We at TextileFuture are very happy and proud to present to you today the “State of Fashion 2022: An uneven recovery and new frontiers”, a joint oeuvre by the fashion team of McKinsey and BoF Business of Fashion.

The work is so profound and offers so many aspects of fashion, consumer behaviour, political aspects and particularly why the changes arrive, because during the long period Covid many weaknesses in the supply chain, distribution, warehouses, etc. became evident.

We know that this time consuming, we offer you the work in two parts, a very ambitous and intensive reading, but the facts and figures and all aspects involved make your reading worthwhile.

In all of the years we have never expirenced a more indepth world report of fashion, than this one! So take the time, it is rewarding to all readers and reveals particularly in the incorporated interviews of different representatives of the fashion industry, a wealth that you cannot stop reading! So take the time to go into depths.

State of Fashion 2022: An uneven recovery and new frontiers

ACKNOWLEDGEMENTS

The authors would like to thank Emma Bruni and Dunja Matanovic from McKinsey ’s London and Oslo offices respectively for theircritical roles in delivering this report. We would also like to thank Abhishek Goel for his significant contribution to the MGFI articlethis year.

A special thanks to all members of The Business of Fashion and the McKinsey communities for their contributions to the research andparticipation in the BoF-McKinsey State of Fashion 2022 Survey, especially the many industry experts who generously shared theirperspectives during interviews. In particular, we would like to thank Claire Bergkamp, Daniela Ott, Daria Shapovalova, GeraldineW harry, Harald Cavalli-Björkman, Harminder Matharu, José Auriemo Neto, Joseph Phi, Lance Spitzner, Libby Wadle, MargaretMitchell, Patrik Lundström, Rajni Jacques, Renee Parker, Robert Triefus, Ronna Chao, Sian Keane, Stefan Larsson, Steve Lamar,Steven W hitehead and Susan Scafidi. We’d also like to thank StyleSage and Lyst for their invaluable data sharing for this report.

The wider BoF team has also played an instrumental role in creating this report — in particular, Alexandra Mondalek, Amy Vien, AmyWarren, Anna Rawling, Brian Baskin, Casey Hall, Chantal Fernandez, Chavie Lieber, Darcey Sergison, Diana Pearl, Emma Clark, IsoldaHanney, Janet Kersnar, Jael Fowakes, Joan Kennedy, Josephine Wood, Kate Vartan, Laura Bateman, Marc Bain, Nick Blunden, OliviaHowland, Rachel Deeley, Robert Williams, Sarah Kent, Scarlett Fillingham Burrows, Sheena Butler-Young and Zoe Suen.

We would like to thank the following McKinsey colleagues for their special contributions to the report creation and in-depth articles:

Aimee Kim, Andrea De Santis, Andres Avila, Annabel Morgan, Benjamin Klein, Carlos Sánchez Altable, Carsten Lotz, Charlie Lewis,Colin Henry, Corinne Sawers, Daniel Zipser, Elisa Albella, Ellie Baker, Ezra Greenberg, Guenter Fuchs, Hannah Yankelevich, HarryBowcott, Ian De Bode, Irina Duchanin, Isabel Brito, Jaana Remes, Jessie Wang, Jonatan Janmark, Karl-Hendrik Magnus, Kris Cai,Krzysztof Kwiatkowski, Leigh Chantal Pharand, Libbi Lee, Marie Strawczynski, Mario Ortelli, Natalia Lepasch, Nic Cornbleet, PhilippRau, Rachel Dooley, Rebecca Johnson, Rebecca Zhang, Richard Ward, Rickard Vallöf, Sakina Mehenni, Sarah Andre, Shruti Badri,Simona Kulakauskaite, Tiffany Wendler, Tom Skiles and Vanessa Goddevrind. We’d also thank David Wigan and Jonathan Turton fortheir editorial support, and Adriana Clemens for external relations and communications.

In addition, the authors would like to thank Chelsea Carpenter for her creative input and direction into this State of Fashion report,Francesco Ciccolella for the cover illustration and Getty Images for supplying imagery to bring the findings to life.

EXECUTIVE SUMMARY

With much of the world under Covid-19-related restrictions through 2020 and 2021, the global fashion industry has faced exceptionally challenging conditions. But after nearly two years of disruption, the industry is beginning to find its feet again.

Despite ongoing headwinds, there were signs by mid-2021 that things were taking a turn for the better, particularly in markets where vaccination rates were high. In the US, the release of pent-up demand created spikes of so-called “revenge buying,” leading to a growth spurt that echoed an earlier phenomenon in China. Return-to-work and occasion styles topped consumer shopping lists.

But the pandemic has only served to exacerbate inequalities in performance that have become a persistent theme over recent years. A small group of leading brands are equalling, and in some cases already surpassing, their pre-pandemic performance. This should not, however, be confused with a universal return to form. Large numbers of companies will continue to struggle to create value — and, in some cases, to survive — as the bruises of the crisis linger on.

The few brands that outperformed either played into the needs of the moment — comfort, outdoor activities and online shopping — or appealed to wealthier cohorts who were able to better weather the impacts of the crisis. Companies that couldn’t align with these market features tended to struggle, and the list of casualties grew longer as the pandemic continued through 2021. Indeed, the fashion C-suite has been an uncomfortable place to inhabit for much of the past year, illustrated by the rising numbers of takeovers and bankruptcies.

After a hiatus in last year’s edition of The state of Fashion, we return to our roster of fashion “Super Winners” — the top 20 listed companies by economic profit. The proportion of value destroyers (companies generating negative economic profit) in 2021 was higher than ever. Moreover, the losses of the bottom 80 % in terms of value creation more than offset the profits of the top 20 %.

This year’s Super Winners group is dominated by sportswear brands, luxury players and Chinese home-grown companies, all of which outperformed the wider market. From a geographic perspective, China recovered to 2019 levels of economic activity much faster than the rest of the world. Chinese demand was fuelled by appetite for local shopping, particularly in the luxury segment, as consumers who faced travel restrictions shifted to domestic alternatives.

Looking ahead to 2022, in aggregate, McKinsey Fashion Scenarios suggest global fashion sales will reach 96 to 101 % of 2019 levels in 2021 and 103 to 108 % in 2022. Still, while overall sales are expected to make a full recovery next year, performance will vary across geographies, with growth likely driven by the US and China, as Europe lags. In addition, as international tourism remains in the doldrums, the shape of consumptionwill continue to evolve, sparking a growing focus on domestic spending. In response, many companies will recalibrate their retail footprints, even amid uncertainty as to whether these pandemic-induced behaviour shifts will stick.

In the year ahead, discount and luxury fashion will continue to outperform, as recovery will be uneven across value segments, and the mid-market will be squeezed. Still, with economic growth and consumer sentiment improving in some markets, and many shoppers looking to refresh their pandemic-era wardrobes, growth will be top of the agenda for many brands.

The market environment, however, will remain complex with new challenges to address, amid logistical bottlenecks, manufacturing delays, high shipping costs and materials shortages. These will further inflate input costs and strain imbalances between supply and demand. The likely result will be higher prices for customers.

Despite widespread operational disruptions, the pandemic has done little to slow down the megatrends reshaping the industry. In fact, these have accelerated over the past year, with industry leaders making bold moves in digital, taking action on environmental and social priorities and focusing more sharply on diversity, equity and inclusion in response. However, concerns around slow progress in these areas, coupled with all-time high job vacancies, mean brands will need to work hard to attract and retain talent in the year ahead.

In a similar vein, fashion companies will need to ensure they are acting in the interests of all stakeholders — including customers, employees, contractors, investors and wider society. Many brands will push harder on circular business models, greener materials and more sustainable technologies.

One breakthrough to support these initiatives is blockchain, which is the underlying technology for digital “product passports.” These contain coded information that can add value, support supply chain transparency and ensure authentication — a significant advantage tackling counterfeiting.

Online business models were a standout success story of the pandemic. We expect that companies will continue to invest in digital innovation and experiment with fresh approaches to creativity and commerce in 2022. Digital assets such as non-fungible tokens (NFTs), gaming “skins” and virtual fashion will edge closer to the mainstream, with some brands expanding into the digital “metaverse.” In-app social commerce will play an increasingly important role in sales and marketing. On the flipside, these opportunities will bring increasing threats of cyber crime and data loss, meaning companies will need to work hard on resilience in an increasingly risky digital landscape.

Most fashion players will proceed on an uneven footing in 2022, as an inconsistent and uncertain recovery requires them to either raise their games or face the threat of consolidation or bankruptcy. Indeed, many of the gains expected next year are likely to be offset by recovery pains and disruptions to the global economy, which will compel decision-makers to take measures to keep businesses steady.

As fashion leaders consider their options, they will need to reflect on the many lessons they have learned during the pandemic, keeping their companies aligned with an ever-shifting playing field, enhancing their strategies for managing turbulence and balancing the needs of various stakeholders to create value for their customers, their shareholders and society at large.

Executives in the global fashion industry are cautiously optimistic about the year ahead, though new and ongoing disruptions are beginning to erode that mood in some quarters. While some global markets are starting to recover after 18 to 20 months of pandemic-related turbulence, propelled by surging e-commerce adoption and domestic spending, challenges relating to supply chain bottlenecks and uneven consumer demand continue to hang over the fashion industry, undermining growth prospects.

Overall, global fashion sales are on track to pick up momentum in 2022, as increasingly hopeful consumers unleash pent-up buying power, refreshing their wardrobes as social life begins to resume in many key markets around the world. While the luxury sector is expected to achieve a full recovery by the end of 2021, the wider fashion industry is not set to return to pre-pandemic performance levels until early 2022.1 This is a much quicker recovery than was expected six months ago.

The industry’s recent emergence from a sustained period of turbulence is still weighing heavily on the minds of industry executives, as shown by their choice of the top three words to describe business conditions in the year ahead n our BoF-McKinsey State of Fashion 2022

Survey: “recovery” (cited by 59 % of fashion executives), “challenging” (50 %) and “changing” (42 %). However, executives are leaving behind the all-consuming preoccupation with “uncertain” market conditions that they expressed in 2021 and turning their attention to driving growth in an altered market landscape — even though a degree of uncertainty around crisis recovery and inconsistency nonetheless persists in the year ahead.

In 2022, fashion is poised to benefit from fundamental macroeconomic drivers. Consumer sentiment is on a positive trajectory, especially in markets where vaccination and saving rates are high. In the US, savings in the first quarter of 2021 were estimated to be 3.1 times higher than in the first quarter of 2019.2 Alongside this, 43 % of US consumers said they would increase their fashion spend in 2021,3 with clothing for work and special occasions top of their shopping lists. While pent-up demand has already played out as so-called “revenge shopping” in the luxury segment in China, similar behaviour is expected to pick up steam in the broader fashion market in the US in early 2022. In Europe, consumer confidence in economic recovery is more cautious, with approximately one quarter of respondents in a September 2021 survey optimistic that the economy would rebound to pre-pandemic levels by the end of 2021, while over half expected recovery only in 2022 or later.4

As fashion inches towards rosier conditions in some regions, industry leaders have a more hopeful outlook than last year. Some 75 % of luxury executives, 61 % of mid-market executives and 50 % of value executives expect better trading conditions in 2022 than 2021.5 This reflects a different distribution of mood compared to our last survey, which was conducted in 2020 to capture sentiment about 2021, in which mid-market executives were the least hopeful group, with only 22 % expecting better trading conditions, whereas value executives were the most hopeful at 36 % followed by luxury at 31 %. While there are most likely a variety of reasons why mid-market executives are feeling more positive about 2022 than they were about 2021, one may be that the surviving and restructured players in that segment of the market are expecting a rebound after it fared poorly for several years.

From a demand perspective, younger cohorts such as Gen-Z and wealthier consumers from middle-income groups and upwards are predicted to demonstrate the strongest appetite for leisure spend (including fashion, dining out, travel, entertainment, electronics, etc.) in the US through 2021 and beyond. Fashion is one of the top three categories on which they seek to splurge or treat themselves.6

In China, there are strong prospects for growth in consumer spending power, where rising incomes will contribute to an anticipated increase of USD 10 trillion in consumption growth between 2021 and 2030.7

While the global fashion market will continue to grow overall, performance will be uneven across geographies, depending on their ability to recover from pandemic-induced health and economic shocks. The Chinese fashion market — including both luxury and non-luxury segments — is already back to pre-Covid sales levels. The non-luxury segment reached +2 % over 2019 H1 sales in H1 2021.8 However, for a full-year comparison, macroeconomic disruptions through the latter half of 2021 will likely temper this growth to -3 to +2 % for 2021 versus 2019 sales overall. On the other hand, the luxury sector shows strong signs of growth in China amid ongoing travel restrictions and increased domestic spend; the luxury segment is set to reach +70 to +90 % over 2019 sales by the end of 2021.

The US is not far behind — US non-luxury segment fashion sales will have recovered to +5 to +10 % over 2019 levels by the end of 2021, according to McKinsey Fashion Scenarios analysis.9 A similar picture will emerge in the US luxury segment, which is expected to return to -5 to +5 % of 2019 levels in 2021, slightly below non-luxury due to ongoing luxury spend repatriation in China muting sales recovery in the US. In Europe, there will be a slightly slower trajectory for recovery of non-luxury fashion sales, reaching just -15 to -10 % of 2019 sales by the end of 2021, and taking until 2022 to recover fully. Meanwhile, the European luxury segment will remain below 2019 levels until beyond 2022, as vast amounts of spend from Chinese nationals travelling abroad is redirected to Mainland China.10 Given this diverse set of dynamics and with the global fashion industry fully recovering only in 2022, growth will be front of mind in the year ahead: 87 % of fashion executives plan to pursue sales growth in 2022.11

Despite the slower projected return to pre-pandemic sales levels in Europe, executives in that region are the most optimistic about the year ahead, likely owing to factors such as the comparatively strong presence of European luxury brands across global markets. Indeed, 67 % of Europe-based executives expect better trading conditions in 2022 than 2021. This compares with 57 % of executives in North America (where the release of pent-up buying spiked in 2021) and 52 % in Asia, where most key markets have already returned to pre-pandemic sales levels.

None of the executives in Asia anticipate worse trading conditions in 2022, while some scepticism remains among executives in Europe and North America, where 8 % and 9 % expect worse conditions respectively.12 Collectively, these sentiments likely reflect a relaxation of stimulus packages and the release of pent-up buying, and point to the caution required next year in the face of supply chain stresses and the challenges of maintaining stable growth.

Several forces are at work to create both opportunities and risks in 2022, including new growth channels, consumer behaviour patterns and complications in the global economy. Executives predict that supply chain pressures, the rise of domestic luxury spend amid muted international travel and the continuing evolution of digital channels will have the biggest impact on their business in 2022. To be sure, the disruption of global supply chains ranked at the top of the agenda for 84 % of executives in the BoF-McKinsey survey, as the turmoil experienced over the last two years — amid material shortages, transportation bottlenecks and soaring shipping costs, exacerbated by surging consumer demand in some markets — is expected to remain in the year ahead.13 As the logistics industry continues to shift and challenges mount, executives need to pay close attention to the transparency and control measures in their supply chains to meet consumer demand.

Invariably, supply chain stresses will impact margins. As a result of these cost inflation pressures, 67 % of fashion executives expect to increase retail prices in 2022, with an average uplift of 3.2 %, while 14 % of executives even expect to increase prices by more than 10 %. Since many players will be focusing on sales growth, price increases will be used to offset narrowing margins.

Still, 17 % of executives expect to lower prices, with the most expectation for price decreases coming from the mid-market, perhaps due to the segment’songoing squeeze throughout the pandemic.14Following supply chain disruptions, the second most prominent challenge on executives’ executives as one of their top three concerns for 2022 in the BoF-McKinsey survey. However, 12 % of executives also rate sustainability as an opportunity in the year ahead, suggesting that any costs or challenges they encounter relating to sustainability may be outweighed by business benefits associated with improving their company’s impact on the environment and society. Compared with 45 % of executives who cited Covid-19 as a top challenge in last year’s survey, the health crisis was highlighted by just 10 % of respondents as a top challenge for 2022, suggesting that measures to curb the impact of the pandemic on business are proving their mettle in some markets.15 Looking ahead, fashion companies will need to address these interconnected challenges by taking an active and vigilant approach to supply chain management while establishing priorities for an ambitious and revitalised sustainability agenda.

Alongside sustainability, executives are also looking to “digital” and “consumer engagement” as opportunities for 2022, cited by 32 % and 11 % of fashion executives respectively.

While both digital and sustainability opportunities are longer-term themes that are highlighted by executives year on year, consumer engagement is a new opportunity cited by executives for 2022, reflecting the view that customer experiences with brands across online and offline channels are becoming even more important for brand differentiation in a highly competitive marketplace.

Fashion players will therefore need to accelerate their use of data and analytics across business functions to develop customer insights and adjust their strategies accordingly.₁₆

The year ahead will present a welcome shift for some fashion players, having regained much of the ground lost to the pandemic after nearly two years of turmoil. Still, worrying signs, supply chain stresses and a degree of uncertainty across some geographies and parts of the industry point to a need for prudence as an increasingly inconsistent overall picture emerges. At the same time, as overall industry sales recover, fashion players will likely continue to suffer business disruptions through 2022, with some fighting for survival as both pandemic-related and global economy aftershocks are likely to emerge in the year ahead. All told, the state of the global fashion industry in 2022, defined by the 10 themes in this report, will be characterised by new and persisting challenges tempered by fresh opportunities to grow and evolve at a crucial time for most businesses.Industry Outlook as of the beginning of November 2021.

UNEVEN RECOVERY

Recovery from Covid-19-related economic shocks will be uneven across consumer markets and sourcing regions, as countries with strong healthcare systems and economic resilience outperform. In this patchy environment, fashion players with international footprints will need to look at investment decisions with precision, reassessing local conditions regularly while mitigating for market-specific risks.

In the global effort to vaccinate people against Covid-19 and recover from the economic shocks related to the pandemic, some countries are better positioned than others. The key parameters that will shape recovery patterns in the year ahead include levels of health resilience — a function of both Covid-related measures and domestic healthcare systems —and economic resilience.

Gaps will also be impacted by varying levels of government fiscal support and the maturity of their digital economies. In response, fashion companies operating international businesses will likely need to tailor strategies to local conditions, as well as take steps to mitigate risks and boost their supply chain resilience.

A significant differentiator is access to vaccines, which varies substantially between low- and high-income countries. Of the approximately 5.5 billion vaccine doses that were administered globally by September 2021, some 80 % were in high- or upper-middle-income countries, according to the World Health Organization.17

Looking ahead, many low-income countries may not receive enough doses to vaccinate all adults until well into 2022 or 2023.18 With the ongoing threat of new variants, these countries could stand to be the most exposed to further humanitarian crises and deeper economic shocks.

“The pandemic is reversing hard-won development gains, adding to the problems facing the most vulnerable. The post-Covid recovery must not leave anyone, or any country, behind,” World Trade Organization director-general Ngozi Okonjo-Iweala declared in a 2021 plenary session, calling for equitable access to vaccines and greater trade cooperation. “Keeping global markets open is essential for a strong and sustained recovery.”19

Countries that lack the digital infrastructures for remote working, or whose economies rely heavily on manual labour, are particularly susceptible to further shocks.

The fashion industry has seen workers in manufacturing hubs impacted by ongoing Covid-19 outbreaks and associated shutdowns that have punctured production output. Throughout 2021, outbreaks in Vietnam led to the closure of numerous factories affecting supply for companies such as Adidas and Swiss shoe brand On.20

Meanwhile, Ethiopia, Honduras and India also saw increased uncertainty around job security and working conditions, while China’s zero-Covid policy continues to result in factory shutdowns.2

Global Economy

Coupled with the slow distribution of vaccines in some markets, these ongoing disruptions will have both upstream and downstream consequences on fashion.

The global fiscal response to the pandemic as been three times higher than the response to the 2008 global financial crisis, exceeding USD 10 trillion in the G20 alone.22 However, many countries struggling under high debt burdens have lacked the firepower to drive recovery. For fashion, this meant some companies used the financial support available to them to maintain labour and budget balances, while others have faced prolonged difficulties. With many existing fiscal support schemes set to come to an end in the year ahead — while others have already ended — companies will need to consider alternative strategies to support a return to growth.23

Looking ahead to the medium term, McKinsey in partnership with Oxford Economics has developed a range of scenarios24 for how the virus will likely influence the recovery of individual economies, based on the varying levels of effectiveness of their healthcare systems and fiscal responses. While some countries are likely to see their GDP growth return rapidly to pre-pandemic levels, others will likely face recurring health shocks and therefore weaker short-term growth or even prolonged downturns. In the scenarios analysed across fashion’s largest consumer markets, 2022 is broadly expected to be a year of growth. However, there will be variations across countries, reflecting the unpredictable nature of viral outbreaks and differences in fiscal and healthcare responses. In the US, year-on-year GDP growth of 3 to 3.2 % is likely in 2022, according to McKinsey analysis.25 While the economy in China had regained GDP levels from the third quarter of 2019 by as early as the end of the first quarter of 2020, further year-on-year growth of between 6.3 and 8.2 % is expected in 2022.26 Across the Eurozone, the year-on-year GDP growth rate is predicted to be approximately 5.3 %. For example, in Germany, the forecast is 5 to 5.3 % GDP growth, following rising infections and accelerating inflation through mid-2021.27 Despite record numbers of Covid-related deaths and one of the most severe economic slowdowns, the UK outlook is brighter, with a forecast of 7.2 to 7.4 % in 2022.28

Adjacent to fiscal and healthcare responses, consumer sentiment will play a large part in determining the speed of return to pre-pandemic social and working lives. Spending restrictions by consumers during Covid-19 lockdowns combined with stimulus payments boosted savings across key consumer markets such as the US, where saving rates in 2020 were double that of 2019.

As a result of these and other factors, McKinsey Fashion Scenarios project an almost complete recovery to pre-pandemic sales levels in 2022 in Europe, the US and China, with the latter’s incremental growth in domestic luxury spend.

The global fiscal response to the pandemic has been three times higher than the response to the 2008 global financial crisis, exceeding USD 10 trillion in

the G20 alone.

In the scenarios analysed across fashion’s largest consumer markets, 2022 is broadly expected to be a year of growth. However, there will be variations across countries, reflecting the unpredictable nature of viral outbreaks and differences in fiscal and healthcare responses. In the US, year-on-year GDP growth of 3 to 3.2 % is likely in 2022, according to McKinsey analysis.₂₅

While the economy in China had regained GDP levels from the third quarter of 2019 by as early as the end of the first quarter of 2020, further year-on-year growth of between 6.3 and 8.2 % is expected in 2022.26 Across the Eurozone, the year-on-year GDP growth rate is predicted to be approximately 5.3 %. For example, in Germany, the forecast is 5 to 5.3 % GDP growth, following rising infections and accelerating inflation through mid-2021.27 Despite record numbers of Covid-related deaths and one of the most severe economic slowdowns, the UK outlook is brighter, with a forecast of 7.2 to 7.4 % in 2022.₂₈

This will translate into increased optimism next year, particularly among younger and wealthier customers who will continue to drive spending in fashion categories, particularly in the luxury segment.₂₉ The spikes in spending that emerged in China during so-called “revenge shopping” periods in 2020, when lockdowns ended and consumer confidence returned, are expected to play out in some other fashion markets as they recover.₃₀

In the US and UK, these spending spikes will likely occur after the start of 2022, according to McKinsey analysis.₃₁

Globally, these scenarios suggest that total fashion industry sales could surpass 2019 levels by 3 to 8 % in 2022, with the luxury segment surging by 15 to 25 % over 2019 levels.

However, lower- or middle-income countries that have lower vaccination rates face the risk that Covid-19 could become endemic, causing cyclical waves of the virus and subsequent slowdowns in economic growth.₃₃ On top of this, the highly transmissible Delta variant has accelerated the spread of Covid-19 in some countries, with its high levels of vaccine resistance disrupting the recovery trajectory. For example, in India, the variant’s proliferation in the first half of 2021 pushed consumer sentiment to a record low and disrupted fashion industry suppliers.₃₄ While spending has rebounded in urban areas especially, with the country’s GDP predicted to expand by around 8 % in 2022 according to McKinsey, supply chains remain impacted amid ongoing factory closures.₃₅

Across other regions, growth projections remain uneven and subject to rapid change. In Latin America, McKinsey projects between 2 to 5 % GDP growth in Mexico in 2022, which is linked to growth in the US economy, while Brazil is set to experience slower growth of 1.5 to 3 %.₃₆

In the Middle East, growth is expected to pick up overall, driven by the loosening of travel restrictions and increased oil output. Meanwhile in Africa, the outlook is mixed and will depend on vaccine dissemination and the severity of potential new waves of Covid-19. In Nigeria for example, the outlook is increasingly muted for 2022, with growth expected to be 2 to 4.5 % following another wave of the Delta variant in 2021.₃₇

Given such a mixed global picture, there will likely be significant variation in recovery profiles across consumer markets and sourcing countries that play a critical role in fashion’s supply chains.

Moreover, the outlook remains volatile as Covid-19 continues to send shockwaves across the global economy. This, combined with the inflationary impact of additional supply chain disruptions — including shipping industry consolidations, global labour shortages, longer-term regulatory changes and a burgeoning energy crunch — and other macroeconomic and geopolitical risks, means significant and unpredictable challenges will remain in the year ahead.

“We are living in very uncertain and uncharted times,” declared the International Monetary Fund’s chief economist Gita Gopinath at an October 2021 press briefing for the organisation’s world economic outlook. “We have never seen a recovery of this kind… and we have to be particularly vigilant.”₃₈

As fashion leaders consider potential scenarios for the markets in which they operate in the year ahead, they will need to plan for accelerating growth in some and delayed recoveries in others. As a result, they should adopt market-specific strategies that reflect conditions in their key centres of commerce. Those who navigate this uneven outlook by better anticipating granular demand trends across specific income groups, cities and demographics within each market will likely fare better (see “How the Global Wealth Gap Is Impacting Fashion”).

Furthermore, given the supply chain uncertainty embedded in this outlook, fashion brands should reassess the risks of relying on each manufacturing hub in their sourcing footprint while weighing up the need for supply chain resilience with the increased cost of sourcing.

Scenario 1: Recurring health impacts with slower near-term growth

Scenario 2: Recurring health impacts with strong initial growth rebound and recovery

Eurozone USC hina World

REAL GDP PROJECTIONS 2019-2022, INDEX (100=Q4 2019) REAL GDP PROJECTION 2021-2022, % CHANGE from new and diversified locations. In any event, brands should consider avenues to strengthen their supply chains and logistics networks, where a renewed focus on flexibility, sustainability, transparency and cost management will help them meet consumer demand as it ebbs and flows across markets. By planning for an uneven recovery and allocating resources accordingly, fashion players are more likely to achieve a smoother upward growth trajectory in 2022 and beyond.

How the Global Wealth Gap is Impacting Fashion

When the president of the World Bank appeared at a virtual press conference in October 2021 for the organisation’s annual meeting, his account of the growing inequality gap was unambiguous. “As you know, the world is suffering from a dramatically uneven recovery. Inequality is worsening across country groups,” said David Malpass, referring to the different recovery speeds and trajectories of higher-income and lower-income countries from the impacts of the

Covid-19 pandemic.₃₉

Since countries with stronger healthcare systems and economic resilience are likely to outperform others in 2022, business performance

will vary across many of the consumer markets, operating hubs and sourcing regions that underpin the global fashion industry. But fashion companies will need to do more than just take 27 these differences into account as uneven recoveries across countries will be exacerbated by uneven recoveries within countries. Indeed, the recovery picture is far more diverse, complex and nuanced at the sub-national level, complicated by disparities in each domestic context. Within countries, some provinces, states, regions and cities were impacted unevenly by the pandemic or saw economic gaps between them widen as a result.

In the UK, for example, the pandemic has made the country’s “North-South divide even worse,” according to a report by the Centre for Cities, a London-based think tank. The health and economic impact of the crisis has made it “four times harder” to narrow the divergence between people’s living standards in the North and Midlands regions and those in the South, with cities like Birmingham and Hull therefore predicted to face greater challenges than others.₄₀

Fashion companies considering their expansion priorities in a given market or refining heir assortment mix across an existing retail

footprint would be wise to keep such shifts in mind. A similarly uneven picture has emerged across cities and regions in many other countries. In Brazil, longstanding economic disparities between certain states have heightened since the onset of the pandemic,₄₁ such as significantly higher poverty levels in the states that make up the North and Northeast regions compared to wealthier states in the South and Southeast.

According to Carlos Jereissati Filho, outgoing chief executive of Iguatemi Empresa de Shopping Centers, a retail group which owns malls across Brazil, international brand partners that have noted these shifting patterns are now doubling down on certain states and cities.“The luxury brands that have been in the market for a long time… are now seeing that Brazil is bigger than just states like São Paolo and Rio de Janeiro [in the Southeast region]. They’re seeing opportunities in the South region [where we havmalls and outlets in Rio Grande do Sul and Santa Catarina states] and in the Central-West region of the country like Brasilia [where we have a mall in the Distrito Federal] and places where the cultural industries have been booming [in spite of the pandemic] and a lot of money is flowing into like Goiânia [in Goiás state],” he said.₄₂

Different demographic groups within countries were also unevenly affected by the pandemic, with the nature of impacts influenced bfactors such as socioeconomic group, occupation type, educational attainment, race, ethnicity gender and others.₄₃ Due to the intersectional nature of some of these characteristics, pre-existing inequalities between cohorts are often reinforced or exacerbated by a widening wealth gap, which can lead to more severe outcomes for affected groups. “V-shaped” or “U-shaped” economic recoveries fromthe pandemic have largely given way to a “K-shaped”model, in which the wealthiest people saw a quicker economic recovery, and those at the lower end of the income spectrum saw their economic opportunitiesdwindle or stagnate. This has happened in both developing and advanced economies.In the US, for example, poverty increased after some of the benefits that were part of a government relief package ended in 2020, according to data published in a joint report by researchers at three universities in December of that year.₄₄ The authors noted a disproportionate impact on some groups and communities: “The increase in poverty in recent months was more noticeable for Blacks,children and those with a high school education or less,” reads the report. A disproportionate impact between different demographic groups has beenobserved around the world, in countries as diverseas Japan,45 Russia₄₆ and Argentina.₄₇“The most marginalised groups always gethit the hardest,” Wendy Edelberg, director of the Hamilton Project, an economic policy arm of the Washington DC-based Brookings Institution, told a US media outlet in 2021.₄₈ “But what is so unusual is, for a lot of other groups, it’s not that they’re being hit less — it’s that they’re seeing no pain at all [or]they’re doing well,” she added. “For a lot of people, the crisis is over. It’s invisible to them.”

This is certainly not the case for the 97 million people around the world who were pushed into extreme poverty in 2020 by the pandemic,now living on less than USD 1.90 per day.₄₉ Among the working poor are many who are employed by manufacturers and raw materials producers in thedeveloping world that supply global fashion brands.

Many have been at the sharp end of the Covid-19 crisis, increasingly vulnerable to factory closures and exploitation.50 According to analysis in the

“BoF Sustainability Index,” a significant proportion of fashion companies’ commitments to pay workers iving wages are not backed by concrete action.₅₁

Meanwhile, the number of people accruing extreme wealth during the pandemic period has risen precipitously. A record 493 people joined Forbes’ World’s Billionaires list in the year spanning March 2020 to 2021,₅₂ amounting to the creation of a new billionaire every 17 hours on average. The growing number of people who are either very richor very poor has meant that the global middle class, which had been an expanding demographic for many years, shrank by 54 million people in 2020.₅₃

These shifting dynamics clearly point to numerous moral imperatives for governments, societies and businesses in the years ahead. Yet, in addition to their collective and individual responsibilities to help tackle inequality across the countries where they operate, fashion companies must also prepare for the many potentially profound business implications that such disparities present. As they decide where and how to invest, leading fashion players will determine how unequal recovery speeds and trajectories affectthem (see “Uneven Recovery”) in more granular terms.

Indeed, however useful a bird’s-eye view on the wealth gap may be for identifying living wage levels or distributing merchandise by value segmentacross countries, it obscures important detail about sub-national disparities. Decision-makers must weigh up risks and opportunities by studying subtly different and sometimes rapidly changing local market conditions across different subsets of society and different expanses of each country, which areinfluenced by a unique context of political, cultural, economic and historical factors.

Consider the following four snapshots which illustrate how uneven recoveries within countries could impact the global fashion industry in 2022.

The widening wealth gap could trigger policy changes that impact specific segments, such as the luxury sector in key markets like China.

Even in China, where comparatively effective early management of the Covid-19 pandemic allowed it to be one of the only majoreconomies to experience growth in 2020,₅₄ recovery has been uneven across different demographics.

Chinese President Xi Jinping’s calls to rein in “excessive incomes” can be seen as a directresult of widening inequality in the country, which has become more pronounced since the arrival of the pandemic. Like in many other countries, poor workers and small businesses bore the brunt of China’s Covid-related economic impact, with Gavekal Research estimating that the bottom 60 % of Chinese households lost about USD 200 billion in income during the first half of 2020.55

Meanwhile, the Hurun Research Institute reported that the collective wealth of the members of its 2020 China rich list — made up of 2398 people with individual wealth of over 2 billion yuan (approximately USD 312 million) — increased more thatyear than in any other during the 22-year period the organisation has been compiling the list.₅₆

In China and other countries, growing inequality undermines the social contract between the government and its people, whose satisfaction rests partly on the belief that they will collectively continue to grow more prosperous.

Though some luxury analysts are concerned that new policy interventions to curb income inequality could be implemented which may hit the luxury market (an October 2021 China International Capital Corp report predicted, for example, that China would expand its consumption tax to cover more luxury consumer goods),57 others suggest that any impact on the bottom line is likely to be muted for most luxury brands.

The luxury sector’s ultra-wealthy VIP consumers, the likeliest target of any overt moves to curb perceived excesses, are defined by investment bank Jefferies as those who spend more than EUR 100000 (USD 117000) a year on luxury goods. This cohort is estimated to comprise around 110000 individuals, accounting for a quarter of total

Chinese spending.58 Though this is a significant proportion of the luxury market, it is not the main driver of luxury spend in China. Rather, that is the middle and upper-middle class, a cohort which expanded by 350 % between 2009 and 2020.59 A push to lift more of China’s population into this groby promoting a so-called “olive shaped” economy (shrinking economic extremes at each end and growing the centre) could actually be positive for luxury sales in the long term, some analysts contend.

Still, as future policymaking plays out, analysts see 2022 as a pivotal year for luxury brands. Some may consider opportunities to shift marketing, distribution and product development in ways that align to consumers who are either less inclined to exhibit their wealth or prefer a more discreet experience.Events in South Africa highlight how intersectional inequality can create a destabilising force for future high-growth retail markets.

Even before the pandemic, South Africa had one of the highest, persistent economic inequality rates in the world, with a consumption expenditure

Gini coefficient, which measures the deviation from equal income distribution, of 0.63 in 2015 (0 represents perfect equality and 1 represents maximuinequality).60 According to Vuyokazi Futshane, author of a May 2021 report prepared for the United Nations about the intersection ofinequality and recovery, “upward mobility [in South Africa] is greatly influenced by gender, race and class,” and “all of these dimensions of poverty and inequality have been heightened by the Covid-19 pandemic.”₆₁

South Africa has a “heavily racialised” labour market, according to a report by the country’s department of statistics, in which Black outh Africans are not only the most likely to be unemployed, but also earn the lowest wages. Whitesearn substantially higher wages than all other population groups.₆₂

Manifestations of this longstanding

Manifestations of this longstanding inequality have been felt in both direct, as well as a multitude of indirect, ways by fashion retailers. One recent example was the attack on shopping malls andother retail centres as part of looting and proteststhat began in July 2021. The unrest was nominally triggered by the jailing of former President Jacob Zuma, but it also signified the release of longstanding pent-up grievances felt by Black South Africans who have been hit hard by job losses and rising living costs as a result of the pandemic.

Despite a slowdown in GDP growth in recent years and a contraction of per capita incomcontinued to enter the South African market and, in some cases, have succeeded in taking market share from local chains. The middle class and lower-income groups in South Africa have beenbusiness at shopping centres, but hopes are high for a relatively fast recovery among some high-end mall executives.

According to Preston Gaddy, general manager of Sandton City and Nelson Mandela Square in Johannesburg — both of which emerged unscathed from the unrest, though Sandton City did close its doors for a period as a precautionary measure after consultation with police — thenumber of weekend shoppers between 2021 lockdowns bodes well for 2022. In an echo of other markets, repatriated spending on luxury goods hashelped soften the blow during the pandemic.

“‘Mrs Sandton’ cannot go to the Champs-Élysées to buy her LV bag, so she’s been buying locally,” he said, referring to an archetypal customer at the shopping centre seeking brands like Louis Vuitton. “Global luxury brands are saying, ‘It might be a small dot on the edge of the African continent, but the numbers being posted by luxury retailers in South Africa [are] notable and we need to pay attention.’”
Gaddy said that brands from Adidas to Alexander McQueen have continued opening, expanding or investing in Sandton City. He believes more luxury entrants are eyeing South Africa as a gateway to the continent, a region which is increasingly on their radar. Others, however, are less certain that those who can afford to drive South Africa’s consumer comeback in 2022 and beyond can necessarily be counted on to do so.
“I think we are going to see a huge dent to confidence… and maybe [we’ll also see] another wave of emigrations,” explained Sasfin Bank senior equit analyst, Alec Abraham. “Where we could have had an uneven but something of a recovery in more discretionary categories in retail, the fear that many people experienced during those riots will certainly impact that recovery in 2022.”

A local approach to controlling India’s Covid-19 outbreak has led to uneven retail recovery speeds across different regions of
the country. In late 2021, the recovery of the Indian retail sector from the country’s devastating second wave of Covid-19 infections was still underway.

According to Retailers Association of India (R AI) chief executive, Kumar Rajagopalan, recovery has been uneven, not only across income groups —income inequality has broadly been widening over the last 20 years in India63 —but also geographically. Unlike in 2020, when India’s pandemic plan included a lengthy nationwide lockdown, lockdowns in 2021 were mostly rolled out and lifted on a state-by-state basis. With different durations and severities of restrictions, retailers across the country naturally experienced different economic impacts.

In late 2021, the recovery of the Indian retail sector from the country’s devastating second wave of Covid-19 infections was still underway. According to Retailers Association of India (R AI) chief executive, Kumar Rajagopalan, recovery has been uneven, not only across income groups — income inequality has broadly been widening over the last 20 years in India63 —but also geographically.

Unlike in 2020, when India’s pandemic plan included a lengthy nationwide lockdown, lockdowns in 2021 were mostly rolled out and lifted on a state-by-state basis. With different durations and severities of restrictions, retailers across the country naturally experienced different economic impacts.

According to Rajagopalan, the South region of India, and most of the country’s North region, where malls and retailers were open for business “almost all the way through [the pandemic]” in some states, have seen a faster retail recovery in the wake of India’s second wave. By August 2020, an R AI survey showed the North had recovered 98 % of retail sales (versus the same month in 2019) and the South had reached 97 %.

However, in the country’s East region, “there have been some ups and downs,” he said, especially in the Northeast region, where persistently high Covid-19 case numbers resulted in more restrictions.

As one of the first states that went into lockdown and one of the last to emerge from Covid-19 restrictions, Maharashtra in India’s West region, which boasts one of India’s largest economies64 and is home to the city of Mumbai, initially lagged other regions in its recovery. It is not yet clear how these divergent recoveries will play out in the year ahead. This is in part due to the dynamic and complex nature of income inequality and other disparities between people living in India’s regions, states and cities. However, there will almost certainly be perceptible differences which require diverse responses fromglobal fashion companies as they decide how to invest across the country.

Overall, Rajagopalan says the “India story” is as compelling as ever for the broader retail sector: “India has a young population; its middle class is growing; percapita income is growing above the USD 2000 level; all these stories are still there. If you consider [all that alongside the return of] government spending and employment… the market for retail should return to its full might in 2022.”

According to R AI’s September 2021 business survey, nationwide retail sales had already reached 96 % of comparable levels in 2019, boosted bythe beginning of India’s festive season, which runs through to December, and the return of weddings, many of which were postponed due to restrictions on people gathering.

Women’s employment-to-population ratios declined more than men’s during the pandemic but the impact of the gender gap on economic recovery will depend partly on local local market conditions like those in Saudi Arabia.₆₅
“Social and economic inequalities have been exacerbated, undermining women’s economic security and resilience against shocks,” said Michelle Bachelet,UN High Commissioner for Human Rights, explaining the reasons for a growing gender gap over the pandemic period in a 2021 address. “[Yet] the majority of socioeconomic Covid-19 responses adopted by states are surprisingly gender-blind, often failing to address the specific needs of women.”66
The need to work from home and to home-school children has prompted many women to drop out of the labour force since the beginning of the pandemic. According to estimates by the International Labour Organization (ILO), women’s employment worldwide declined by 54 million
in 2020_.67

There have been some anomalies, though. In Saudi Arabia, despite fears the pandemic would set back recent progress in labour force participation,the number of women in the country’s workforce actually grew 64 % in the two years from late 2018 to the end of 2020, according to World Bank data.68 Though part of that timespan covers a period prior to the pandemic, economists at the international organisation have specifically noted evidence of a continued rise since the onset of Covid-19.69

Though years of gender inequality and laws limiting Saudi women’s participation in society prior to reforms that started in 2016 mean the country is coming from a very low baseline in terms of female labour force participation, the recent lift in employment rates bodes well for the country, assuming it isaccompanied by a more comprehensive female empowerment agenda. More working women is also good news for the fashion and retail industries.

Both industries have been beneficiaries of Saudi Arabia’s Vision 2030 master plan for economically diversifying the kingdom away from reliance on oil, spearheaded by Crown Prince Mohammed bin Salman Al Saud. Growth of the Saudi service sectors is a key pillar, particularly those that also boost domestic consumption and tourism. By 2020, 26 % of Saudi women were working in the wholesale and retail sector, according to figures from the Brookings Institution.

An exodus of foreign workers during the pandemic and a relatively early retail reopening after the lifting of restrictions unlocked evenmore opportunities for women in the country. Saudi women are more likely to replace expatriate workers than Saudi men in some settings, according to Brookings, and they are also more likely to work in service sectors like fashion and retail. Though this is partly driven by their comparative willingness to work for lower wages, both Saudi women and men are paid significantly more than foreign workers.70

While there are questions around how permanent the shift to local employees will be for blue collar and manual labour sectors, white collar jobs and those in the fashion and retail sectors are more likely to remain open to local women. The country’s overt “Saudisation” policy, which compels companies to allocate a certain proportion of jobs to native Saudis, should help encourage that.

“For the first time, brands [are employing Saudi women and therefore] have direct access to their female consumers via their teams… and the result is [that brands are] having more insight into the consumer behaviour of their target market,” explained Marriam Mossalli, founding partner and senior consultant of Jeddah-based luxury communications and marketing consultancy Niche Arabia.
Members of this new female workforce are also looking for new work-appropriate items for their wardrobes, a change she suggests more global
fashion brands should note. “It’s not just attire [for women who] lunch anymore.”
The author of this article focuses on global markets in Asia-Pacific and other
regions at The Business of Fashion.

The fashion industry is reliant on an intricate web of global supply chains that are seeing unprecedented levels of pressure and disruption. With logistical logjams, rising shipping costs and shortages of many kinds adding new layers of complexity, companies must rethink their sourcing strategies while implementing cutting-edge supply chain management, and building in greater flexibility to keep products flowing with customer demand in the year ahead.

Around half of global businesses suffered supply chain disruptions in 2021, with one in eight severely affected.₇₁ This was the fallout from a combination of global and local factors, including material and component shortages, transportation bottlenecks, staff unavailability and rising shipping costs.₇₂ Many of these challenges show no signs of abating, and the majority of business leaders expect logistical roadblocks to persist through 2022 and beyond. Indeed, 87 % of fashion executives in our BoF-McKinsey State of Fashion 2022 Survey expect supply chain disruptions to negatively impact margins next year.₇₃

It is likely that logistics challenges will only intensify in 2022, with global surges in demand clashing with unpredictable pressures on freight services, ports and terminals. There are growing concerns that increased levels of disruption and price hikes could last longer term, or even represent a new logistical normal for the global fashion industry.

“The supply chain assets are running at full capacity. It’s bursting at the seams. So my opinion is that these frustrations will continue until at least the second half of [2022 or]… even extend into 2023,” said Joseph Phi, group chief executive of supply chain management company Li & Fung, which counts fashion brands among its clients.₇₄ Three structural factors are at play in creating these conditions, which add to the impact of the Covid-19 pandemic: operational challenges (caused in part by soaring demand), shifting industry dynamics and new waves of trade agreements and regulation.

After months of lockdowns, consumer demand is surging in markets such as the US and UK. However, some brands have struggled to obtain products on time, with manufacturing and transport delays — on sea, in the air and on land — leading to chronically depleted inventories insome cases. Brands with manufacturing operations in regions severely impacted by the pandemic have faced staff shortages and factory closures. In August

2021, Adidas said that pandemic-related supply chain disruptions could cost the company up to EUR 500 million (USD 586 million) in sales.₇₅

Outbreaks of Covid-19 have also worsened port congestion and restricted ship availability. In July 2021, container ship supply was 11 % lower than the previous September. The situation was exacerbated by the limited availability of steel container boxes, as surging demand to restock inventories amid shipping disruptions left thousands of boxes at sea, in freight hubs or in ports.76 The dislocation contributed to skyrocketing costs and undermined brands’ efforts to keep pace with demand. In response, some turned to air freight and trans-continental rail alternatives, leading to new capacity jams, longer waiting times
and rising costs in air and rail freight, too.₇₇

Alongside logistical challenges, fashion and shipping companies are facing a range of new regulatory and trade hurdles. Among incoming regulations is the EU’s proposal for a world-first carbon border tax and new restrictions on emissions from ship engines. Companies must manage these alongside challenges such as import bans from China’s Xinjiang region.₇₈

For companies shipping between the EU and the UK, Brexit adds new layers of paperwork and customs delays.
Equally, ongoing trade tensions between the US and China threaten to exacerbate supply
chain disruptions.₇₉

In 2021, the vulnerability of maritime chokepoints was highlighted by the Suez Canal blockage, when a container ship became wedged in the canal, preventing shipping in both directions. The six-day event delayed the transport of billions of dollars’ worth of goods.80 Though such events are rare, they demonstrate the industry’s reliance on a limited number of supply routes. “[With] the Panama Canal, there’s always a threat of closure, either by accident, or maybe intervention by government and other factors too [ but]… what happened in the Suez Canal… is a call to action
that we need to identify and build contingencies.

Given what’s going on, overland freight [via train between China and Europe] is definitely a viable alternative,” said Phi of Li & Fung.₈₁ Today, it costs up to six times more to ship a container from China to Europe than it did at the start of 2019, and up to 10 times more from Chinato the US West Coast_.82

In real terms, shipping a 40-foot container from Asia to the US West Coast cost between EUR 1600 and USD 2,100 in July 2019; now it will set companies back between USD 21000 and USD 23000.₈₃

Looking ahead to 2022, shipping prices will likely continue to climb and remain above their pre-pandemic levels in the longer term, as shipping companies continue to consolidate and new capacity only slowly emerges.₈₄

In response, fashion brands may need to abandon the idea that cost increases are hiccups, instead planning for a permanently more expensive logistical future.85 Still, some fashion players will be more exposed to these factors than others. There may be opportunities for luxury brands to pass on higher costs tocustomers by raising prices.₈₆

Globally, pressure on containers and shipping will continue to require logistics players to deprioritise some shipments, while a lack of road-transport drivers, both domestically and internationally, will exacerbate operational costs and delays. In holding back the delivery of products to stores and homes, these conditions will continue to make it difficult for brands to respond to booming consumer demand. To further complicate matters, customers have become accustomed to super-fast delivery, both online and in store, with delivery delays putting a strain on customer satisfaction,₈₇ while adjacent trends such as accelerating demand for sustainable materials are putting additional pressure on supply.₈₈

In the longer term, brands will need to balance the desire to enhance speed to market with the need to alleviate supply chain pressure.
That may mean streamlining production, logistics planning and booking capabilities, as well as putting in place contingency plans and alternative
suppliers, while remaining as agile and flexible as possible. To do this, some companies are bringing 35 shipping in-house: in late 2021, companies such as Walmart and American Eagle invested in dedicated container services to avoid third-party shipping congestion.89 In the last mile of delivery, dynamic rerouting and drone delivery could present alternative solutions to short-staffed last-mile distribution in some circumstances.

At the same time, brands need to work with their suppliers to scale up nearshoring and reshoring activities to build production capacity and safeguardaccess to raw materials. Indeed, a number of European companies doubled down on nearshoring efforts through the pandemic, moving textilemanufacturing from China to Turkey to minimise delays.₉₀

Over 70 % of companies plan to increase the share of nearshoring close to company headquarters, and roughly 25 % intend to reshore sourcing to their headquarters’ country, according to McKinsey’s Apparel CPO Survey 2021.91

“As an industry, we still have too long lead times,” said chief executive of PVH Corporation Stefan Larsson. “There is a big opportunity to better match planning and buying to demand, and that’s something that we learned when Covid hit.

The second-biggest learning is to build resilience into the supply chain now.”₉₂

Of course, adapting operations and adjusting to rising demand will come at a cost to a company’s profitability. Shoe brand Steve Madden reported that supply chain disruptions were behind a USD 30-million cut in its first-quarter sales expectations in 2021, while Asos has warned that supply chain pressures and consumers returning to pre-pandemic behaviour could reduce 2022 profit by over 40 %.₉₃ There will likely be more profit warnings attributed to supply chain issues in the year ahead.

Given the hefty bottom-line implications of logistical gridlocks, many fashion executives are working hard to find solutions. “It has been difficult

to plan inventory flow with much precision,” said Erik Nordstrom, chief executive at Nordstrom. “We do not expect those conditions to change any time soon.”94 Common practical measures have included introducing agile ways of working to improve efficiency, upgraded inventory management,reimagined supply chain organisations (incorporating visibility-enhancing solutions) and technologies such as sophisticated dashboardsknown as digital supply chain control towers.₉₅

As leaders innovate to create efficiencies, there is an imperative for slower-moving brands to expand their focus from efficiency initiatives to digital and operational enhancements which help to better plan and track logistics. In addition, expectations for prolonged logistical turmoil will encourage larger brands and retailers to consider more fundamental solutions. It is likely some will explore cross-functional or even vertical integration, such as bringing distribution or production in-house.₉₆

Fashion executives have pointed to further digitisation of supply chain operations as the way forward. VF Corporation chairman, president

and chief executive Steve Rendle said that he sees “significant opportunities in creating a hyper-digital supply chain.”97 Meanwhile, H&M Groupchief executive Helena Helmersson suggested that a lot of the firm’s supply chain development is focused on technology and that it is a priority to find “competitive advantages in a supply chain context when it comes to speed, agility, cost efficiency and price.”₉₈

With logistics caught in the industry’s crosshairs like never before, decision-makers should think carefully about how to adapt. In 2022, brands will aim to regain control of supply chains while communicating potential delays with customers at each step. It will pay to consider control towers, in-house distribution, nearshoring of manufacturing and cutting-edge inventory management, all while securing early access to rawmaterial supplies.

Leading brands will collaborate closely with logistics providers, communicating frequently and expecting that providers will hold more cards in negotiations. To keep a watchful eye on finances at a time of rising supply chain costs, they may also consider using a zero-based budgeting system, requiring all costs to be re-justified at each budget review. In short, as the pressure intensifies, careful planning and a deeper integration of supply chain considerations into decision making will become table stakes in the year ahead.

Executive Interview by Casey Hall

It’s difficult to imagine the challenges that faced Joseph Phi when he was promoted to groupchief executive of Li & Fung in October 2020. Not only was a pandemic raging, causing untold complications in global supply chains, but his company had only just delisted from the Hong Kong stock exchange after 28 years of public trading. Now, supply chain stressors, including port shutdowns, a container shortage and the rapid rise in freight costs, are front of mind for both Phi and the fashion executives who rely on him to provide solutions for international sourcing, production and logistics.

In 2022, responsible supply chain management means expecting even more of these unexpected shocks. Future-proofing supply.

Li & Fung: Facing up to Vulnerabilities in the Supply Chain Joseph Phi Group Chief Executive, Li & Fung. In its 115 years of doing business, Hong Kong-based supply chain management company Li & Fung has seen off many challenging periods but the latest logistics crisis of container shortages, price hikes, log jams and threats to vital shipping routes is unprecedented. Group chief executive Joseph Phi says fashion brands can nevertheless boost their resiliency if they diversify their post-pandemic sourcing base, adopt new technologies and invest in serious contingency planning.

In 2022, responsible supply chain management means expecting even more of these unexpected shocks. Future-proofing supply chains requires sustainable diversification, technological innovation and a wholesale reframing of the concept of “value,” he says. Instead of trying to wring out every ounce of cost from the chain, value should be captured by decreasing complexity, shrinking lead times and reducing the financial cost of doing business while also reducing the cost that the fashion industry inflicts on people and the planet.

In 2021, there were port closures, shipping container shortages, freight cost surges and more. How long will this last and which challenges do you foresee carrying over into 2022?

Brand owners, retailers, consumers, I think, even suppliers, are starting to adapt tothis so-called new normal. The irony is that this [consumption] rebound is adding pressure to a supply chain that’s already under a lot of stress. Now the containers and the capacity, they are in the wrong place and this imbalance has resulted in a phenomenal rise in freight rates, which together with a shortage of containers and lack of vessel space, will slow down this global economic

recovery, unfortunately. My opinion is, that these frustrations will continue until at least the second half of 2022, if Covid is under control, and if the ports and the factories are operating with some sort of normalcy. If things are not under control, then this may even extend to 2023.

To what extent do you think some of these problems would have hit the fashion industry, regardless of the pandemic?

There were some unforeseen external shocks, just like the [March 2021] Suez Canal closure and the driver shortage in the UK following Brexit. During

normal times, frankly, we can withstand these shocks, but this time around they had an out of proportion impact because the whole supply chain is running at full capacity. So what this pandemic has done is expose vulnerabilities across the entire supply chain.

Do you think businesses will look back at this period as a point at which they made significant changes in the running of the global supply chain?

I truly believe so. The pandemic has shaken the very core and the very foundation of how the fashion supply chain has been built. It was built on efficiency by squeezing every ounce to make it cost effective. There is a need for a new equilibrium, and this will include diversification of the sourcing base, instead of putting all of your eggs in one basket. In the past, brand owners rarelyneeded to think about supply routes. Now, you’ve got to think of the trade lanes that you should be in. Of course, people need to think about the whole digitalisation of the supply chain too and you’ve got to make it more transparent so that it can facilitate decision-making.

What is the most important takeaway for brands?

I think brand owners and retailers need to rethink the relationship between themselves and the suppliers. You’ve got to treat them as partners; you’ve got to treat them as a critical component of the entire ecosystem. In a supply ecosystem, you are only as strong as the weakest partners.

Your parent company the Fung Group was one of 30 global fashion and textile industry companies to first sign on to the G7 Fashion Pact in 2019, committing to key environmental goals. What kind of tangible progress have you made so far?

We need to address the environmental impact of the fashion supply chain. Li & Fung ’s technology spin-off, LFX, recently launched 3D -as-a-service through a company we call UNIFi3D. In the past, a lot of products were air freighted for approval, back and forth [untilthey are approved]. Essentially, the whole thing now can be done in a 3D manner, so you eliminate waste during this process. The shortening of the whole product development cycle also means companies can give themselves more time to read the market, and with better intelligence develop products that have the highest probability of success, reducing the number of SKUs. So this reduces inventory, and then reduces inventory waste. It’s going to be game-changing, in my opinion, because inventory [waste] is the biggest cost to the brand owners and retailers as well as [one of the] biggest negative impacts on the environment.

What do you think the fashion industry has learned from the Suez Canal blockage?

In the past, brand owners defined value in a way that was always skewed towards the demand, downstream side of the chain. My sense is that the Suez Canal incident is highlighting to everybody that we need tostart investing in solutions that manage the upstream supply side, and form greater partnerships with your suppliers and vendors, your freight forwarders and your shipping lines.

What about the potential for conflict in the South China Sea, is that a geopolitical factor the fashion industry needs to consider?

I’ve lived in this region nearly my entire life [and] my sense is that the probability of a conflict is low [and the] cost of a conflict is very high. Having said this, when we talk about probability, we are playing with chance. So we really need to think about if it happens, how do you then rebalance your supply chain? How would you ensure that the flow of goods is not disrupted? Certainly, as we think about our three-year plan, it will be on my agenda, and I think it should be on the agenda of every chief executive in a company that has exposure in this region.

Are there viable alternatives to these sea routes that are maritime chokepoints?

I may not have said this 20 months ago, but given what’s going on, overland freight is definitely a viable alternative. My guess is that the future road and rail costs may be similar to the current ocean rates, but take half the lead time of the ocean route, which means that it’s actually faster to ship by land. Earlier this year, our logistics business, LF Logistics, signed an agreement with a local company in Chongqing [to leverage the] growing railway network linking China and Europe along the New Silk Road, which basically connects Chongqing with the port city of Duisburg in Germany. This agreement will definitely accelerate our expansion into Eurasia. For me, and for us as a company, that’s the way to go.Despite recent waves of offshoring from China and international trade disputes involving China, many fashion companies are still reliant on Chinese suppliers.

In this new, more diversified era of sourcing, which trade agreements are most important for the industry moving forward?
A very important agreement is the Regional Comprehensive Economic Partnership [RCEP]. It’s the largest multilateral trade agreement in the whole world and impacts 30 % of the world’s population. It has the potential to be at the core of the reconstruction of the global supply chain. RCEP is possibly the only trading block that has both the production capacity and the consumer demand, so my sense is that it’s going to dramatically facilitate the
regional trade and investment within Asia.
What does the conversation about hedging supply chain risk look like as we look ahead to 2022?
Given everything that we have learned from the pandemic, it’s very important to diversify our sourcing base, but it should not be blind diversification. In my opinion, the export share of China will gradually reduce by design. The finishing part of production can then move to ASEAN [Association of Southeast Asian Nations markets]. Because of RCEP, the movement of raw materials, the fabric, components,they can enter ASEAN countries largely duty-free, so it softens the cost of movement and transport.
Do you think there’s an overall decreased appetite for riskier sourcing locations, such as Ethiopia and Myanmar, even if they are lower cost?
As a company, we have started to look at Africa. In particular, we’re talking about Egypt, Ethiopia, Kenya, Madagascar and the like because they’re duty-free countries to America.
Realistically, I think we possibly need to wait until this whole pandemic stabilises for us to have a really thorough assessment of whether we want to scale up or
not, because there is some risk there.
How can brands make themselves more resilient in this new sourcing era?
You’ve got to be mobile. You cannot be tied to a particular location and geography. Secondly, I think it’s about time that we seriously look at our business continuity and contingency
plans. The third thing is that shipping costs are sky-high — my goodness — so brands need to find ways of offsetting this increased cost through increasing productivity. I think the exercise of value engineering is therefore very important. By reducing the number of players between myself, as the chief executive, to the lowest rank and by delayering, you reduce your costs. At the same time, you improve your customer service because things get done faster. You remove bureaucracy. I think a lot of companies should pay attention
to that.

DOMESTIC LUXURIES

Travel has traditionally been a key driver of luxury spending, but international tourism is not expected to fully recover until between 2023 and 2024. To capture the shift in shopping patterns set to shape the year ahead, luxury players should engage more deeply with domestic consumers, rebalance their global retail footprints and duty-free networks and invest in clienteling for local e-commerce channels.

Before the Covid-19 pandemic, 30 to 40 % of luxury sales were generated by shoppers in transit and abroad.₉₉ However, international travel flows plunged to new lows at the height of lockdowns and by 2021, global tourism spending had been cut nearly in half.100 With tourists set to stay local in 2022, consumers and brands alike are doubling down on domestic luxury shopping. Amid restricted international travel, consumers have switched to buying luxury online and at home, taking advantage of local duty-free offerings and the narrowing price gap between domestic and international markets. With tourism stalled, domestic shoppers helped buoy some of luxury’s biggest players. LVMH, Kering and Richemont were among the companies to defy expectations, seeing sales surge above pre-Covid levels by the second quarter of 2021 thanks to consumer enthusiasm to shop locally and online, particularly in Asia and the US. In 2022, much of this new onshore business will remain intact.₁₀₁

Aside from flows between Europe and North America which will get close to their 2019 performance next year, inter-regional travel is unlikely to return to pre-pandemic levelsbefore 2023. Moreover, the recovery of travel between China and Europe — formerly a cornerstone of luxury purchases in Europe — is likely to lag other pairings, only reaching 50 % of 2019 levels by 2022. In comparison, travel between the Middle East and Europe and between North America and Europe is expected to rebound to 110 and 105 % of 2019 levels respectively by 2024. “[Recovery will be] phased across different regions,” said Benjamin Vuchot, chairman and chief executive of LVMH-owned luxury travel retailer DFS Group, in mid-2021. DFS is planning to open new T Galleria stores which will be fully operational by 2023 in Australia and New Zealand, two countries Vuchot predicts will be among the early beneficiaries of a resumption in travel. “When travel becomes possible, luxury will be one of thefirst categories to benefit.”₁₀₂

With cross-border travel restricted throughout 2021, domestic markets have had an opportunity to pick up the slack. Indeed, despite some reopening to international traffic, most

shopping has been comprised of local customers. Following the reopening of non-essential retail in the UK, the Bicester Village designer outlet reported a flood of domestic shoppers and only a trickle of international visitors. Luxury retailers including Harvey Nichols and Selfridges in London and Galeries Lafayette in Paris have tried to adaptto the changing conditions, with the latter offering online clienteling and next-day home delivery.₁₀₃

CONSUMER SHIFTS

Governments have been similarly proactive in encouraging luxury shoppers to spend more at home by cutting local consumption taxes, reducing import duties and promoting duty-free zones. In China, the popular holiday destination of Hainan saw duty-free sales surge by 257 % in the first half of 2021, to 26.77 billion yuan (USD 4.13billion).₁₀₄

This followed a Chinese government announcement that it planned to transform Hainan into the world’s largest free-trade port. The plan included reduced corporate and individual tax rates, relaxed visa requirements and a drastic expansion of the Hainan duty-free programme. The government also lifted purchasing limits from30,000 yuan to 100000 yuan (USD 4646 to USD 15487) and allowed consumers to buy duty-free products online for six months after returning home.

The success of China Duty Free Group (CDFG), which controls around 95 % of the Hainan market, has attracted companies such as LVMH’s DFS, Dufry and Lagardere over the past year. Looking forward, CDFG expects 20-fold revenue growth between 2019 and 2025. If that is accurate, the island province will account for one third of China’s luxury market by 2025.₁₀₅

Meanwhile, elsewhere in China, municipalities in the city of Shenzhen are considering developing their own downtown duty-free zones.106

Brands have also played their part in the shift to domestic sales. Many have launched or expanded local marketing campaigns andinvested in their domestic physical footprints.107 In November 2021, Dior opened its first Middle Eastern exhibition in Qatar, which was adapted specifically for the region and will run until March 2022,108 and Chanel hosted its 2022 cruise collection in Dubai. In the US and UK, luxury brands such as Dior and Prada have compressed price differences between markets, reducing the allure of “travelling for a bargain” and shoring up consumer confidence in domestic purchases.₁₀₉

In China, Louis Vuitton and Prada have shifted some of their attention away from tourism hotspots and first-tier locations to new stores in cities such as Wuhan.₁₁₀ Meanwhile, the activities of China’s daigou (grey-market surrogate shoppers who buy goods overseas to sell on the mainland) have shifted, with supply chain bottlenecks

and closed stores and factories adding to the complexities of the trade.While domestic markets have prospered, international airports and city-centre retail locations, which are often designed for the international traveller, have seen store closures and strategic shifts. In Japan, the ongoing travel ban has hurt duty-free retailers and tourist-focused outlets,leading to retailers shuttering more than a dozen stores in Tokyo’s high-end Ginza Six mall in early 2021.₁₁₁

Meanwhile, tourism shopping tax refund company Global Blue, headquartered in Switzerland, saw a more than 80 % drop in its first-quarter 2021 revenues compared withpre-pandemic levels.₁₁₂

With airports maintaining strict social distancing measures and border controls, the sense of a fun, airport-based experience will likely continue to diminish in the year ahead. Of course, this does not spell the end of international travel. In countries that have seen rapid vaccine rollouts, the appeal of leisure trips abroad is returning:seven in 10 Americans are eager to book a vacation, according to a recent Nielsen survey.₁₁₃

Still, even as international bookings rise, the practical difficulties and risks (such as uneven vaccination rates, testing and quarantine requirements andthe threat of viral mutations) will mean many consumers continue to favour domestic trips. However, some travel retail players are ramping up their duty-paid airport concessions alongside duty-free operations in provincial hubs across markets like Brazil.114 “With our new shops spread across the whole [Salgado Filho Airport in Porto Alegre] we will be able to… serve both domestic and international travellers [tailored accordingly],” said Gustavo Fagundes, chief operating officer of Dufry in South America.₁₁₅

DOMESTIC LUXURIES

Globally, domestic travel is on a steeper upward curve than its international counterpart, and is likely to recover to more than 90 % of pre-pandemic levels by 2022, compared to 50 to 80 % for international travel. Demand for weekend and short shopping trips, which historically accounted for a large proportion of luxury tourism spend, will remain subdued. So too will business travel, amid continued adoption of digital alternatives.Domestic luxury consumption has similarly benefitted local and regional online players.

In China, Alibaba expects to see a continued rise in cross-border e-commerce through 2022, as consumers browse for both foreign and domestic goods on local sites.₁₁₆ Global luxury e-commerce platforms such as Net-a-Porter may see more traffic from regions like the Middle East, where they have a localised offering with competitive delivery and payment options and offer access to local designers.

UAE-based luxury players with an online presence, such as Al Tayer Insignia’s Ounass and Chalhoub Group’s Tryano and Level Shoes, are also expanding fast across the region.₁₁₇

Citing the shift of international travel-based spending back to countries like the UAE and Saudi Arabia, Khalid Al Tayer, chief executive of Ounass and managing director of Al Tayer Insignia, which operates joint ventures with brands including Gucci and Saint Laurent, said the trend “has really accelerated the brands in their adaptation of local tastes and local cultures and local celebrations by coming up with communication, [events] and merchandising that appeals to them.”₁₁₈

Given the increased choice in home markets, both in terms of brands and channels, the rise of domestic luxury is likely here to stay. Another outcome of this shift is that consumers are discovering new local designers or investing more in familiar local names.

“Here in Shanghai, many showrooms are still reporting a big boost in sales of Chinese designer brands,” said Shaway Yeh, founder of fashion innovation and sustainability agency Yehyehyeh.₁₁₉ “With consumers having less access to international fashion than before, this isn’t surprising, but it also speaks to the rising national confidence that consumers are tapping into, and a newfound sense of solidarity to support local businesses that won’t go away anytime too soon.”

A similar pattern is emerging in key African markets like Nigeria, where luxury consumers have been unable to travel abroad as easily as they did before the pandemic to shop in hubs like London and Dubai. “While we do expect customers to return to previous [international] buying habits, we’re certain that [more] ‘repatriated spending’ will become the norm. As consumers search for quality products they don’t have to travel for, local designers and artisans are exceeding expectations and matching — sometimes surpassing — thequality demanded,” said Avinash Wadhwani, co-founder of Lagos multibrand store Temple Muse,which stocks both global and local luxury brands.₁₂₀

Looking ahead, brands will need to adopt a two-pronged approach to capture the shift in luxury spend, targeting both domestic shoppers and aligning with new travel and purchasing behaviours. However, in line with projections that a travel rebound and sustained domestic luxury spend will not be mutually exclusive, the pressure will be on — particularly from investors who increasingly expect a full sales recovery in 2022 — to prioritise the right opportunities at the right time. Indeed, consumers may begin to cautiously travel internationally, while temporary VAT exemptions and other domestic incentives support demand at home. But most likely, luxury consumers will shop for more novel, local designs abroad, while continuing to spend on staples, accessibly priced luxury items and local brands in domestic markets.

In response to these dynamics, travel retail and duty-free players will need to expand their horizons, offering more than the usual merchandise mix to travellers and broadening the travel retail proposition beyond the simple offer of tax savings. Companies must offer value-adds, such as unique local products or collaborations, that enrich the customer experience and create a pull factor for reluctant travellers.

European luxury hubs will be especially hard-hit by the sustained domestic spending boom in China and other markets and will need to find ways to compensate. In Paris, London and Milan, brands and retailers most dependent on international shoppers will likely see sub-par performance through the end of 2022 at the earliest.₁₂₁

Leading European luxury department stores that are able to adapt their approach will remain influential in their respective cities. However, while many have expanded theire-commerce operations, they will continue to rely largely on in-store shoppers, meaning they will need to increasingly court local customers using enhanced localisation strategies.

Luxury brands will need to continue to expand their footprints across regions, moving away from an over-reliance on tourist destinations. In towns and cities, retail locations in transport hubs and domestic terminals offer potential for growth. To build meaningful relationships with domestic customers, players will need to sharpen their localised marketing strategies. This may mean introducing enhanced clienteling, holding community-building events or offering tailored merchandise mixes to accommodate local tastes.

As the dynamic between travel and luxury shopping shifts, luxury brands need to formulate new solutions to capture both domestic shoppers and incoming tourism in the longer term, reallocating their investments accordingly. This, in turn, will require a rethink of all aspects of doing business, across product development, marketing, merchandising and retail.

With tenants like Louis Vuitton and Christian Dior and partners including Celine and Valentino, retail behemoth JHSF Participações has had to strengthen its ties

with local luxury clients during the pandemic, and the group’s chairman is betting on long-term gains from their new shopping patterns. After leveraging the firm’s hospitality assets to boost loyalty, José Auriemo Neto reveals how he plans to persuade well-travelled Brazilians to keep shopping domestically.

By Zoe Suen

Though some have suggested that the repatriation of luxury spending in Brazil is onlytemporary, José Auriemo Neto believes otherwise. The increasingly local consumption habits Brazilians developed over the course of the pandemic aren’t going away, says the chairman of JHSF Participações (JHSF), who is so confident that he is building a hotel on top of the group’s largest luxury mall to make it more convenient and appealing for wealthy Brazilian travellers from across the country to shop domestically in the commercial capital.

One of two major luxury retail players in the country, JHSF has fostered long-term relationships with tenants such as LouisVuitton, Christian Dior and Cartier, while establishing exclusive joint ventures with the likes of Celine, Valentino and Balmain. But more than a decade after he introduced the likes of Hermès and Jimmy Choo to Brazil by way of the group’s crown jewel Cidade Jardim, the executive is not plotting international, or even regional, expansion. Rather, Neto is doubling down on one state in Brazil, where he plans on strengthening ties with the group’s high-end clientele usinga diversified, experience-first strategy.

Brazil was hit particularly hard by Covid-19, both in terms of the human tragedy and the economic impact on businesses. But how substantial were JHSF’s retail losses over the course of the pandemic and the local luxury sector more broadly?

In the retail division we were negative during the months we had to stay closed, down 15 to 18 %, but sales recovered as of the last quarter of 2020, where we saw growth exceed 2019 levels. Sales in our malls grew 16 % in Q2 2021, compared to Q2 2019. Of course, the luxury segment has benefitted as our clients were not able to travel and people were buying more domestically.In the state of São Paulo, where the majority of our business is, vaccination [is happening quite quickly as of September 2021] so people are more confident about going out. We are seeing the luxury segment grow faster than other segments and the country’s GDP which I believe… will be something close to 4.5 %.

Our retail division is expecting to have double-digit growth thisyear [in 2021], and also next year, due to all the demand that we’re seeing. How much of your retail sales did regional and international tourism respectively account for pre-pandemic? What did the repatriation of luxury spending look like for JHSF?

About 90 % of our business was driven by locals, but we’d see people coming from the other regions of Brazil to buy in São
Paulo — 25 % out of this [domestic share of ] 90 %. Brazilian clients spent almost a year and a half with travel restrictions to destinations like the United States, Europe and also some of the countries in Asia and Africa. But this helped us provide an experience that they were not having before; I believe
that the level of business that we are going to have post-pandemic is going to be higher, because customers adapted to buying in the country.

Brazil’s high tax burden has traditionally prompted luxury brands to retail at significantly higher prices than in other markets, which gave affluent Brazilians an added incentive to shop abroad in the brand flagships in Europe and the US where there is usually a larger selection — rather than buying at home. Are things changing?

Some of the brands, they’re now selling at 15 %, 18 % above US retail but our customers expected much higher price
differentials considering prices used to be 50 to 60 % higher than the US and Europe up until 2019, so we saw a very positive impact when they came to the stores and were saying, “Okay, it’snot that bad, so I can be a regular customer in Brazil after all.” Brands saw that they’d drive their business volume up,the closer they get to US and Europe retail prices so now they’re making a very strong effort not to be much higher than 20 %.

What strategies are you using now or planning to adopt at your shopping centres next year to continue to benefit from repatriation? And how can you fend off competition from local luxury mall competitors in the process?

It’s all about providing these customers with the right experience. Through our brand partners, we can do merchandising and buy with a focus on our customers and their sizes. We are also having lunches and dinners where we are exhibiting some of the new products that we are receiving in advance. Some of the travel restrictions to France were lifted, so we’re taking some clients to Paris Fashion Week. We have another advantage in that clients buy in nstalments; this is a common practice in Brazil.

We also launched a benefit 2 % cash back on all their buys in the mall; this is connected with our real estate division, so if you buy a house in one of ourcountryside projects, you collect 0.5 % cash back that you can use in our malls, restaurants and hotels. So we’re exploring thesesynergies more and providing more benefits in terms of service, experience and advantages to our clients.

Who is your core shopper? How have their habits changed over the pandemic and what shifts do you predict for the year ahead?

Around 65 to 70 % are women, aged 22 to 55. In terms of geography, it’s mainly São Paulo, and states like Goiás, Minas Gerais and Rio de Janeiro. We are seeing more people travelling to São Paulo, not only to buy, but also to enjoy the city. We’ve seen more of our clients buying online, and more of ourclients accessing our concierge service, which we started this year [in 2021] with one person but we are expecting to have 50 staff working on it by next January.

JHSF operates five malls — with a total gross lettable area of over 265000 square metres — and has others under construction. What exactly are your expansion plans?

We have four retail projects that are under development. One, in the area of Faria Lima, the central financial district of the city ofSão Paulo, is a mall with exactly the same model that we recently inaugurated in the Jardins area of São Paulo. We have a physical retail platform, and we also have a digital platform integrated into some of these stores; some of the merchandise is in the stores, but some orders that clients are receiving at their homes is delivered from a warehouse. We have another three projects: one in the countryside of São Paulo [state], called Boa Vista Village; another one in São Paulo, called Real Parque; and the extension of Cidade Jardim mall that we areopening in H1 2022.

You’re really betting big on São Paulo. Why?

Our business is focused on high-end clients, so we have tobe where they are. It’s the centre, the wealthy part of the country. More and more of these Brazilian clients are travelling to São Paulo from elsewhere, too, so we want to give them as good experience [as possible] when they are here.

We’re even opening a new hotel on top of the Cidade Jardim mall. It’s going to be completed in about one-and-a-half years, so peoplewill be able to stay in the same place they’re shopping when they are travelling.

You also have shopping centres outside the state of São Paulo, in cities like Manaus and Salvador. How do they factor into your plans?

When we look at the growth opportunities in the country, they are more connected to the state of São Paulo, and we are not seeing a very relevant growth in the North or Northeast region where we have those two malls that you mentioned. Right now, we’re focusing our expansion 100 % on luxury malls but the ones we run there are not luxury malls, they’re more democratic.

Once restaurants and shops re-opened after lockdowns in Brazil, did you see a fall in e-commerce sales versus physical retail sales?

Yes, the level of demand for the online platform stabilised, and then went down about 10 to 15 %. But of course, that means clients did download our app [CJ Fashion] on their phone and they started to surf this digital world, and once they started to go to digital, they got more used to it.
There are many big global luxury e-commerce platforms out there with wide assortments of merchandisetrying to tempt wealthy Brazilians to buy from them.

How can your online offering compete?We have an advantage over international players because the brands that we offer on our digital platform are in our malls. We really believe that for a country where there are a lot of logistical challenges, it’s very important to have both; it’s different from other markets, where you can deliver merchandise across the country from a big warehouse. This integration is how we’re giving our clients the access to the merchandise that they want, and how we can understand our clients in a very deep way.

JHSF also operates the Catarina Fashion Outlet outside São Paulo. What shifts have you seen in your outlet business, and what are your expectations for 2022? The outlet business is growing a lot. We’re seeing this business grow year over year in double-digits.

Everyone is bracing themselves for continued uncertainty in 2022. How is JHSF adapting to a more volatile market when it comes to luxury, travel and retail?

A good part of our strategy is related to mixed-use projects. This is helping us a lot, because we can provide for our clients not only the experience to buy
merchandise, but the experience for them to live in our properties. I believe that this is relevant for the next few years, because we’re seeing that people want to get together; they want to spend time with their families. So our challenge is to be on that trend even more.

This interview has been edited and condensed

WARDROBE REBOOT

After focusing on the likes of loungewear and sportswear for nearly two years, consumers will reallocate wallet share to other categories as pent-up demand for newness coincides with more social freedoms outside the home. To anticipate these nuanced and sometimes paradoxical preferences, brands should lean more on data-driven product development, adjusting their inventory mix accordingly to ensure that assortments resonate with consumers adjusting to new lifestyles.

The pandemic fashion era will be remembered for a surge in comfortable clothing among other things, but some shifts in spending between categories were temporary, while others will see sustained momentum over the longer term. The net result is an altered consumer demand structure comprised of new baselines for some fashion categories, a change which will compel some players to adjust strategies across product
development, merchandising and marketing in 2022.

Consumers’ lifestyles were drastically altered through the pandemic, causing lumpy seasonal purchases characterised by irregular spikes and lulls of activity, such as surging demand for athletic wear and loungewear. Resizing needs have also disrupted usual demand patterns. In the US, 40 % of women and 35 % of men are a different size than in 2019.122

Now, some categories and products are starting to experience demand fatigue as the recent torrent of irregular purchases is set to subside. According toanalysis by online fashion platform Lyst, pandemic-resilient categories such as nightwear, activewear and underwear are starting to see decelerating demand compared withthe more-than 100 % growth rates that were common in 2020.₁₂₃

While 2022 will certainly not see a collapse of loungewear and leisurewear, some brands operating in these categories are beginningnew activewear shorts and tops in the US and UK were down 20 % and 50 % respectively in late 2021 compared with the same period in2020, according to e-commerce trend research by data analytics platform StyleSage,₁₂₄ reflecting a similar trend in China.

On the other hand, as more people return to the workplace and formal occasions are reinstated on social calendars, consumers will reinvigoratethe formalwear business in the year ahead, building on momentum established in the latter half of 2021, as pent-up demand manifests as so-called “revenge shopping” in some markets after people’s social lives resume.125 Global monthly searches for occasion dresses, such as homecoming, wedding guest,cocktail and formal dresses, were already up 200 % in 2021 compared to the previous year, according to StyleSage.₁₂₆

Similarly, in footwear, consumers will look beyond the sneakers and comfy sandals that ruled lockdown-era shopping. In August 2021,online searches for women’s heels were up more than 200 % compared with the same month in 2020.127 However, more practical heel shapes that cater to adjusted consumer preferences will likely remain popular even as people dress up again: footwear styles with the highest number of units sold in 2021 were wedge heels, rubber heels, thick or block soles and kitten heels.₁₂₈ In summer 2021, similarly comfortable options like Gucci pool sliders and Tory Burch “Miller Cloud” sandals were merchandiser.₁₂₉ Dressier sneaker styles were also high on consumer wish lists, particularly in the US, where searches for platform sneakers and brands such as Golden Goose were up 28 % and 104 % respectively.₁₃₀

In contrast to the reinvigorated demand for occasion dressing, workplace wardrobes will witness increased casualisation in some markets, such as the US and UK, as people adjust to new ways of working, including hybrid office-home patterns. Work looks and feels different now,” said US-based retail consultant Kathy Gersch. “Virtual work and flexible hours aren’t going to go away. Brands that believe old patterns will revive will fall by the wayside._”131

In another sign of creeping casualisation, workplace returnees in many regions have been shopping for casual blazers rather than suits: global search volumes for blazers were more than 100 % higher in August 2021 than in August 2019. In some markets like Germany, searches for suits were down. Even some traditional and corporate offices will adopt hybrid styles, replacing suits and heels with business-casual styles and sneakers.

Of course, there are nuanced differences between markets, where dress codes in some regions and professions will necessitate a return to formality. This said, brands will still find opportunities to tap into the casualisation shift by developing products with new fabric options or hybrid styles. For example, athletic brands Lululemon and Athleta have expanded into workwear, while Hugo Boss collaborated with Russell Athletic to produce suits in jersey fabric, some of which have shorts in place of trousers.₁₃₂

In addition to the changes companies make across design, product development and merchandising, they may also need to employ fresh marketing strategies that align with those changes. For example, exuberance in marketing campaigns will likely mirror consumers’ eagerness to dress up for social occasions again. As such, brands should consider bold ads and ambassadors suitable for the new mood, fine-tuning their approach to rapid shifts in social marketing trends on platforms like TikTok and Instagram to enable customers a seamless and instantly gratifying route to purchase new styles. At the same time, leveraging marketing channels that were largely ignored during pandemic, such as in-store events, will be increasingly important to build a sense of community and loyalty.

With consumer demand rebounding alongside ongoing logistics challenges in many global markets, 2022 pricing strategies should also be re-examined. Indeed,fashion executives across different value segments have cited plans to increase prices in 2022, with an average expected rise of 4 % in luxury, 2 % in mid-market and 5 % in value, according to the BoF-McKinsey State of Fashion 2022 Survey.₁₃₃ These price hikes are in part due to ongoing supply chain disruptions that will impact margins (see “Logistics Gridlock”). However, they will also have downstream effects on how consumersin each segment shop new styles to reboot their wardrobes.

Looking ahead, there will likely be increased appetite for experimentation and self-expression as consumers seek out more playful and energeticways of dressing, boosting demand for novel designs, more adventurous colourways and creative pairings across categories in 2022.134 “Often it’s the case during times of crisis, people revert back to shiny fabrics, bright colours, clothing that can inspire happiness,” said London-based trend forecaster Geraldine Wharry. “If you look at the 2008 [global financial] crisis, a couple of years after that, there was the trend starting to really gain traction in terms of bright clothing, almost clothing inspired by toy colours.”135

In the US, patterned trousers and women’s garments in bright colours such as fuchsia, green, orange and purple were more commonly sold out through 2021 versus 2020, according to StyleSage.136

The budding new consumer mood, which was captured in late 2021 by fashion critics like GQ magazine’s New York-based Rachel Tashjian, is likely to continue feeding into aesthetic preferences in 2022. “During the opening stages of the pandemic, there was defeatism… but that’s evolved into this type of exuberant attitude,” she said.137 Brand leaders are increasingly aligning their creative teams with the changing consumer sentiment: “People are ready for a little bit of optimism… [and] looking to be inspired,” said J.Crew Group chief executive Libby Wadle.138

Executives, merchandisers and buying team leaders at retailers including Moda Operandi and Intermix noted soaring appetite for bold and risqué styles in late 2021.139 Indeed, this theme will likely extend into next year, with luxury players’ Spring 2022 collections by brands such as Michael Kors and Chanel showing skin-baring looks at fashion weeks in New York and Paris.

In a bid to capture demand for new styles, particularly from younger consumer cohorts, fast and ultra-fast fashion players are
upping their inventory turn. Asos, Boohoo and PrettyLittleThing are among those to have recently accelerated product introductions.140

Chinese ultra-fast fashion player Shein consistently introduces more than 6000 new products per day in limited units, with designs informed by customer data, which can be turned around in as little as three days.141 However, companies reliant on these business models are facing increased scrutiny for their environmental impact and labour conditions.142

“There are huge contradictions at the moment [with the concurrent rise of both ultra-fast fashion and]… the mindful consumer,” said Wharry. “I think we’re at a tipping point when it comes to people associating the item they buy with its contribution to society… [ but even for those who are less concerned about that aspect], there will be more awareness of ‘how can this item also be recycled into other occasions?’”143

As such, agrowing number of consumers are likely to allocate more of their wallet share to investment pieces and versatile items, even as inexpensive items andimpulse purchases remain an important part of the wardrobe mix for many in 2022.

For most brands, the demand for new styles does not necessarily mean adopting bigger assortments, but instead using greater thoughtfulness around data- and demand-driven product launches and inventory mixes. With increased opportunities to collect consumer data through the growth in e-commerce spend, brands should track category shifts and pay special attention to how new assortments resonate with
consumers.

WARDROBE REBOOT

The chief executive of the company that owns Calvin Klein and Tommy Hilfiger believes creativity will be even more of a differentiator in 2022 as fashion players move to better align merchandise planning with demand in the face of escalating supply chain challenges. By further elevating the iconic status of PVH brands and using persuasive design to drive engagement, Stefan Larsson sees opportunities to gain market share.

By Chantal Fernandez

Since becoming chief executive of the group that owns Calvin Klein and Tommy Hilfiger in February 2021, Stefan Larsson has been clear and consistent about his mission at PVH Corp. “I keep coming back to the same [idea], which is our ability to stay true to the iconic DNA of our brands and keep connecting them closer and closer to where the consumer is going,” he says. In a crowded and disruptive digital market, the seasoned executive considers creativity one of the most important differentiators.

One way to accomplish more creatively, he suggests, is for companies to break down the traditional boundaries between internal and external activities, in favour of a “network” approach.Like most of its peers, PVH is emerging from a period of great challenges, during which the company moved to boost its e-commerce channels and reprioritise domestic consumers, especially in the US where foreign tourists generated more than a third of sales prior to the pandemic. To gain market share in the year ahead and indeed for the long term, “it’s never been more important to invite in [voices from the outside], to let [them] be heard,” Larsson said, referring not just to design functions but sustainability initiatives and workplace culture. “We have to be leading big companies and big brands in a much more entrepreneurial way than before to win.

Europe is PVH’s largest region in terms of revenue, and its brands benefit from a healthier wholesale market there too. Are there lessons that you can take from your stronger markets to apply to the North American market, where discounting and the shift to digital have been disruptive?

The consumer is moving and continuously moving fast — and the barriers have come down, and the noise levels have come up, and the consumer has all this choice — so it’s the importance of connecting with the consumer through creativity and design that drives engagement. Equally important is to connect with technology and become more data driven to understand more about where the consumer is going. Having a systematic, repeatable operating model is also going to be more important going forward.

But how does that focus on being intimately connected with the consumer impact your global distribution strategy?

It’s about growing with a mix in those channels that reflect where the consumer is going. The consumer also wants to shop at the likes of Zalando, AboutYou, Amazon and Tmall. So increasingly, it’s about winning in the digitally led marketplace, and looking at it as an integrated marketplace region-by-region and almost city-by-city. The biggest opportunity to grow, by far, is direct-to-consumer e-commerce and third-partye-commerce, both with pure players like Amazon, and with more traditional wholesale partners.

Most customers around the world have gradually started to return to their pre-pandemic lives or something close to it, but international tourism is still depressed; in the US, most international travel bans were only due to be lifted in November 2021. How has this informed your view on refocusing the business around domestic consumers?

Where we were the strongest with the domestic consumer pre-Covid is where we weathered Covid the best. And where we had the most dependency, or an over-dependence on tourism, we had the most work to do to win more with that domestic consumer. So strength has to be built into every market [in terms of the domestic consumer going forward].

How do you see recent and future supply chain disruptions permanently changing your production strategies and your sourcing footprint?

We still as an industry have too long lead times, and there is a big opportunity to better match planning and buying to demand, and that’s something that we learned when Covid hit. The second-biggest learning is to build resilience into the supply chain now, with an awareness that [crises like] pandemicsdo happen. Also to build in a geographic and partnership approach where we are able to compensate for what happened during [an event like the] pandemicand continue to supply the business with goods.

How are you thinking about cutting down on lead times next year?

For us, it starts with making sure that every single product in the assortment has an intent, and our focus is on the most essential categories and then, withinthose categories, developing hero products. Once we do that, we create the foundation for planning and buying inventory closer to demand, because wehave fewer SKUs and more focused product silhouettes. Then we can work more with flexible and more agile supply chain set-ups, cutting the lead time by getting much more focused and upfront in the categories and the product silhouettes that matter, and then getting closer [to demand] when it comes to deciding fabric, colour and where in the world these products go.

Many companies have benefitted from reducing their inventory and focusing on their hero products, and that’s helped them cut down on discounts and raise their average unit retail (AUR). What will distinguish the companies that are able to keep that momentum going in 2022 from those sliding back into bad old habits?

The winners will be those who keep developing a systematic focus on building assortments of products that [stand] out in a sea of generic products. Next year, I believe we are moving into an era in this sector where creativity will become even more of a differentiator — style, taste, original creativity — and then technology will be an amplifier of that. But I’m surprised that there hasn’t been more conversation about the importance of competing with creativity.

Tommy Hilfiger was still staging runway shows before the pandemic, but Calvin Klein no longer does, and both brands have been focused on collaborations. In our fast-moving digital world, do you see collaborations as the best way to create halo moments that attract customers to your brands?

The consumer appreciates the iconic brands with staying power, where they have a certain level of predictability. They also love creative newness like never before, and the mix of those. Staying true to the iconic nature of your brand, and then utilising that iconic nature as a platform to amplify new up-and-coming creativity — it creates newness and relevance for the consumer.

The consumer is taking down barriers. They don’t look at it like, “Is this Calvin or Heron Preston?” They’re saying, “Oh, I love Calvin, and I love what Heron is doing, and I love the mix.” So that, I believe, will just continue.

Are there trade-offs when moving towards sustainability goals while also optimising the supply chain, whether that relates to environmental concerns or workers’ rights?

Our experience is that most often they go hand-in-hand. We just had our big yearly supplier summit. What I asked them for, and what I committed to them, was to tap into some of their innovation and expertise because a lot of them are moving forward in making more sustainable sourcing and production. One mega trend I see overall in the sector is the importance of breaking down the traditional boundaries of what’s in the company and [what is done externally]; what can be accomplished together as a network — whether it’s creativity, sustainability and supply chain, or technology. It’s looking at how we can follow the consumer and maximise our positive impact by working together in a way that breaks down the boundaries of what traditionally we said we wanted to do [internally] as a big company.

We’ve seen several textile recycling projects come out of both Tommy and Calvin. What do you feel has the greatest potential to scale in the next year?

Tommy has piloted something called Tommy For Life, where we bring back old pieces and clean and repair and resell them. We’re taking a lot of action to try to see what we can do, and what can be scaled. We’re moving forward on a number of fronts, and we are increasingly looking at identifying the big needle-movers that we can drive over the next few years to make a real positiveimpact. So it’s a combination of going big — where we see we can go big right away,like sustainable products and VPPAs (virtual power-purchase agreements), and the solar roof on our [distribution centre in Venlo, Netherlands], to testing circular design and circular product initiatives — and testing small, so that we can then learn and scale over time. [But most of all, it’s about] being humble enough to realise that we have 90 percent of the work still to do [in this area].

What about opportunities in the metaverse and virtual goods? Do you see that as something that could become a revenue driver for the business?

One thing we learned through Covid, and the disruptions ahead of Covid, is that when you see those exponential growth rates of consumer-shifting behaviour, you need to follow that, including the meta-world, and be open to how the consumer wants to engage — and be open to the possibility that it could, sooner rather than later, be an income stream.

The fashion industry is currently facing a talent crunch. What does it mean to be a competitive employer in 2022, and how might that evolve going forward?

Just like the consumer, team members also have a lot of choices. The traditional way of running a big company — where you told people what to do and the further down you got in the organisation the more you’d just execute — is going to be obsolete. If you’re really clear on the vision, you’re really clear on the priorities, you can empower team members across all levels of the organisation to make decisions to follow the consumer. It will put pressure on us to
become much more inclusive, much more engaging and much more diverse. It’s going to be our job to invite team members, independently of where they are in the organisation, to engage and see that they have impact in not only driving to become one of the winners from a shareholder return perspective, but also doing it in a way that maximises our positive impact from a [diversity and inclusion] and sustainability perspective.

This interview has been edited and condensed.

Here ends the first part of the report. The second one will follow in a week’s time!

Newsletter of last week

What Should I Do With My Big Fat Inheritance? – The new key to automotive success: Put customer experience in the driver’s seat – Maeve Reilly Changed How Women Dress. Now She’s Building Her Brand – It’s Never Too Late to Pick Up Your Life and Move to Italy https://textile-future.com/archives/81074

The highlights of last week’s NEWS, for your convenience, just click on the feature to read.

Antimicrobial

Koketa begins sampling garments made with Acteev® antimicrobial technology https://textile-future.com/archives/81108

Awards

Internationalisation Awards of the President of the Republic of Finland to Relex, Peikko, Bayer and Maria 01

Bangladesh

M&S to buy more high-end garments from Bangladesh https://textile-future.com/archives/81114

Building

Swiss Empa Building smarter: Heat storage in the deep https://textile-future.com/archives/81225

Chips

Will the chip shortage create a nightmare before Christmas? https://textile-future.com/archives/81136

Companies

Lenzing Managing Board proposes dividend of EUR 4.35 https://textile-future.com/archives/81191

Cotton

ICAC: Cotton Prices Expected to Remainat Elevated Levels throughout 2021/22 https://textile-future.com/archives/81211

Data

Are you shopping online today? (Black Friday/Cyber Monday) https://textile-future.com/archives/81033

The McKinsey Week in Charts https://textile-future.com/archives/81051

People aged 65 or over in Switzerland are very satisfied with quality of healthcare https://textile-future.com/archives/81118

Swiss Consumer prices remained stable in November 2021 https://textile-future.com/archives/81181

Green energy products 2020: EU imports exceed exports https://textile-future.com/archives/81279

Visualise the latest economic trends https://textile-future.com/archives/81288

11th ITMF Corona-11th ITMF Corona-Survey Business situation and expectation are very good along the global textile value chain https://textile-future.com/archives/81307

Face Mask Market worth USD 2.7 billion by 2026 https://textile-future.com/archives/81387

Design Tool

H&M Group launches first part of Circulator design tool https://textile-future.com/archives/81362

Divesture

Selfridges owners agree GBP 4 billionn sale to Thailand’s Central Group https://textile-future.com/archives/81219

Dyes

Pangaia Lab Powered by Colorifix introduces apparel made with biological dyes https://textile-future.com/archives/81346

Steady increase in EU agri-food trade https://textile-future.com/archives/81011

Hydrogen: Europe’s Industry rolling out hydrogen projects on massive scale https://textile-future.com/archives/81122

Global Gateway: up to E 300 billion for the European Union’s strategy to boost sustainable links around the world https://textile-future.com/archives/81164

Events

R+T 2022 postponed https://textile-future.com/archives/81230

Texcare France – Your dedicated events for the entire Professional textile care sector https://textile-future.com/archives/81246

Sustainable Apparel and Textiles Conference https://textile-future.com/archives/81318

Intertextile Shanghai Home Textiles – Spring Edition returns in March 2022 https://textile-future.com/archives/81377

5th BISHKEK FASHION & TEXTILE EXHIBITION MARCH 10 – 12, 2022 in BISHKEK – KYRGZISTAN https://textile-future.com/archives/81381

Fines

Antitrust: EU Commission fines UBS, Barclays, RBS, HSBC and Credit Suisse EUR 344 million for participating in a Foreign Exchange spot trading cartel : https://textile-future.com/archives/81267

Finland

FIVE FROM FINLAND: Top index rankings for 2021 https://textile-future.com/archives/81014

IMF

IMF Executive Board Concludes Eleventh Periodic Monitoring https://textile-future.com/archives/81141

Intellectual Property

Madrid Case Study Highlight: Xiaomi Corporation, Promoting a Better Life through Innovative Technology https://textile-future.com/archives/81195

Partnering

Hexcel Partners with METYX for High Performance Carbon Pultrusion Technology https://textile-future.com/archives/81263

Personalities

Virgil Abloh, Barrier-Breaking Designer, Is Dead at 41 https://textile-future.com/archives/81060

Changes to the UBS Group Executive Board https://textile-future.com/archives/81174

Change in the Board of Directors of Rieter Holding AG https://textile-future.com/archives/81202

Oerlikon Board Change – Dr. Suzanne Thoma to not stand for re-election in 2022 https://textile-future.com/archives/81373

Pricing

BASF increases prices for butanediol and derivatives in Europe https://textile-future.com/archives/81285

New Products

Highly efficient, durable quat-silane polymer system to control the growth of unwanted bacteria: Sanitized® Puretec™ technology delivers optimal antimicrobial performance for all fibre types https://textile-future.com/archives/81024

Reskilling

Nestlé supports first pilot in European reskilling project: Portuguese government and companies together to reskill workers for future jobs https://textile-future.com/archives/81301

Shirting

Thomas Pink relaunches website for “exciting new era” https://textile-future.com/archives/81126

Switzerland and Vietnam to further deepen relations https://textile-future.com/archives/81008

Waste Water

Industrial Wastewater Treatment Market worth USD 15.0 billion by 2024 https://textile-future.com/archives/81130

Webinars

WIPO’s annual Advanced PCT Seminar (Virtual, December 2021) https://textile-future.com/archives/81005

WIPO Webinar for the Release of the Report on Voluntary Copyright Registration Systems (December 8, 2021) : https://textile-future.com/archives/81277

Textile Exchange Webinar Co-hosted by Canopy Exploring the Sustainable Material of Green Shirts in Man-Made Cellulosics https://textile-future.com/archives/81311

Hohenstein Academy is presenting a Webinar on 3D Simulation of Apparel – Virtual Design and Fit https://textile-future.com/archives/81351

WTO

TWELFTH WTO MINISTERIAL CONFERENCE: WTO General Council decides to postpone MC12 indefinitely https://textile-future.com/archives/81043

TextileFuture

by Virginia

State of Fashion 2022: An uneven recovery and new frontiers

ACKNOWLEDGEMENTS

EXECUTIVE SUMMARY

Global Economy

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