainable.
Some of the international buyers we spoke to believe the industry is not moving fast enough in this direction. Others are more positive: they feel that, given the resilience and adaptability Bangladesh’s manufacturers have shown in the past, the RMG industry will be able to navigate the necessary transformation, though structural changes will be inevitable.
As Bangladesh graduates from least-developed to middle-income country status in the next few years, preferential access to European and other markets is up for negotiation. Additional tariffs would be seriously disruptive for the RMG sector, but levelling the playing field with competing markets could also trigger a much- needed focus on productivity, as well as investment in digitization, automation, and sustainability.
Some global executives are reducing sourcing from Bangladesh, as their sourcing volume reaches a tipping point in their dependency and supply-chain risk on the country (which is further heightened by the pandemic), and owing to loss of competitiveness in some product categories. There is also an increased focus on nearshoring for greater flexibility and speed. That said, Bangladesh’s larger and more advanced suppliers may benefit from advances in flexibility, productivity, digitization, environmental sustainability, worker welfare, and innovation. One sourcing executive told us: “Speed is becoming more important, but only a minority of suppliers in Bangladesh understand that.” If they are to remain competitive, many suppliers will need to invest in upskilling, vertical integration, digitisation, and automation to unlock speed and transparency.
Sustainability, too, is becoming ever more important, with increasing consumer demand for environmentally friendly products, and concerns about climate change and social justice.11 In 2020, Bangladesh ranked only 87 out of 115 countries in the World Economic Forum’s Energy Transition Index; transforming the Bangladesh RMG sector into a climate-neutral industry will be a major challenge, requiring enormous investment into renewable energy and the grid.12
There will also be regulatory changes to contend with, especially in the EU. Suppliers will need to ramp up R&D and innovation: to drive product upgrading and diversification in areas such as technical materials and functional innovation; and to pursue sustainability by focusing on circularity, innovative fibers, and operational improvements.
In our past sourcing surveys, consolidation towards more advanced suppliers to deliver on flexibility and sustainability gained traction.
Consolidation of Bangladesh-owned factories has been accelerated by COVID-19 (Exhibit 3), which has heightened the polarization of progressive suppliers and small enterprises—impacting the capacity of the whole industry to transform.
Some sourcing executives mentioned a shift of sourcing volumes towards foreign-owned factories in Bangladesh, especially for more complex or technical products and synthetics. They are also looking for suppliers who continuously invest in sustainability, worker welfare, and transparency.
11 Consumer sentiment on sustainability in fashion, McKinsey & Company, July 2020. https://www.mckinsey.com/industries/retail/our-insights/survey-consumer-sentiment-on-sustainability-in-fashion.
12 Fashion on climate, GFA and McKinsey & Company, August 2020. https://www.mckinsey.com/industries/retail/our-insights/fashion-on-climate.
13 Vietnam Textile and Apparel Association (VITAS)
Bangladesh’s government might benefit from recalibrating its strategies to attract foreign investors. An FDI, often from a multi-country corporations, brings global management and operational best practices, as well as R&D capability and funding. But Bangladesh’s RMG sector currently lags in FDI compared to its Asian peers. In Vietnam, for example, FDI-backed companies—from South Korea, Taiwan, Hong Kong, China, and elsewhere— account for around 70 percent of apparel exports.13
Bangladesh’s RMG sector has achieved impressive growth and transformation over the past decade, overcoming significant obstacles along the way. Today, however, it faces a new set of challenges, amid a global pandemic and a shifting global apparel-sourcing market. In the years ahead, the industry will need to embrace a more holistic transformation, in partnership with manufacturers, international buyers, worker representatives, the government, and other stakeholders.
As international buyers navigate the rapidly changing environment, they are tasked to work with more advanced suppliers to develop demand-driven, more sustainable supply chains. To do so, they will need to build deeper, truly strategic partnerships,14 while pushing to overcome the past decades’ deflationary dynamics in global apparel retail markets.
Here you will find the second item of the TextileFuture Newsletter:
The postpandemic state of Fashion
A transformative year in the technology, trends, and tastes in fashion.
By guest authors Anita Balchandani and Achim Berg. Acim Berg is a senior partner in Frankfurt and global leader of McKinsey’s Apparel, Fashion & Luxury service line. Together, they co-led The State of Fashion 2021 report, which McKinsey publishes jointly with The Business of Fashion. Anita and Achim, welcome. Diane Brady is interviewing them.
In this episode of The McKinsey Podcast, Anita Balchandani and Achim Berg talk about the challenges and trends shaping the next wave of fashion. An edited transcript of their conversation follows.
Diane Brady: Hello, and welcome to The McKinsey Podcast. I’m Diane Brady. What a year for fashionit has been. In this show, we’re going to talk about it with two people who know it like few others. Anita Balchandani is a partner in the London office who leads our work in apparel, fashion, and luxury in the UK, Europe, the Middle East, and Africa.
Achim Berg is a senior partner in Frankfurt and global leader of McKinsey’s Apparel, Fashion & Luxury service line. Together, they co-led The State of Fashion 2021 report, which McKinsey publishes jointly with The Business of Fashion. Anita and Achim, welcome.
Achim, let’s start with you. What is the state of fashion?
Achim Berg: It’s a challenged state. We’ve seen a year like no other. It’s going to be the worst year for the fashion and luxury industry since collecting any figures. On development, it’s unprecedented. It’s not comparable to a financial crisis. It’s probably closer to what people must have seen during the Great Depression. So it’s a really bad year and devastating for the industry.
Now, Anita, it’s understandable. We’ve been sitting home. In fact, when I told somebody I was doing this podcast, she said, “The state of fashion is sweatpants. I haven’t left my home in seven months.” So is this simply a question of obviously retailers have been closed, and that’s simply impeded sales?
Anita Balchandani: Great question, Diane. It’s clear that athleisure and casual-wear sales have seen a huge acceleration over this pandemic. But let’s not forget, so has digital. While overall industry sales are down—there’s no question about that, especially earlier on in the pandemic when food and health and safety were far more important than fashion on the minds of consumers—what we have seen is a huge acceleration and step change in online channels.
In many countries, as of this year, 40 percent of all sales will be digital. As players have seen stores reopen, digital channels continue to grow. So we think that has been one of the silver linings and one of the areas of opportunity that the industry has been able to play with and work with over this last year.
Achim Berg: We’ve also seen a casualisation underway.
Casualisation? That’s a great term. What does that mean?
Achim Berg: It means dresses have become much more casual. But that is not an invention of COVID-19.
It’s a trend we’ve seen for a long while: moving away from more formal wear, having casual Fridays not only on Fridays but also from Monday to Thursday. Of course, working from home without the restrictions that you typically have in an office has an impact on how you dress.
On the other hand, we should not forget that we’re lacking many occasions for which people dress up. Weddings have been canceled and postponed.
Concerts have been canceled. A lot of culture and people-gathering had to be canceled due to the pandemic. All of that has an impact on how we dress, what we shop for, and how we shop for it.
So when I look at the reports from previous years, Anita, you do talk a lot about the disruption in the industry. Has this accelerated the trends that you were already watching?
Anita Balchandani: What we’ve seen through COVID-19 is indeed an acceleration of a lot of the trends that were already underway. Whether you look at digital, sustainability, or even athleisure and casualization, these were all trends that we were seeing before the crisis. If anything, they’ve been amplified over the course of the crisis.
There definitely have been a few things that you could pin specifically on the crisis. One is clearly international travel, which has driven segments like luxury and travel retail and has clearly stalled.
That was probably one of the areas where we saw a stalling or reversal of a trend. But in everything else that we look at, COVID-19 has accelerated many of the trends that we’ve seen.
How the crisis has affected the state of fashion.
Achim, what kinds of players have really proven to be most resilient in this situation, or even most vulnerable?
Achim Berg: Let’s start with the winners of this. It’s actually the winners we had identified before, and, at least to a very large extent, the industry
is a winner-takes-all industry. The top 20 %of the industry was already responsible for the lion’s share of value creation.
Our past analysis also showed that only 45 % of the companies really generate an economic profit, which means they not only earn their cost of capital but also really create some margin at the end.
That got accelerated through COVID-19.
By now, only 27 percent are expected to be value creators. If you ask which companies are those, you could say to a certain extent they’re the typical suspects: very strong brands with a strong balance sheet that were already in a better position when this crisis hit.
They were more digital. They were more international, with a stronger exposure to China. They were also able to invest in sustainability and in really close relationships with consumers through modern technology, through social media, and through all the innovations that we’ve seen in the industry.
Anita, I’m contemplating this: 73 percent of companies being value-destroying if the 27 percent are value-creating. When I look at that particular trend, is part of the issue during this crisis brand loyalty? Certainly we’ve seen at the retail level, consumers have been less loyal to the brands we put on our shelves. Is that similar tothe clothes we now put on our bodies?
Anita Balchandani: Absolutely. The trend of a greater share of the industry now being in value- destruction territory is clearly accelerated from the run rate we were seeing prior to COVID-19. We would put this down to a number of different factors. Let’s not forget at the start of the crisis, fashion was not a top priority for consumers.
People were busy with food, with health, and with a number of other priorities.
This pandemic has forced a demand rethink, certainly in the earlier part of the crisis. The second factor that’s playing out here is what we wear. The product mix of that has been dramatically different, owing to the fact that we’re all now spending much more time at home. All of that has caused a real demand shock in the system.
You’ve had the second factor here, which is a lot of the channels that a number of brands would rely on— for example, wholesale channels, independent retailers, et cetera—have actually been at the sharp end of and seen the pain from the crisis. And finally, you’ve had a huge pivot to digital.
If you were a player that wasn’t fully able to capitalize on that, then we’ve typically seen a deflection; brands and consumers absolutely have shown to us during the crisis that they’re open for change.
They’re open to trying new brands.
We have seen loyalty being questioned in a way. We’ve also seen greater propensity to try new brands, and particularly channels online. Those have typically been the players that to some extent have also been, relatively speaking, more resilient.
Achim, that propensity to change seems to be an opportunity, does it not? What are you telling people? Let’s say I’m a retailer. I’m a fashion brand that’s on the losing side of the equation at the moment. What can I do?
Achim Berg: The first good news is it’s fashion. If you really understand the trends, if you make your product relevant just from a product point of view, you can still play. So it’s art and science. And the art part will always be strong in this industry. On the science part, it’s difficult. If you’ve missed the train on digital, if you are undercapitalized and lack now the budgets to invest in the future, and if you have to deal with a lot of the legacy of what used to be retail dominated, of course there are a lot of challenges. We will see a massive consolidation. But it also means that this consolidation will give some room to breathe and will provide some market- share opportunities for those that get through this and will likely be embarking from this crisis in a stronger fashion.
So consolidation, meaning the brands become part of a larger conglomerate? Or that the brands disappear?
Achim Berg: We’ve seen after the financial crisis a lot of what we call zombie brands, brands that were still around but that were undercapitalized, were also not really in fashion with the consumers but were still somehow alive and managing to get from one year to the other. In that respect, 2020 will make a difference. And 2021 will also prove to be different.
Casual wear, sustainability, and other trends
So Anita, we’d be remiss in talking about fashion if we didn’t talk about the trends. Both of you certainly weigh in here. But did anything strike you this year, or anything looking ahead, that you see as more of the motif of our tastes?
Anita Balchandani: The one thing that we’ve seen is the trend around casualization, but we could well imagine that there is a revival toward glamour as we start to come out of this. We’re already seeing that the need for self-expression doesn’t go away because we have just been through a pandemic.
So to some extent, we think the demand for product that is more special, more glamorous, et cetera, will make a comeback. We anticipate—and you’ll see in the report—that nearly 90 percent of industry executives feel that the working model of the future will be hybrid. People are typically going to be working from home two to three days and the rest in the office.
We might see some fluctuating behavior, which is really sort of dressing up and looking your best on the days that you are out and being much more casual and cocooned when you’re in the home.
However, what we are also likely to see is that the new variant of glamour will also come with a degree of comfort.
People have realized that clothing that’s comfort- able, that falls well, that feels good, that is well made has become much more important, given the lives that we’ve been leading. So that probably is something that will continue.
Goodbye, four-inch heels. I can’t say I’ll miss them.
So, Achim, there certainly seems to be more discussion of sustainability. Is that a trend that’s going to transform the priorities in fashion?
Achim Berg: We’ve seen that transformation underway for a while. In last year’s report, we said, “Sustainability will be the big topic in 2020.” Despite the fact that obviously the coronavirus crisis was the big topic, sustainability still stayed hugely relevant.
We’ve also published a report called Fashion on Climate together with our partners from the Global Fashion Agenda that looks into the CO₂ footprint of the fashion industry on the planet and what it takes in order to reach the Paris Agreement targets. And that is massive. The industry needs to do a lot to bring the emissions down by a minimum of 50 %.
The question is, how is COVID-19 impacting that? The jury is still out. Market research makes us believe that people have become more conscious. They had time to think about it. They had time to look into their wardrobes. They had time to realize that they need far less fashion if they don’t have the occasions to wear it.
I think that a jogging pant can get you a long way these days. But we will see. If the Roaring Twenties are back and if we are all going to celebrate that the pandemic has vanished, we might go back to buying more. And then we hopefully buy more with sustainability in mind.
Anita, I’ve seen some strange bedfellows, luxury brands partnering up with what essentially are resale sites, big brands buying streetwear brands. What’s going on?
Anita Balchandani: This day of reckoning for fashion is probably broader than just about sustainability. It’s a whole revisit of how the fashion industry works and to reimagine it in a way that’s future-proof.
Some of those examples are really a recognition that whether it’s pre-owned, whether it’s resale, whether it’s casualization, these are trends that are here to stay for the consumer of tomorrow. If you’re a luxury brand that’s going to remain relevant in the next decade, then some of these opportunities present tailwinds that you should be accelerating toward as well.
This moment—and certainly the last nine months— has really shown us that there are almost no sacred cows in a way. Fashion businesses are taking stock of how they can reshape their futures on a number of different dimensions.
Achim Berg: It’s also a great example to see how the one and the others can be connected. Because one of the key issues for the fashion industry when it comes to sustainability is that the garments are not worn as long as they should be worn.
The fact that a secondary market really got a boost through digital innovation—because it’s now a digital exercise, and it’s somehow lost its stigma with the younger consumers, and even became trendy—is a nice way to see how technical innovation, a new consumer group, and sustainability come together and create a whole new market and a better footprint for the industry.
Launching a brand in today’s market
What are the conditions right now for young designers who are starting out? Is it more difficult, or in some ways do they have a wider script to find a market, frankly?
Achim Berg: On the one hand, we see a consoli- dation of brands. So you could think that the opportunities for young designers will become fewer. On the other side, the digitisation of the whole industry, the fact that you can basically start your own brand, bring it to a broader audience than your local environment—through digital platforms, through direct-to-consumer, through social media— also provides opportunities. I’m not concerned that we’re going to have a lack of creativity, of new designers. That’s what the whole industry lives off of. And everybody in this industry is well advised to nurture that.
Anita Balchandani: I’d also say that it really depends on the life stage of the brand. We actually believe it’s easier today to start a brand and to launch some- thing if you’re a designer because you have a lot of digital innovation to be able to access a global consumer. You’ve got access to crowdfunding and sources of capital, all of which we believe are easier today than they might have been historically.
However, when it comes to scaling up a brand— when designers need to scale, for example—I think that’s where we probably start to see that [consolidation]. And if you look at the beauty industry as an analog, a lot of the disruptive start-ups were really able to gain momentum, but ultimately actually have found themselves and their homes to be within a larger business, to really help them with what it takes to scale up the business in a global way. So the opportunities for designers and what that looks like may vary by life cycle on the start-up phase versus the scale-up phase.
The spiritual center of fashion traditionally is certainly Europe and to a large extent North America. You are in Europe, the Middle East, Africa. Anita, let me start with you. In terms of the global perspective, both consumption trends and the innovation that we’re seeing, is there still this pivot toward European brands? Or are you seeing shifts there?
Anita Balchandani: It’s a great question. If we start to think about how brands are discovered today and what drives consumers to shop them, then I think we’re living in a world that is increasingly global, increasingly interconnected. It makes it much easier for consumers around the world to find that designer or that label from Paris versus America.
Let’s not forget that a lot of the online platforms are also making it possible for brands from Asia, or indeed even manufacturers from Asia, to be able to connect with consumers around the world. So to that extent, the flavour overall is getting much more global because of the way brands are discovered and the role that digital channels have to play in that.
But equally, this also is starting to show the hall- marks of a winner-takes-all market where the big brands have proven that they are more resilient. In many ways, consumers have gravitated toward these bigger brands that have a clearer value proposition and a clearer positioning in consumers’ minds. Then you could argue that some of the bigger brands are really setting the scene for consumer demand around the world.
The changing luxury market
That’s a great point. Achim, you’d mentioned Asia. Certainly from an economic point of view, we can understand how that’s becoming a bigger force. From a distribution point of view and some of the online platforms and such, that also seems to be a factor. Why is Asia so important in fashion right now?
Achim Berg: You’re absolutely right. Asia is very important. And let’s name it. It’s mainly China that is driving the increase in demand. You have highly developed, big, and relevant markets like Japan and South Korea. But if you look at growth rates in recent years, and also in this year, China is probably the only country with a positive GDP growth.
That has a massive impact on the industry. We were already writing two years ago that the center of gravity is moving back to the East. That’s exactly what we saw in 2020. The whole industry has seen how dependent we are on the Chinese market.
It started at the beginning of last year when a lot of the more midmarket brands were concerned about their growth because of the outbreak of COVID-19. We’ve seen a much harder lesson for the luxury industry afterward. A lot of the luxury industry in Europe, also in North America, was and currently still is dependent on the international traveller from China, to a lesser extent also from the Middle East and from India.
Now that this consumer is unable to make it into Europe and North America, that consumption goes away. It is repatriated in a way in China. People have really started to consume luxury domestically in China, even if prices are 20 to 30 percent higher than in Europe.
It also shows the complete lack of sales we’ve seen in Europe, which now funnily leads the luxury brands to go back to the local customers. Given that we don’t expect travelers to come back until, let’s say, later this year or early ’22, and that things only normalize in three to five years, there will be a lot of focus on local and regional customers in Europe and in North America in the next couple of years.
Reimagining the role of stores
Anita, what about the store experience, since that’s so critical to fashion? Is it dead?
Anita Balchandani: Look, we’ve all seen the acceleration in digital channels. There’s no question that the role of stores and the scale of a portfolio that is appropriate for a brand or retailer to have is going to be called into question. Many will be reviewing their store portfolios and indeed their rental cost space.
Having said that, we believe there’s going to be a reimagined role of the store as well that will emerge from all this. Particularly, we’ve been quite excited to see some of the innovation that finally makes the merging of online and offline channels a reality.
For example, we’ve seen players draw on customers who are on a website, able to connect with colleagues in store for customer service. We’ve seen in many cases store colleagues starting to pick and pack and get customer orders ready to ship.
We’ve actually seen for the first time probably much greater integration and ability of both store colleagues and physical locations to also power
the digital experience. That’s going to be an exciting area of innovation for the future.
So much of fashion is tactile but also event-driven. Here in New York, Fashion Week is an event that extends far beyond the world of fashion. I want to ask a more personal question, Anita, about your own habits and how they’ve changed and what you miss. You must have spent a lot of time on the road prior to this.
Anita Balchandani: Indeed. I always like to look at the positives that have come out of this, and clearly some of the other things that we miss and crave in a way. The fact that this has brought about just a much more thoughtful reflection on where it makes sense to travel versus actually, what are things that can be done well virtually?
What we’ve been doing over the last year is quite frankly out of force because we’ve had lockdowns and various measures. But we’ll come out of it and find a balance, which allows us to spend more time making sure we get home in the evening or that we have a certain proportion of the week when we can base ourselves from home, but also which brings us back to some of those conversations and connections that are really important to innovate, excite, and work much more collaboratively with teams and with clients.
My rule of thumb or conclusion is that we’ve all found we can be extremely productive even in a virtual world. But it’s very difficult to also be able to do some of the things that call for greater innovation, inspiration, connection, relationship building in a purely virtual world. I’m hoping that we will come out of this into a much more blended sort of form that is the best of both worlds.
Changing role of fashion shows
Achim, these kind of industry- gathering events, are they going to be less important in the physical world since we can kind of do them virtually?
Achim Berg: We’ve already seen that the role of the fashion shows has become less important than it used to be. In the old day, it was basically two times a year in each of those fashion cities to inspire, to produce some news, to produce pictures and stories for the media, and for the brands to communicate about the innovations and the new collections.
In the world of social media, two times a year multiplied by four or five cities is just not enough. We’ve seen that more storytelling was required.
We’ve all found we can be extremely productive even in a virtual world.
But it’s very difficult to also be able to do some of the things that call for greater innovation, inspiration, connection, relationship building in a purely virtual world.’
More occasions were required. And fashion shows, in a way, have only become one of many moments to create these stories.
But I think the industry needs to get together. It needs to exchange the same way as we need to exchange with our clients. A lot of ideas, a lot
of opportunities are created through those kind of unplanned gatherings and discussions that we all have under those circumstances.
Using videoconference and telephone is efficient but also much more transactional. So I can’t wait to be back at the fashion shows. I can’t wait to be really back in the boardrooms of my clients. And hopefully, at least the second half of this year will get us there.
The only thing I would add is that the bar on what would get us out of bed, I think, has risen, right? So we will absolutely take the time to [get ready] for important moments and special occasions.
But we will also start to question some of the other meetings and conversations that one might look back at and say were probably not that essential or didn’t quite require making that effort into traveling to.
This push for social justice—whether it’s Black Lives Matter or just this understanding of embracing diversity—I’m curious around the extent to which this is influencing your end of the business because fashion is as much a political statement as it is a personal style statement. Are you seeing that starting to influence conversations in any respect?
Achim Berg: It already has massively. Fashion is a mirror of culture, a mirror of what’s going on in the world. It’s also an expression of yourself and what you believe and what you want to make others see. So there’s always a translation of that into fashion and into style.
We also clearly see that social media and consumers are much more sensitive to those topics and want to see that reflected in the way brands act and present themselves. Sustainability, social justice, equality, all of those topics are highly relevant.
What it will take for brands to recover?
We’re still in the middle of tough times right now. Anita, what advice do you give to people in the industry or even to individuals listening to this?
Anita Balchandani: It would be best summarised as, we’re certainly looking forward at a recovery trajectory. However, let’s not forget that the recovery isn’t going to be complete even this year, right? So we will continue to live with the virus and its consequences.
The key takeaway, if we think about the character- istics and traits of those who have been, relatively speaking, more resilient through this period, is first, it will call for speed and responsiveness, really staying tuned to where the consumer is heading, what matters, and how quickly players can respond and pivot around that.
Second, it’s really going to be about focus. Brands and players and individuals won’t win by spreading their efforts and attention everywhere. It will call for a particular focus on the channels and the markets and geographies that are going to drive this recovery. You have to be where the recovery is to ensure that you can stay ahead and win as part of this recovery.
And finally, it’s important to note that this recovery is going to come with a market-share redistribution.
So the recovering tide is not going to lift every player. It’s going to lift the players that are better positioned and will end up gaining and distributing market share in their favor. So really thinking about what it is that it would take for you to be a winner in market-share terms as we come out of the recovery, that’s going to be an essential lens for companies to adopt.
Achim Berg: Despite the fact that it’s all tough to live through this crisis, it’s also an amazing opportunity for this industry. And it was somehow overdue, yes? Because we all learned somewhat the hard way that this industry can innovate.
Think about how product has been developed in the last couple of months: very often from a kitchen table, much more digitized; using tools, not being with your factory; selling online, not in stores; building up new capabilities; being much more agile and flexible than we used to be.
We should make sure that a lot of those workarounds and new techniques become a new standard and a new reality. That will help to innovate the industry. We will always need fashion. So I’m not concerned about that. If the industry gets its act together, it will also continue to be successful in the future.
Diane Brady: Definitely. I’m looking forward to the day when I can wear something a little different from my athleisure. Anita Balchandani, Achim Berg, thank you very much for joining us.
Achim Berg: Thanks, Diane, for having us.
Anita Balchandani: It’s been a real pleasure, Diane. Thank you.
Here starts the third feature:
Retailers as ‘experience designers’: Brian Solis on shopping in 2030
In the future, the most successful retailers will employ experts in video-game design and spatial computing, predicts Salesforce.com’s global innovation evangelist.
Only if retailers stop thinking like retailers will they truly innovate. So says Brian Solis, a self- described “digital anthropologist and futurist” who joined Salesforce.com in March 2020 as its global innovation evangelist. The author of several books including X: The Experience When Business Meets Design (John Wiley & Sons, 2015), Solis recently shared his views on the future of shopping with McKinsey’s Cindy Van Horne. This interview has been edited for length and clarity.
Related video canbe had here:
You have an unusual job title. What does it mean to be a “global innovation evangelist”?
Brian Solis: At Salesforce, I study how technology is changing markets and behaviors. I then reverse engineer trends to help executives and decision makers understand how to get in front of those trends—through technology investments or by reimagining business models, operational models, and leadership mindsets. In other words, I help people see the future of business differently.
Today we’d like you to help us see the future of retail differently. Walk us through the shopping experience in 2030. How will it be different from the shopping experience in 2021?
Brian Solis: There are two ways that 2030 could play out for a retailer. One is, “We’re just going to keep iterating with all of this incredible new technology.” On that path, the retailer gets stuck on iterative investments and incremental designs that build on the past, which limits the possibilities. The other path is, “We’re going to innovate and reimagine what shopping should look like in 2030—in a way that the customer either already wants or doesn’t know yet that they want—and once they have it, they’ll feel like they can’t live without it.” In my work, I focus on the latter.
The problem, when we imagine the future of retail, is that we tend to think about it as retailers. But there are other possibilities. For example, we could look at the most innovative amusement parks and translate that guest experience to the inside of a store or across other channels.
Think about all the artistry and science that go into virtual reality, augmented reality, video games, or theme parks like Disney World. There’s a lot of “Imagineering,” as Disney calls it, that has to take place to marry technology with the customer’s experience in special ways that a company can then own and make a part of its brand. What do consumers love about those experiences? What’s the wow factor and how can we re-create it in retail in ways that didn’t exist before? As developers, as retailers, we’re only limited by how much we allow ourselves to break away from the conventional definition of retail itself.
By 2030, 5G will have given way to 6G. We’ll have sensors, computer vision, artificial intelligence, augmented reality, immersive and spatial computing. How can these worlds play together in a way that is almost fantasy-like? Figuring that out takes imagination. It takes experience architecture—a new type of discipline and expertise. I wouldn’t be shocked if the best retailers in 2030 are employing game designers or spatial-computing designers.
What does all of that mean for retail stores? What role will physical stores play in the future that you described?
Brian Solis: Retailers can no longer just build fixed structures and rely on a business model based on, “How much can we squeeze out of this design before we need a remodel?” The business model is remodeling. It’s about being agile, evolving, staying culturally relevant. It’s about reimagining space and flow: How will people come through this space? What will they feel? What’s the draw? What’s the attraction, beyond just stuff on shelves?
Let’s look at a current trend like microfulfillment, for example. The spirit of microfulfillment is essentially freeing the shopper of the confines of stuff: I can walk around and shop and experience things, and then microfulfillment will just take care of my purchases on the backend—by putting them in the trunk of my car, delivering them to my home, or figuring out some other way to get them to me later. By offering microfulfillment, you just changed the dynamic of how I’m going to operate within your retail space.
In futuristic movies like Minority Report and Blade Runner, a character walks through retail settings and he’s greeted by name; there’s technology that knows who he is and tries to sell him things, and it’s very intrusive. That should give us cues from a design perspective: technology shouldn’t feel intrusive and suffocating. It should just be in the background.
Those technological capabilities already exist today. Technically, a retailer could know me by name when I walk into a store. It can know what transactions I’ve made and it can look at other types of data points in real time to know a more inclusive me, a 360-degree me, beyond just what I’ve bought at that store. It can offer me new products and services based on that broader view of me.
The technologies exist, so the question becomes, “How do we use them?” It’s about creating magic. Great retailers, in the future, will make you feel like you’re in a special place, designed especially for you, so that you take time out of your life to go to that place because it feels like the right place to be. It’s aspirational.
You’ve mentioned many different types of technologies that retailers could invest in. How can they strike the right balance between “creating magic” and staying profitable?
Related Video can be had here:
Brian Solis: Of course, retailers have to think about profitability—but also growth. When we get caught up in profit, we start getting caught up in costs, and then the conversations about innovation and the future of retail sound a lot like, “Let’s just do what we’ve been doing, but slightly better.” When we’re not willing to give up any profitability or shareholder return, that can hold us back from potential growth. It forces us into a cycle of short-termism—thinking only about performing better than we did last quarter.
When we’re imagining the future of retail, we have to stop thinking about these efforts as a cost center. We need to think of them as an investment. The “I” in ROI can stand for ignorance—what’s the return on ignorance? What’s the opportunity cost if we don’t move in new directions? Will it be good enough for us to be incrementally better? No. We have to break out of the profitability box and instead think like an investor.
A retailer might say, “Oh, that’s just too much to get my mind around. I’m bleeding money over here. The COVID-19 pandemic caused us to shut down so many stores.” I get it. But consumers in 2030 won’t want to shop the way they did in 2020. Consumers have learned how to shop more digitally; they’ve dealt with brands and start-ups that offer personalized experiences. They want to see their shopping experiences brought to life in ways that take full advantage of the technologies that we’ll have in 2030.
Retailers will need design and tech talent to make all of that happen and they’ll be competing with many other companies in other industries for that same scarce talent. Any advice for retailers on that front?
Related video ‘Demonstrate imagination as part of your brand’
Brian Solis: I did some work with Westfield, the shopping-mall developer, when it was launching an innovation center and a lab in San Francisco. The company wanted to not just imagine the future of retail but also set the stage for the type of talent it wanted to attract. So it opened a collaboration hub and invited entrepreneurs to work there, which created energy and a sense of belonging. That’s one way to start thinking about the talent question: What are you, really? Are you a retailer? Or are you an experience designer and retail just happens to be a facility of how you transact?
I believe that it’s a mindset. In the 2000s and 2010s, Domino’s Pizza realized that it had to be a technology company first. How does a pizza company attract top software talent? By attaching innovation to the brand. Domino’s started to demonstrate radical possibilities, like self-driving pizza-delivery vehicles.
You have to demonstrate imagination as part of your brand. People don’t see themselves as just engineers or developers; they see themselves as architects of the future. They’re attracted to brands that have similar values and visions for where the future can go.
This interview was conducted by Cindy Van Horne, global communications director of McKinsey’s Marketing & Sales Practice.