State of Fashion 2022 (Part 2)

As we promised, please find the second part of the State of Fashion in this TextileFuture edition. This part is on the Metaverse Mindset, with interviews of noteworthy industry representatives. It is also about Social Shopping, Circular Textiles, Sustainabilitiy issues, about COP26 and Product Passports anmd Cyber risks and resilience, as well as Talent crunch, and it offers also a Fashion Index.

We feel that it is excellent material to devote some time to digest all information and we hope you do take the time to read in depth.

We excluded the aspects of the Beauty business as this is not the major focus of our readers, but at the end you will have an opportunity to download the entire report, including also the Beauty business, if this subject is also on your mind!

As digital environments come of age, they are transforming from linear and transaction- focused spaces into multi-dimensional, experiential and collaborative virtual worlds.

Tech-savvy and younger cohorts are spending increasing amounts of time in these spaces — from social media and gaming to virtual realities — and are adopting multiversal identities along the way. At the vanguard, digital assets in the form of virtual fashion and non-fungible tokens (NFTs) are offering new ways for consumers to shop, exchange goods and inhabit those identities.

Hyper-interactive and creative digital environments are a natural evolution of how people use technology and reflect the ever-growing amount of time consumers are online. Gen-Z spent an average of eight hours per day on screens in 2020.144 Part of the appeal of virtual worldsis the chance to engage with others and build communities — a need that was exacerbated when global Covid-19 lockdowns put an end to most in-person social contact. As digital spaces become more dynamic, some consumers are participating in “digital campfires,”₁₄₅ around which they can connect with others who share their values, have conversations, tell stories and co-create.

These soaring levels of engagement have spawned a new generation of digital fashion creatives, who are pushing the limits of possibility online. Brands, meanwhile, see the emerging “metaverse,” in which people work, play, socialise and shop, as an opportunity to engage more deeply and creatively with their customers and unlock new value streams.

“There are more and more ‘second worlds’ where you can express yourself [but] there is probably an underestimation of the value being attached to individuals who want to express themselves in a virtual world with a virtual product, [through] a virtual persona,” said Gucci’s chief marketing officer Robert Triefus, citing the 19 million visitors who came to the Gucci Garden within the Roblox gaming metaverse.₁₄₆

The USD176-billion gaming industry, which attracts more than three billion players globally, has a long history of community-building.₁₄₇Meanwhile, the metaverse is becoming a big business, with funding pouring in from investors. Epic Games raised USD 1 billion in April 2021 to accelerate its work in building connected social experiences across a metaverse of linked games and services.₁₄₈

As gaming increasingly becomes an extension of the real world, and with the pandemic supercharging participation, it has become a prime target for fashion brands. In many cases, engagement has taken the form of collaborations with gaming platforms to design virtual fashion assets. Ralph Lauren partnered with South Korean social network and avatar simulation app Zepeto to create a virtual fashion collection, giving users the opportunity to dress their avatars in exclusive products, or appearance-altering “skins.” Gucci has created digital assets for gaming platform Roblox, as well as for Pokémon Go and Animal Crossing.

Some brands have set their sights even higher. After unveiling its Autumn/Winter 2021 collection inthe form of a fully-fledged video game,₁₄₉ Balenciaga teamed up with gaming giant Fortnite to unveil a collaboration including shoppable virtual clothing and physical products. It advertised the partnership across traditional and metaverse channels.₁₅₀

As gaming increasingly becomes an extension of the real world, and with the pandemic supercharging participation, it has become a prime target for fashion brands.

The opportunities in gaming are extensive and offer a platform to engage younger consumers, as well as create buzz with cohorts that would not usually interact with brands in physical formats. Tapping into in-game merchandise further allows brands to monetise digital assets where it is the norm to pay for elevated experiences.

Virtual clothing is picking up momentum across a range of digital environments. “Gamers are famous for buying skins in games [but] we have two sets of [broader] customers,” said Daria Shapovalova, co-founder of DressX, a platform that estimates the total addressable market for digital fashion at USD 31 billion₁₅₁ and has more than 100 partner designers offering digital fashion items. “First, there are those Millennials who immediately understand the idea of digital fashion and are active shoppers of luxury goods; they want to try something new, so they use it to elevate their social media. Then there are Gen-Z customers who are on platforms like Snapchat or TikTok, where video is becoming the main communication tool rather than the still image.”₁₅₂

Indeed, for some consumers, digital fashion is the natural extension of applying social media filters on platforms like Instagram and Snapchat, says Simon Windsor, co-founder and joint managing director at Dimension Studio, an agency that worked with Balenciaga on its video game.₁₅₃

“We’re just at the tipping point of this new era… It starts to change the meaning of fashion itself.”₁₅₄

Beyond social media and gaming, artificial intelligence (AI) and augmented reality (AR) technologies present additional opportunities for new business models leveraging virtual fashion. Online fashion wholesale platform Ordre uses 360-degree view technology to present seasonal collections through online showrooms, offering a complementary channel to facilitate management of luxury wholesale networks. Elite World Group and Tommy Hilfiger have recently partnered on various virtual ventures, including avatars of models walking 3D virtual runways.₁₅₅

Much of the excitement around virtual environments is directed towards NFTs, which have seen an explosion of interest over the past year. NFTs are unique crypto assets whose authenticity and ownership are verified on blockchains and are bought, sold and exchanged in the metaverse, often with cryptocurrency. Their uniqueness means that the value of some NFTs can skyrocket: one created by digital artist Mike Winkelmann — also known as Beeple — was sold at Christie’s auction house in 2021 for a record- breaking USD 69.3 million.156 NFT platform OpenSea exceeded USD 1 billion in sales in the first seven months of 2021.₁₅₇

Proponents of NFTs argue that the recent boom is no flash in the pan. “This is fundamentally going to change digital ownership, creative structures, the creative economy, how we view money even,” said Karinna Nobbs, co-chief executive and chief experience officer of NFT marketplace The Dematerialised. “This is bigger than the internet.”₁₅₈

In fashion, NFTs have a wide range of use cases, ranging from product authentication (see “Product Passports”) to serving as collectable pieces in their own rights. With consumers seeking to collect and invest, digital fashion creators such as The Fabricant, DressX and RTFKT are finding audiences for digital clothing authenticated by NFTs. Meanwhile, some companies are tapping into the excitement around NFTs by experimenting with alternative engagement models: Adidas attracted headlines when it collaborated with The Fabricant and model Karlie Kloss to launch a competition for creators to make their own NFT versions of the WindRdy parka jacket.₁₅₉

In 2021, there was a wave of NFT engagement among luxury players, often via the gaming universe. For its 200th anniversary, Louis Vuitton launched a video game with collectible NFTs partially designed by Beeple. The game contained NFT art that could be acquired by players in a story echoing the journey of the brand’s founder.160 Burberry created NFTs within the Blankos Block Party game, featuring digital vinyl toys that live on a blockchain. Adorned with Burberry’s TB summer monogram, the limited- edition Burberry Blanko Sharky B NFT can be purchased, upgraded and sold. The collaboration also includes branded in-game NFT accessories, including a jetpack, armbands and pool shoes.₁₆₁

Beyond gaming, Farfetch has partnered with digital fashion platform DressX and Crypto.com, a marketplace for NFTs, to launch a virtual collection.

Dolce & Gabbana collaborated with Unxd, a curated marketplace for digital luxury and couture, to create an inaugural nine-piece collection of NFTs sold alongside physical couture.162

With no shortage of marketing hype, there are indications that digital fashion assets can generate significant revenue streams. Dolce & Gabbana’s collection fetched the equivalent USD 5.7 million.163 Still, monetisation opportunities are likely to be contingent on the psychology of scarcity and limited editions driving NFT mania— together with the security of authentication and the potential for community-building that they provide. The most likely fashion segments to lead the way are luxury and streetwear.

What is undisputable is that fashion industry leaders are interested in exploring the potential of virtual fashion?

“We say to any fashion brand we work with: it’s experimental. It’s not always going to work and we can’t guarantee it will work,” said Amber Slooten, co-founder and creative director of The Fabricant, a digital fashion house that helps brands create their own virtual products and has worked with brands including Adidas, Marques Almeida and Buffalo London.₁₆₄

Amid the hype, there are also reasons to exercise caution. One concern is the environmental impact of the blockchain technologies that underlie NFTs and, in particular, the energy required to validate transactions. Cyber security

is also a potential cause for concern (see “Cyber Resilience” on page 97), with counterfeiting and security breaches a significant threat. A recent cyber attack on the artist Banksy’s official website caused a collector to pay GBP 244000 (USD 334000) for a counterfeit NFT.₁₆₅

“To assume that… NFTs or more generally blockchain won’t be an incredibly volatile environment for the next five years is to have forgotten the lessons of history when it comes to the internet,” said Ken Seiff, a managing partner at Blockchange Ventures, a venture capital firm investing in early-stage blockchain technology.₁₆₆ At a minimum, fashion’s foray into the metaverse promises new routes for consumer engagement. This will support creative branding strategies, enable immersive consumer experiences and generate excitement among highly sought-after consumer groups.

Looking ahead, the buzz around NFTs will continue to build as increasing numbers of fashion brands seek paths to differentiation and launch creative experiments. As consumers spend more time interacting online, their interest in collecting and displaying digital objects is likely to deepen. However, they will also seek out opportunities for co-creation and will expect brands to engage with digital assets in a format that is native to the spaces they inhabit, rather than content that repeats across channels.

The crypto fashion opportunity will demand significant investment, experimentation and a new playbook. Brands will need a strategic mindset and a willingness to develop partnerships and harness a variety of talent to deliver high-quality content, either in-house or via third-party collaborations. In an arena characterised by a large amount of hype,it will pay to seek out business cases that spark excitement but remain on-brand.

The crypto fashion opportunity will demand significant investment, experimentation and a new playbook.

To do this, it may be necessary to take a new lens on ROI, focusing on less measurable benefits such a brand awareness and marketing impact, as well as setting flexible targets that are calibrated to potential, rather than focusing exclusively on the bottom line. Flexibility will be key, and brands should remain cautious in deploying their capital.

However, the risks should not deter them from engaging with this rapidly growing digital universe.

EXECUTIVE INTERVIEW

Gucci: Testing Luxury’s Opportunities in the Metaverse

Robert Triefus, Executive Vice President and Chief Marketing Officer, Gucci

Intangible products such as NFTs and digital fashion used in games and other virtual environments are a fast-growing area of interest for luxury brands, but will their experiments in the metaverse pay off? Gucci’s chief marketing officer Robert Triefus believes the immersive world signals a paradigm shift and expects it to drive a ‘very significant new revenue stream’ for the brand in the years ahead.

— by Robert Williams

The metaverse became one of the fashion industry’s hottest buzzwords in 2021, as interest in digital products linked to blockchain-powered non-fungible tokens (NFTs) exploded, and activity on virtual reality interfaces surged as the global fanbase of video games made their presence felt. Luxury brands raced to get a foothold in these fast-evolving virtual worlds, with Gucci among those leading the charge.

In 2021, Gucci auctioned off its first NFT and issued its first-ever virtual sneakers, selling the 3D animated kicks for USD 12 a pair.

Staging virtual brand activations on the Roblox platform and life simulation game The Sims, it has also created assets for Pokémon Go and Animal Crossing. The brand even hired a dedicated team to work on developing digital products under creative director Alessandro Michele.

Overseeing Gucci’s experiments in the metaverse is Robert Triefus, the brand’s chief marketing officer who has been a central player in a multi-year push to build a sprawling and highly engaged online community. But establishing Gucci’s foothold in the virtual realm isn’t just about marketing, Triefus says. In the years to come he expects the metaverse to become a “very significant” driver of revenue growth.

As blockchain technology burst into the digital art world with the emergence of NFTs, Gucci was quick to get involved, auctioning off an NFT for charity in June 2021. Since then, brands including Dolce & Gabbana, Rimowa and Louis Vuitton have also released NFTs. But luxury brands aren’t known for being first adopters of new technologies and NFTs remain a niche market, so what is it about this space that has the industry in such a hurry to participate?

The industry has changed. Whereas back in 2000, naysayers were saying e-commerce could never be a luxury experience, today there is a deeper understanding that digital can lead to enhanced [client] experiences. When it comes to NFTs, it’s going to require a lot more time to understand what they can represent in terms of customer experience or value- add. But you’ve seen a significant number of brands within the sector saying, okay, we believe that NFTs have relevance, we’re not 100 % sure yet what that relevance is but we’re going to pilot [this], we’re going to experiment, and have some learnings and insights as a result.

Why is the audience for NFTs an interesting market to engage with? Is there really significant overlap between luxury consumers and the market for NFTs?

As we think about the Gucci community, we do think about adjacencies, or other communities and cultural groups that potentially intersect. Digital art has been a growing area of cultural intersection with fashion for a few years.

How valuable to you is the intersection that NFTs have with the cryptocurrency community?

Cryptocurrency is linked almost inextricably to NFTs and that’s an area with great future potential. I think cryptocurrencies will progressively become better understood, and also some of the issues surrounding [blockchain’s] sustainability, which have been of concern for NFTs too, will be resolved. It’s an area of test and learn, but I would suggest in probably a year or two these areas will be much more pervasive in terms of how fashion brands are engaged.

The NFT space still feels like it’s only relevant to a fairly narrow swathe of fashion consumers. What evolutions could help pave the way for broader adoption?

One is the actual application. There are opportunities around authentication, providing an additional sense of authenticity and security to customers. Or around added value that comes with specific products, where there may be a narrative linked to it. Digital collectibles may inspire physical manifestations. This will take time, as brands are [ just] beginning to understand how they can add value through NFTs. Then, as with any new technology, the customer equally needs to understand what’s in it for them, how you purchase NFTs, how you potentially resell them. That learning experience is essential as a foundation.

Isn’t there also an issue around customers’ ability to enjoy them? It’s notnecessarily intuitive, how you would admire an NFT or show it to somebody.

Yes. The ease with which theend-user can understand, benefit and appreciate what NFTs offer still has a way to go.

NFTs’ valuations skyrocketed in early 2021 but fell significantly later in the year. As a luxury brand, whose business is based on selling things that are meant to retain their value over time and be quite durable, do you have concerns about the reputational risk of being afirst mover in a space like this?

When you test and learn, you always do that with an understanding that the learnings may move you not to proceed. Is it better to test and learn or sit on the sidelines? If you ask me, it’s better to test and learn.

Speaking about the metaverse more broadly — whether it’s NFTs or your recent projects on virtual reality interface Roblox, where you staged a Gucci Garden exhibition and sold high-top sneakers — what are some of the top-line learnings your team gained from these experiences?

There’s the dynamism of the gaming world, which has grown significantly, probably because of [pandemic] lockdowns, but also because of the innovation that is going into the experience. Then there are more and more second worlds where you can express yourself. There is probably an underestimation of the value being attached to individuals who want to express themselves in a virtual world with a virtual product, [through] a virtual persona. The idea that everything has to be physical is very quickly being disproven. We had 19 million visitors to the Gucci Garden within the Roblox metaverse.

Could you tell us a bit about how fashion brands’ deals are structured with emerging players in the metaverse, like Roblox or The Sims? Are any brands actually seeing revenue from these initiatives so far, or is it more of a marketing investment?

It depends on the objective. It might be about branding, or a revenue share, or a combination of the two. I won’t tell you how we structured our different deals [but] what I can tell you is that we have proven to ourselves through these collaborations that the virtual world can create a very significant new revenue stream.

How significant? How lucrative do you think the metaverse could become for brands and how soon can it be monetised?

Roblox has a remarkable market capitalisation… and they’ve only been around for a very short while. This demonstrates that they have become very successful at understanding how to monetise virtual experiences. We know that people are willing to pay good money for NFTs, for digital collectibles, and to have a second life in the metaverse. So, the revenue potential is absolutely there. One has to understand how to curate the experience as in the physical world, and make sure thatexperience is delivering what the customer would expect from the respective brand.

Still, with some initiatives in the metaverse it’s hard not to suspect the brand is doing it for the headlines. How much of the activity we’re seeing in this space is just tech-washing?

Of course, to be perceived as a brand that is innovative, that is leading potentially the industry or the sector, those are great perceptions. But I think Gucci has been recognised as a brand that is authentic, that doesn’t put marketing ahead of trust with its community. There’s too much at stake in these innovations. You’ve got to go into it with your eyes open and a belief that they can ultimately benefit thebusiness and the brand. We have a dedicated team that is focused on this area. We really want to be able to understand what it is like to exist in the metaverse.

One thing that feels like a sticking point with virtual products is that they’re often limited to one specific platform. Consumers are bouncing around between social networks and games, so does it make sense to buy a digital product that is only usable in one of them? Are any solutions emerging for better compatibility?

In terms of collectibles and digital assets, we certainly want to try to create value by allowing assets to be used in multiple universes or metaverses. Where that isn’t feasible, we have to look to create something that is appropriate and authentic to a specific metaverse. With The Sims and with Roblox, the way we entered those experiences and those worlds was to co-create with creators from those communities, who can ensure there is authenticity.

Social media platforms remain the “second world” we’re most familiar with— and it’s one where Gucci is very active. Since the pandemic, you’ve left the fashion week calendar and have been setting your own pace for releasing designs and content online. What’s working and what isn’t right now in terms of your social media investments?

Because of Covid, we decided not to put on physical events [until] our first physical fashion show for some time, [which was] on November 2nd in Los Angeles.

The way that we have been able to navigate these unusual circumstances has been to exploit all the digital platforms that are available to us. In the West, I’m thinking of Instagram, Snapchat, TikTok, Twitter, YouTube. Then, in China and in the East, there’s another whole ecosystem.Each platform’s community is based around a certain type of experience, and if you go on to that platform with an experience that isn’t relevant, it’s not going to be successful.

This interview has been edited and condensed.

The use of social media to discover and shop for fashion gained traction over the course of the Covid-19 pandemic as customers — unable to visit stores or socialise in-person during global lockdowns— spent more time at home scrolling through their feeds. Indeed, 74 % of consumers say that they are now more influenced to shop via social media than they were before the pandemic, and 70 % cite clothing as one of the product categories they shop for most on social media.₁₆₇

While Western markets may still lag China in rates of adoption, social shopping has gained a global foothold and is poised to grow in the year ahead as social media giants from Facebook and Instagram to YouTube and Snap Inc. invest heavily in shopping features and take advantage of new functionalities. Looking forward, in the US alone, annual sales through social commerce are expected to surge from approximately USD 37 bbillion in 2021 to USD 56 billion in 2023 (this includes sales of all products and services agreed on social platforms regardless of the method of payment or fulfilment).168 By 2027, worldwide social commerce sales are set to reach over USD 600 billion.169

In some markets, social media is fast becoming a preferred way of shopping and interacting with brands, as social platforms are increasingly augmented with advanced technology. Indeed, social commerce — from in-app checkouts on social media platforms to sales transactionson livestreams — is already booming in China, where super-apps like WeChat offer users a wider array of functions than just social networking and messaging services, and social media players like Douyin and Xiaohongshu have boosted their e-commerce capabilities.170 In 2021, sales from social commerce across all sectors in China are set to top USD 363 billion (which includes products or services purchased on social networks regardless of the method of payment or fulfilment), up 35.5 % from the previous year.₁₇₁ This is approximately 10 times higher than social commerce sales in the _US.172Product discovery and engagement with brands on social media is already commonplace across most global markets, with customers used to seeing brand activity and references alongside social exchanges with one another and influencers and within entertainment platforms. In fact, nearly half of US TikTok users say they have purchased a product or service from a brand after seeing it advertised, promoted or reviewed on the platform.173 However, the next frontier for social commerce in Western markets is at the narrow end of the marketing funnel — seamlessly checking out in-app and paying for products within the social media ecosystem — where a reduced number of clicks to convert an impression into a sale offers a promising route to sales for brands.

As such, social media platforms are making moves to embed the entire shopping journey — from discovery to checkout — into their core user experiences with functionality ranging from livestream sales and integrated product catalogues to augmented reality try-on. Fashion is the largest single category sold via social media in the US, as well as the leading category for livestream events,₁₇₄ suggesting that brands will find consumers willing to shop on these channels.

“There’s no reason to say that just because we [in the West] don’t have [companies like Alibaba [whose platforms Tmall and Taobao have livestreaming functionality baked into their ecosystems], we won’t have [livestream] e-commerce,” said Sophie Abrahamsson, chief commercial officer at Bambuser, a B2B player equipping brands with livestream technology that in 2021 entered into a master agreement with LVMH. “I don’t see it as an obstacle, it’s just a different starting point.”₁₇₅

Engaging with social commerce formats including those in livestream channels in China can provide brands with learnings that are beneficial when adapted for other geographies and platforms. Tommy Hilfiger held a livestream in China that attracted 14 million viewers and sold 1,300 hoodies in two minutes, which encouraged the brand to extend its livestream programme to Europe and North America thereafter.₁₇₆However, specific market characteristics in China — including longstanding consumer comfort with in-app shopping and the outsized influence of key opinion leader (KOL) hosts for livestreaming — cannot be simply replicated in other markets. “Tech, corporations and consumers need to be at the same pace. In China, all three things came together way before Europe and the US,” said Mei Chen, Alibaba Group’s head of fashion and luxury for the UK, Spain and Northern Europe.177

Nevertheless, interest in social commerce is growing fast in markets like the US, where the number of people who make at least one purchase on a social channel during the calendar year is expected to be 50 % higher in 2022 than

it was in 2019, reaching 96 million customers.₁₇₈ In the UK, where consumers have been more

hesitant, compound annual growth rates for social commerce usage are still expected to be more than 15 % from 2019 to 2022, growing a further 9 % in 2023 — suggesting that 15 million people will have made a social commerce transaction during that year.179

Social commerce consumers typically skew young, meaning the medium has special appeal for brands targeting Gen-Z and Millennial consumers. This means there is still significant room to grow as consumers become more comfortable with in-app payments and platform functionality improves.

Brands have a window of opportunity to tap into local consumer needs and build strategies that capture market share early.

To connect brands with consumers, global social media giants are doubling down on developing in-app shopping experiences.

Instagram, which launched its Shop feature in 2020 and partners with brands such as Chloé, Michael Kors, Oscar de la Renta and Marc Jacobs to make products shoppable either in-app or by steering customers back to their own websites, is ramping up shopping features such as Drops. This is a new destination within the app where consumers can discover and buy the latest and upcoming product drops from brands like Adidas.₁₈₀

Meanwhile, Snapchat is applying its augmented reality capabilities to enable users to virtually try on clothes and accessories from brands such as Prada and Piaget, and TikTok has been expanding commerce partnerships and functionality, testing livestreamed shopping with select brands.₁₈₁ In the US, during Walmart’s first shoppable livestream fashion event with TikTok, it gained seven times more views than anticipated and grew its TikTok followers by 25 %, according to William White, chief marketing officer for Walmart US.182 In August 2021, the social video platform announced an expansion of its partnership with Shopify including a pilot test of TikTok Shopping with select merchants across the UK, US and Canada, which could help brands enable social commerce.183Looking beyond tech giants and incumbents, new venture capital-backed entrants, such as Flip and Chums, are offering fashion brands opportunities to engage with shoppers on hyper-immersive platforms, while platforms such as Amazon-owned Twitch, Discord and Clubhouse (which do not currently offer in-app checkout features) enable brands to target specific demographic cohorts. In the case of Twitch and Discord, for example, their gaming-enthusiast userskews male, attracting attention from menswear and streetwear companies such as sneaker marketplace StockX, which joined Discord to promote its latest products.184

Brands looking to leverage community- specific platforms as a way of boosting the discovery phase of social commerce should take care to engage authentically with users. “You don’t have to be like the audience, you don’t have to pretend [to be] one of them if you’re not, they’ll see straight through it. All you have to do is show you understand them,” cautioned Adam Harris, global head of Twitch’s brand partnerships studio.185 Meanwhile, outside the tech ecosystems of the US and China, specialist social commerce platforms are gaining ground such as Trell in India, which saw investment from the likes of H&M Group.186

While social media channels have typically been viewed as a means to increase reach and drive traffic to brand-owned websites or multi-brand e-tailers — owing to limited platform functionality, hesitation on the part of brands to relinquish control of checkout and payment data to third-party channels and previously lukewarm reception from consumers — social commerce is reaching an inflection point. “The old ‘buy’ button doesn’t work… you are taking your shopper away from their online experience to fulfil a purchase…[so] you burst the bubble. You create what we call an ‘abandoned basket effect,’” said Maria Prados, head of vertical growth teams at Worldpay.₁₈₇

Soon, however, even seamless payments will become table stakes, so brand laggards must overcome the reluctance to surrender control and

increasingly have conversion in mind when investing in social. With the number of fashion brands adopting Instagram as a sales channel growing, more are likely to follow their lead next year, moving away from a focus purely on reach and seizing opportunities to generate paying social customers.

Largely thanks to WeChat, China has seen huge strides in frictionless payments, shortening the sales funnel by reducing the time and friction between discovery and purchase. The ability to interact with sales agents on WeChat to make purchase decisions, and the importance of mini- programmes both on WeChat and other platforms in the Chinese social ecosystem, point to a future integrated model that global platforms could look to for inspiration.₁₈₈

Brands that may have had concerns about relinquishing valuable customer and conversion data to third-party channels will need to devise innovative ways to collect data, such as through discount code-driven sign-ups. Alternatively, some brands are choosing to build their own in-house social channels. For example, US retailer Nordstrom created its own livestreaming platform in 2021, where it hosted shopping events at which customers could chat and purchase products from featured brands such as Burberry.₁₈₉

Brands bold enough to test social-first strategies will be rewarded as younger consumers increase their time spent on digital platforms and spark trends that are born on social media.

“Whether or not Gen-Z is your primary consumer, they definitely set the trends and drive brand heat. And when you look at where trends start and where things go viral, it is almost always with Gen-Z,” said Jenny Campbell, chief marketing officer at Kate Spade.190

To capture the demand for social commerce, brands will need to implement a strategy that can scale fast. The speed at which TikTok took the world by storm is just one example of the pace of uptake, so fashion brands will need to be agile to ensure they are meeting consumers in the digital spaces where they are spending time. As such, companies should tailor their approach for existing mainstream platforms, while conducting A/B testing on emerging platforms to experiment with reaching specific customer segments.

However, brands will need to apply a tailored approach to users of each platform; while some might welcome a more playful style of engagement, such as those on TikTok, others are more conventional. There are regional differences, too, with consumers in some Asian markets approaching livestreams with more of a transaction-forward, deal-focused mentality than consumers elsewhere. While navigating these nuanced considerations, brands will also need to stay abreast of the latest trends and innovations, as currently niche platforms could very quickly become mainstream — or currently buzzy platforms could just as quickly lose their edge over rivals.

Looking ahead, as shoppers place increasing importance on convenience, brands that can unlock the potential of social commerce by offering simple, frictionless shopping will be well-positioned to unlock revenue streams. Indeed, brands thinking ahead to the longer-term growth of social commerce and permanent changes in global consumer shopping habits will use next year to test and learn from approaches that leverage social media platforms to create seamless shopping experiences from product discovery to checkout.

EXECUTIVE INTERVIEW

Snapchat: Enhancing the Social Shopping Experience

Rajni Jacques Global Head of Fashion and Beauty Partnerships, Snap Inc.

Prada, Dior and American Eagle are among the fashion brands harnessing Snapchat’s augmented reality lenses, which overlay digital images on the real world to create immersive user experiences or allow shoppers to virtually try on products. As Snap Inc. works to make its social platform more shoppable, the company’s new global head of fashion and beauty partnerships, Rajni Jacques, is tasked with bringing more top brands into the fold.

— by Marc Bain

After years as a fashion director at Condé Nast titles Allure and Teen Vogue, Rajni Jacques switched gears. In June 2021, she moved to Snapchat’s parentcompany, Snap Inc. to serve as its global head of fashion and beauty partnerships. Jacques joined ata time when the platform and its competitors were making big pushes into social ommerce, launching more shopping capabilities directly within their apps. For Snap, which considers itself a camera company first,those capabilities have primarily centred on augmented reality (AR) and features such as virtual try-on that have drawn brands and retailers ranging from Prada and Dior to American Eagle and Champs Sports.

The aim thus far, however, has not been to turn shopping into a revenue stream by grabbing a cut of sales. Snap says it neither takes a commission nor charges fees for brands to use its AR products. Instead, the company, which derives effectively all its revenue from advertising, views shopping as a way to bolster its appeal to users and brand partners alike. Jacques’s mission is to attract and assist those fashion and beauty brands looking to use Snap’s technology to connect with its largely Gen-Z audience.

Snapchat recently launched a number of new products and features to support shopping on the app, such as expanding virtual try-on, improving the look and movement of fabric, and introducing API-enabled lenses that let brands create content based on real-time product inventory. Why is the company investing so much in shopping?

We think of ourselves as [a camera company] first, and when it comes to AR, we have about 200 million Snapchatters engaging in AR every single day. That truly is revolutionising how fashion and beauty brands operate. We’re harnessing a different type of power when it comes to shopping [and] when it comes to retail, unlocking a whole new range of experiences for Snapchatters and people on the app to engage with products. Everyone gets to try on a variety of different products from

makeup to shoes to sunglasses to jewellery, and there’s way more that’s coming down the pipeline. We are investing heavily in it because we know that brands are looking to, in a way, future-proof their businesses.

There are different ways shoppers can discover and buy products through Snapchat right now. There’s the approach taken by retailers like American Eagle, which has set up a Shop tab on its profile page that users can browse, much like a regular e-commerce site, or there’sDior’s approach with AR for its B27 sneakers to “Shop Now,” which takes you to the product on Dior’s e-commerce site. What else is Snapchat doing to make it easier or more enticing for shoppers to buy products directly in the app?

We are long-term investing in augmented reality and personalisation for everyone.

As consumers, we love personalisation. Snap has been laying the groundwork for an improved online shopping experience and creating value for the shopper but also for the fashion brands, to help reimagine what their fashion [point of view] is [and] help reimagine their campaigns. AR is really at the forefront of this. And it is working. For instance, Dior’stry-on campaign resulted in over [six times the] return on the ad spend. Gucci, when we did all their sneaker try-ons, and even their beauty stuff, reached about 20 million people.

But there are so many different ways brands can use our technology. We worked with Farfetch and were able to do voice-enabled controls, where shoppers can say what they’re looking for, like “I’m looking for a polka dot jacket.” We did something with Prada where they tapped into our gesture recognition, where it allows you to stand in front of the camera and with your actual hands swipe so you can change the colour.

If I’m a brand, what’s the value of trying to attract shoppers on Snapchat versus of the social platforms, particularly since Snapchat’s audience may be smaller than some of its bigger rivals?

It’s all because of AR. To be able to play with a brand is exactly what Snapchat gives you [and] makes it very different in the marketplace. AR allows you to put [clothes] on. When it comes to beauty, being able to swipe different colours on your eyelids, different colours on your cheeks, or different lipstick colours.

There’s nothing like having an immersive experience.

Are there certain categories of products that shoppers are more willing to buy in the app?

Beauty is at the forefront of that, but then accessories: bags, shoes, jewellery.

Is Snapchat doing anything specifically to attract beauty brands and help them to engage users on the app?

Oh, yes. I work on that side with the bigger companies, but then I also make sure to work with smaller companies, diverse companies. I partner with a couple of smaller companies [like] Ace Beauté [and] Kaja Beauty. They’re niche but they have such an array of product. Allowing them to create lenses — we have something called the Lens Web Builder — where they can go in and create their business profile and create their own lenses themselves, so they don’t necessarily have to have a tech arm to be able to do that. That allows them to be in the game with your MACs or [other] big companies.

One of the areas where Snapchat has really expanded its capability is virtual try-on. You started with Gucci and shoes, and more recently expanded into other categories such as clothing and accessories. Which other fashion brands are using the function and what sort of products are they offering?

Your Pradas, your Diors, your Guccis. One of my favourite activations we did was with American Eagle. We did this thing with Connected Lenses. Imagine it being social shopping, going back to the days where you went with your friend to the mall and shopped. We created Connected Lenses to allow that immersive experience to happen. It helped consumers experience the same lens together, so they’re in the same room together, like friends are actually transported to the American Eagle virtual store and can live chat, select outfits and do all those things that you would do in real life. We’ve done something with Piaget where we have a wrist try-on, so you can actually put your hand in front of the lens and see what a watch looks like on your wrist. With Kay Jewelers we did earring try-on. There are so many different brands that use the AR lens.

Shopping directly on social platforms in the US and Europe still happens on a relatively small scale compared to China. For brands and retailers, the value is still mainly as a place to marketto shoppers. How are brands using Snapchat as the top of their marketing funnel?

Brands look at Snap and say, “Wow, there is a lot of innovation there. How can we be a part of that?” I work with them to create top-of-the-funnel business pushes and help them with their marketing plans: What can we do that, one, shakes things up? What can we do that, two, uses our products in the best way possible, so that everyone else can see all the cool things that we can create?

Are there any forms of marketing that seem to work better on Snapchat than others, specifically for fashion retailers?

When it comes to fashion, you have to truly give an experience that someone hasn’t seen before, or you have to give an experience where they feel like there is an emotional connection to what you’re giving them. Dior did a lens for one of their fragrances, and it changes your environment with all these flowers. You could be on the dingiest street in New York City, and you use this lens, and that dingy street gets transformed into something else. Allowing your customer to be part of something and experience something on their own using the lens is what really seems to work .Gucci did a lens, and it was tied to when they did a collaboration with The North Face. It’s a camping experience. You Can literally go from day to night through that, and it transports you to being outside, and really understanding what that collaboration is about. Anything that allows someone to feel something is obviously the way to go, as opposed to somethingthat is very like, “Here is my shoe. Buy it.” It has to have a narrative, a story, a feeling behind it for people to connect.

Where do fashion and beauty partnerships fit into Snap’s larger goals as a company?

Being the head of fashion and beauty, the mission is to bring the best organic opportunities across the Snapchat app, and Snap Inc. as a whole. That’s the broad scope of it: to bring the top brand partners, really having them be part of our ecosystem. We define organic as a non-revenue opportunity. Hopefully, that will lead to deeper investment across Snap’s products from the partners. We don’t want it to be one-and-done.

Are there any lessons you were able to bring from your background in fashion media that have helped in your role at Snapchat?

I came from Condé [Nast] as fashion director of Teen Vogue and Allure, but my job wasn’t necessarily just being the fashion director. As magazines started to get smaller it was about me doing a lot more. Not only did I look over the covers and the centre of book and stuff like that, but I also worked in brand partnerships. I also did branded content. I also worked with the business side to make sure that, alright, if we’re going to have any experiential moments that tag back to that editorial title that I was at, what does that look like? Doing all those things, being able to create, and using that head gives me a broad range to use everything that I learned.

This interview has been edited and condensed.

CIRCULAR TEXTILES

One of the most important levers that the fashion industry can pull to reduce its environmental impact is closed-loop recycling, a system which is now starting to be rolled out at scale, promising to limit the extractive production of virgin raw materials and decrease textile waste. As these technologies mature, companies will need to embed them into the design phase of product development while adopting large-scale collection and sorting processes.

Globally, the fashion industry is responsible for around 40 million tonnes of textile waste a year, most of which is either sent to landfill or incinerated.191 Textile production, meanwhile, consumes vast quantities of water, land and raw materials. Engaging in closed-loop recycling is seen as a critical opportunity to both reduce the extractive production of virgin raw materials and limit textile waste. Closed-loop systems recycle materials again and again, so that they theoretically remain in constant circulation.

Textile production is more resource- depleting than many other sectors. In the European Union, for example, the textile sector is the fourth- biggest consumer of primary raw materials and water (following food, housing and transport),192 while the industry’s reliance on fossil fuel-based textiles like polyester only adds to the challenge.

Yet there are pockets of the global fashion industry that are starting to get serious about addressing these challenges at scale by working towards developing closed-loop recycling processes that have the potential to limit textile waste, reduce carbon footprints and partly upend fashion’s extractive business model.193

Currently, less than 10 % f the global textile market is composed of recycled materials,194 and this is largely the product of open-loop recycling using PET (polyethylene terephthalate) bottle waste, which does not address the need to recycle materials from the fashion industry and has been criticised for breaking the well-established closed-loop process of recycling plastic bottles into other plastic bottles.195 If the industry is to reduce the volume of waste going to landfill and limit the extractive production of textiles, closed-loop recycling systems will be required at scale.

The shift to more closed-loop systems is underway, driven in part by regulatory efforts to support a circular economy, which aim to relieve some of the pain points relating to waste

collection and sorting. The EU’s Circular Economy Action Plan, scheduled for adoption in the third quarter of 2021, incorporates an objective to ensure circular economy principles are applied

textile manufacturing, products, consumption and waste management.196 Meanwhile, the EU’s Waste Directive Framework requires countries to separate all textile waste by 2025, and several European nations have implemented extended producer responsibility schemes, making brands and retailers responsible for post-consumer waste and requiring financial contributions from producers for the collection, recycling and reuse of products.197

Regulators should keep on putting that pressure on markets,” said Patrik Lundstrom, chief executive of Swedish textile recycling company Renewcell. “Every country needs to take responsibility and create that circularity.”198

China published a five-year plan in July 2021 to develop its circular economy by promoting recycling, remanufacturing and renewable resources. In the US, the National Institute for Standards and Technology is making progress

in its ambition to facilitate a circular economy for textiles.199 Still, if the industry is to align with

global climate objectives and its own commitments on sustainable materials, it will also need to take action at a brand level to make a difference.

One challenge the industry faces is achieving sufficient scale in closed-loop processes. However, recent innovations are starting to reach maturity, moving from pilots to proofs of concept on industrial levels.

If the industry is to align with global climate objectives and its own commitments on sustainable materials, it will also need to take action at a brand level to make a difference.

Mechanical cotton recycling, through which cotton is shredded into reuseable fibres, has been in use for a long time. One example of mechanical recycling is the large-scale pilot in Bangladesh by the Circular Fashion Partnership, led by the Global Fashion Agenda, which aims to capture and direct post-production waste back into the productionof new textiles, as well as developing solutions for deadstock. The partnership plans to roll out to countries including Vietnam and Indonesia.200

Mechanical cotton recycling has historically been more difficult to implement for garments that are already worn, mainly due to challenges in collection and sorting. As a result, less than 1 % of cotton was recycled in 2020.201 However, among recent initiatives, Hong Kong-based yarn spinner Novetex Textiles, in collaboration witthe Hong Kong Research Institute of Textiles and Apparel (HKRITA) has developed a method called The Billie System for the mechanical recycling of cotton blends. The system does not consume water or produce chemical waste and currently processes up to three tonnes of fabric per day.202

To enable recycling of the various textile fibres on the market, more innovative recycling solutions other than shredding are required. For non-blended materials, a number of industrial- scale solutions are beginning to hit the market, and further capacity is set to become available. For example, Renewcell has partnered with brands including H&M and Levi’s and has an agreement with Beyond Retro’s parent company Bank & Vogue, which supplies post-consumer waste to

Renewcell.203 Renewcell is building a new plant that will be able to recycle 60,000 tonnes of textiles a year by 2022. Meanwhile, US materials company Eastman is investigating using polyester in its new USD 250-million recycling plant.₂₀

One of the technical challenges facing the industry is the high proportion of garments made from material blends such as cotton and polyester, which make them hard to separate. Still, after years of research and development and pilot ventures, this is another area that is reaching maturity and scale. In Europe, viscose producer Lenzing and recycling company Sodra are working in partnership to increase the annual capacity of Sodra’s technology for blended fibre, with the goal of processing 25,000 tonnes of textile waste per year by 2025.205 In Turkey, denim company Isko has signed a licensing agreement for the “green machine” technology developed by HKRITA, which recycles cotton and polyester blends.206 The technology is also being scaled with partners in Indonesia.207 In Australia, BlockTexx is building a textile recycling facility for polyester-cotton blends that aims to recycle 10,000 tonnes a year by the end of 2022_.208

A critical piece of the used clothes recycling puzzle is collection and sorting. “If there can be larger-scale collection and sorting, that would help us tremendously,” said Ronna Chao, chairman of Novetex. “I have limited space where The Billie System is housed, so I can’t be the collector, storer and sorter all at once… [but] if we can partner with, for instance, NGOs or other players within the industry [in other countries], where they can do the collection and the sorting… then we can process that in a more meaningful way.”209

To that end, authorities, waste companies and brands are making efforts to develop solutions.

These offer some promise, but further efforts are required, including moving from manual to^automated sorting at scale. For example, in Sweden, Sysav waste treatment and recycling company opened the world’s first industrial-scale, fully automated textile sorting plant in 2020, with the capacity to sort 24,000 tonnes of textile waste a year.210 In the same year, Belgium-based Valvan Baling Systems launched Fibersort, an automated sorting machine that can sort around 900 kilogrammes of post-consumer textiles per hour_.₂₁₁

Some companies are also pioneering digital solutions to manage material flows. Sorting for Circularity, created by Fashion for Good in 2021, is planning to launch a digital platform on which textile waste from sorters can be matched with recyclers. Brands including Adidas, Bestseller and Zalando are facilitating the project. In addition, a number of brands are helping to solve the sorting problem by encoding detailed information about materials into products with digital identifiers (see “Product Passports”).

A critical piece of the used clothes recycling puzzle is collection and sorting.

While these initiatives show the industry is making progress, some issues remain to be resolved. One significant challenge is that recycling facilities are sometimes far from the source of the feedstock, which could lead to significant emissions resulting from long-distance transport.

“We’re taking clothes from [Asia] and bringing it all back to Sweden, making new Circulose [material], stripping it back and then making new viscose fibre. However, our next plant is going to be next to a harbour [and], of course, in the long-term, we probably want to have a plant also in Asia, and maybe one in the Americas,” said Lundstrom of Renewcell. “There will be capex investment needed to make all this happen. How do we make that as low as possible and manage that? So that’s another trade-off with going circular.”₂₁₂

Experts mostly agree that closed-loop recycling will not realise its potential until products are specifically designed for that purpose, for example by facilitating the easier separation of materials through design. Claire Bergkamp, chief operating officer at Textile Exchange, a nonprofit aimed at improving the environmental standard of raw materials production, suggests that this also means incorporating the intention to recycle into design curriculums and industry-wide organisational thinking: “What’s going to happen to the product when the first user is done with it?

Is it durable? Will it have a long enough life? That’s the crux. If you are intentionally making something that is not long-lasting, it needs to be recyclable,” she said_.213

For that reason, some parts of the industry are coalescing around common design standards, such as the Jeans Redesign Project by the Ellen MacArthur Foundation. By May 2021, 80 % of the project’s participants had made fabrics or jeans that complied with the guidelines.214 Additionally, designers have more access to software that can support design with recycling in mind, such asthe Circular Material Library from Circular Fashion, which showcases materials that have been tested and validated for future recyclability.215 Furthermore, innovations such as Ecocycle, a dissolvable thread recently launched by industrial thread company Coats, are making the recycling process more efficient, unlocking the removal of non-textile components and facilitating easier sorting of materials from the same garment.

“We know that it will be more challenging for some fashion brands — probably SMEs, for instance — to invest in closed-loop solutions at this early stage in the technology’s development,” said Shaway Yeh, founder of Shanghai-based fashion innovation and sustainability agency Yehyehyeh. “But designers really do need to make meaningful efforts to embed this principle in their studios now, if they haven’t already. The creative teams in the business should be incentivised by leadership to harness some of their innate creativity toscale up circular material use. It’s just a matter of priorities.”216

As an increasing number of fashion players commit to circular materials, scaling will be essential in collection, sorting and recycling.

However, the rollout of industrial processes will drive down prices and boost demand for garments made from circular materials. To maintain a competitive advantage and secure access to circular textiles, fashion players may need to invest directly in recycling facilities and contribute to finding solutions for collection and sorting. Scaling, of course, will require capex and will mean decision- makers will need to look past the still comparatively cheap costs of virgin materials.

To be sure, closed-loop recycling processes also present environmental challenges, including greenhouse gas emissions and significant water use, with some critics suggesting that the reduction in impact from closed-loop processes will not be enough to slow down fashion’s negative impact on climate change.217 “[Closed loop] is not the silver bullet… the silver bullet is producing less stuff,” said Bergkamp of Textile Exchange.₂₁₈

However, seen in the context of comparisons with open-loop — or indeed linear — models,closed-loop processes are an important part of a wider system change for circularity. “Recycled always has lower impact [than linear]. There’s no questioning it,” said Bergkamp. “It’s probably a perfect solution for an imperfect situation.”₂₁₉

While there is reason for optimism that many closed-loop technologies will reach industrial scale in 2022, fashion leaders will need to approach the challenge holistically, incorporating circular textile solutions into a wider effort to eliminate toxic chemicals, decarbonise the supply chain and reduce emissions, if the industry is to significantly reduce its levels of environmental harm.

In fashion, closed-loop recycling is when textile product waste (both post-production and post- consumer) is recycled into new textile products so that the materials remain in constant circulation (garment-to-garment).

This process contrasts with open-loop recycling, in which one product is recycled into a different product, simply delaying the material from going into waste once it cannot be recycled again.

Source: Simplified form of a new Textiles Economy: Redesigning Fashion0s Future, Ellen Macarthur Foundation with Anlaysis by McKinsey, November 2017

EXECUTIVE INTERVIEW

Novetex: Encouraging Brands to Raise Their Game on Circularity

Ronna Chao, Chairman, Novetex Textiles

As fashion brands look to pursue closed-loop recycling solutions, it is increasingly important to engage with suppliers who can help them move toward sourcing circular materials.

Novetex Textiles has developed its own mechanical recycling process — a waterless, mostly automated system that produces no chemical waste — but the company’s chairman Ronna Chao says reaching industrial scale

and mass adoption of the new technology is a ‘chicken-and-egg’ conundrum.

— by Rachel Deeley

Material innovations have long been front of mind for Novetex Textiles chairman Ronna Chao, but full circularity is a more recent endeavour at her family business, which spins yarns like Merino wool, cashmere and cotton to be shipped off to textile mills and knitters. In 2019, Chao negotiated a partnership with the Hong Kong Research Institute of Textiles and Apparel (HKRITA) and the H&M Foundation to develop a patented mechanical recycling-process: one that is waterless, chemical waste-free and almost entirely automated.

The six-step Billie System, named after Chao’s late grandfather and Novetex’s founder, sees unwanted fabric sanitised, separated from hardware like zippers and buttons, chopped to size, sorted by colour, shredded and sanitised again, then shipped as spools of fibre from Novetex’s Hong Kong headquarters to be spun into

new yarn at its other factories in nearby Zhuhai, mainland China. As fashion brands’ interest in circular principles continues to grow, Chao discusses some of the remaining sticking points — from the limitations of recycled fibres to logistical and regulatory roadblocks — and outlines where the industry’s biggest players need to step up.

You’ve previously said that all your clients — both textile mills and consumer-facing brands — are now prioritising sustainability, and that Novetex’s work is just one part of the bigger picture. What else needs to change across the value chain to create a truly circular economy for apparel?

I really think brands can do a great deal by sharing their stories, and the biggest barrier that I think we at The Billie [System] see nowadays is that when a lot of these brands come to us, they want to work with us, and they’re very enthusiastic, but they do not want us to mention their names, they do not want to tell a story, and so the good work that they’re doing in terms of sustainability and circularity is not widely known.

How could brands tell a better story about the closed-loop recycling that’s now available from players like Novetex?

It’s not just [about] having a label on the garment that says, “I used to be an old sock,” it’s more advocacy, maybe working with universities, working with research institutes… I thinkit’s also good to tell the story of partnership, so if it’s with a certain sorting company, orworking with a certain logistics company, the story of different types of partnerships along the way, that could be very meaningful. The more people get involved [and] join this consortium, the better… Maybe storytelling is not the right term, and advocacy sounds too political— but really pushing it out. If somebody is doing something good, why don’t they want to tell the world about it? That’s what I want to say, because when they tell the world about it, that could really result in multiple layers of influence and a change in mindset and behaviour.

As a yarn producer, Novetex is quite far-removed from the final stage of garment manufacturing. How important is it that brands engage directly with you, rather than relying on the dialogue between yourselves and the next tier of suppliers?

It’s very, very important, and I think over the last two decades our role has changed from just dealing with the knitter to very often dealing with the designer and the brands directly… which is wonderful… We also have our role to play in pushing… the movement forward. There are two [practical] ways to work with The Billie [System]. One is only to provide textiles for processing without buying any upcycled products from The Billie; the second is to purchase all the knitted products from the provided materials for a closed- loop cycle.

What are some of the remaining challenges when it comes to integrating recycled materials into existing apparel supply chains?

That is a question that I would love to hear the answer to from the brands. For us, we’re on the the way, that could be very meaningful. The more people get involved [and] join this consortium, the better… Maybe storytelling is not the right term, and advocacy sounds too political— but really pushing it out. If somebody is doing something good, why don’t they want to tell the world about it? That’s whatI want to say, because when they tell the world about it, that could really result in multiple layers of influence and a change in mindset and behaviour.

What are some of the remaining challenges when it comes to integrating recycled materials into existing apparel supply chains?

That is a question that I would love to hear the answer to from the brands. For us, we’re on the other side, trying to convince people, that “maybe [sourcing recycled materials] is a little bit pricier than what you’d expect, but this is something you must do.” You may not be 100 % circular or 100 % sustainable from day one, but that has to be something that we move towards.

Are there issues with scaling and reaching that critical point of maturity in the technology?

Well, [brands] don’t discuss scale with us, because they’re not asking us for 20,000 pounds of upcycled textiles. In the few conversations that I’ve had with brands where we’ve gone a little bit beyond [that and] touched… on the topic of, “let’s close the loop,” what I’ve heard would be [questions about] quality and cost. Sometimes they do ask about scale, but it seems like they expect quality to be very, very high [and for] the cost to be much lower. They’re giving us a mishmash of things, and they want something that comes out from all of that to be very useable and uniform. Perhaps there’s a disconnect between what they’re giving us, or what they think can be done with their textile waste, and what they’re looking for.

Cost is certainly a factor; recycled fibres are typically more expensive than their virgin counterparts. When do you expect to see economies of scale, so that the cost of recycled fibres will be just as affordable, if not cheaper? It’s a real chicken-and-egg situation, because in order to reach that scale, we would need many, many more people to adopt using recycled fibres and yarns in their design and production. Everything is connected; if consumers demand more of it, then the brands will make more, and then they’ll place more such orders with us.

In order to reach that scale, we would need many, many more people to adopt using recycled fibres and yarns in their design and production.

The Billie System currently secures most of its feedstock from B2B partnerships with fashion companies and hotel groups, which can provide unsold inventory, bedsheets or old uniforms, but is there an opportunity to bring post- consumer fashion waste into textile-to-textile recycling?

Right now, if there can be larger- scale collection and sorting, that would help us tremendously. I have limited space where The Billie is housed, so I can’t be the collector and the storer and the sorter all at once. We always

talk about partnerships; if we can partner with, for instance, NGOs or other players within the industry [in other countries] where they can do the collection and the sorting, then let’s say after six months they collect two tonnes of red sweaters, one tonne of beige sweaters, then we can process that in a more meaningful way.

It’s interesting that you mention other key geographies. In Kenya and Ghana, for example, there are entire industries and livelihoods built around buying and selling bundles of used clothing. How do these ecosystems form a part of a closed-loop, circular economy?

I think it’s two separate things. I often say, The Billie System is not a garbage processing machine.

We didn’t create The Billie so that people can continue to make more, and sell more, and throw away more. It’s really a tiny, tiny, tiny part of the solution. The greater effort needs to come from how we look at design, how we look at sourcing of materials, how we look at merchandising, production, marketing and sales, consumption and then disposal.

Where do you see the potential for the fashion industry to really adopt circular design in earnest?

I think the larger the brand — and this is a very personal observation based on my experiences talking to these people — the biggert he disconnect between the departments. For instance, I can have a very, very meaningful and enthusiastic conversation with the sustainability division of a brand. They’re very helpful, they connect me with the different people in different locations to try to address the issue, but they may not be the ones to have any influence [over] design or merchandising. The design team may also have strong opinions or initiatives about sustainability, but they may not be as connected to the material sourcing partof the company. The smaller brands that we’ve worked with are more nimble, because the decision process and the range of influence is smaller. They can make decisions quickly, and the course of direction can change very quickly, or they can just decide, “Okay, we’re going to make 300 pieces of this using our textile waste.” In most cases, they’re willing to tell that story.

One challenge with mechanical recycling is that it produces shorter fibres that need to be blended with virgin fibres to bolster the quality. Is there a point where the technology will evolve enough so that it becomes truly self- sustaining?

We’re constantly in discussion with HKRITA about how to upgrade the parts in The Billie System… Right now it’s only under ideal situations that I can process the [maximum capacity of] three tonnes per day… I don’t know when we can achieve that, where someday we will not have to use virgin fibres. Unless consumers don’t mind [shorter, rougher fibres, but] I think [they] are very spoilt nowadays; everything has to feel good, be light, with all these performance qualities; it has to be cheap, and it has to be beautiful. I won’t say it will never happen, but currently I don’t see it happening within a short time.

Your system can recycle textiles made from 100- % natural fibres, but what about those blended with synthetics?

In order to produce high-quality recycled fibres, The Billie [System] prefers textiles from 100 % natural fibres.

Can The Billie System process textiles containing natural fibre blends, like a cotton-wool blended sweater or linen- cotton blended T-shirt?

Yes.

How are fibres separated out, if at all?

As a mechanical recycling system, we cannot separate the fibres through the upcycling process, so we prefer to collect items that have no more than two fibre combinations to maintain the purity of the recycled fibres.

Regulators are increasingly turning their attention to environmental policies that will implicate the fashion industry, both directly and indirectly. How do you think the apparel industry can really seize this as an opportunity to become circular?

Well, I’ll take ourselves as an example. [We have] difficulty shipping our fibres directly from our Hong Kong factory to our Zhuhai factory because there’s a rule against importation of waste. Now, I know that this rule probably came from many, many years ago when China was, like many developing countries, accepting other countries’ garbage… [but] the rigidity of that rule affects us because what goes through The Billie is sanitised three times, but it’s still labelled as waste. [As one company] it’s very difficult for us to go and lobby [regulators] to change that rule, so ideally, if… there are 20 people like us going to lobby them then it probably makes more sense for them to really take a stand, but if it’s just me and The Billie it’s harder for them to make a case. Those are the kind of things that we face, and it is frustrating.

This interview has been edited and condensed.

Time for Fashion to Raise Its Sustainability Ambitions to Deliver on COP26

Countries, companies and communities are mobilising around climate change. Amid mounting evidence of fashion’s climate impact, and the gathering of nations at the COP26 Climate Change Conference, there is a renewed impetus behind the need for decarbonisation and a much sharper focus on the imperative to adapt and mobilise private-sector capital to fund the required changes. A new era of climate action will therefore be required, meaning fashion leaders must focus not only on decarbonisation but also on building resilience and reversing nature loss as the effects of climate change take hold.

by Harry Bowcott, Leigh Chantal Pharand and Libbi Lee. Harry Bowcott leads the Sustainability Practice in the McKinsey London Office, and Leigh Chantal Pharand manages the COP programme strategy. Libbi Lee focuses on Sustainability in Apparel, Fashion and Luxury, including McKinsey’s research partnership with the Global Fashion Agenda on “Redesigning Growth.”

The COP26 meeting in Glasgow, UK that took place in October and November 2021 was the latest in the United Nations’ series of conferences that aims to tackle climate change and its impacts. COP stands for “conference of the parties,” which refers to the UN member states that are represented parties of the climate change convention, and this is the 26th year the secretariat met to discuss plans. Previous COPs have led to international climate treaties like the Kyoto Protocol and the Paris Agreement. The COP26 agenda focused on four goals: 1) securing global net-zero carbon emissions by 2050 and keeping the 1.5-degrees Celsius limit on global warming within reach, 2) adapting to protect communities and natural habitats, 3) mobilising finance, and 4) working together to deliver on commitments.

For the fashion industry, the run-up to the event galvanised companies such as Arezzo & Co, Cartier, New Look, Prada, Soorty Enterprises, Under Armour and YKK Corporation into making specific commitments or announcements of broader sustainability initiatives, and provided an opportunity for collective discussion and advocacy.220 Fifty textile, apparel and luxury companies announced their commitment to science- based targets in the six months before the event, which is more than three times the number in the same period in 2020.221 Fashion-focused events were also planned for COP26, including The Fashion Dialogue, featuring prominent speakers from the global fashion industry, and the Fashion Industry on the Race to Zero.222

In addition, as COP26 heightened the focus on communities and natural habitats — both of which are for the most part negatively impacted by the fashion industry — many companies honed their biodiversity agendas through “nature positive” commitments, aimed at proactively enhancing the resilience of the planet against climate change and reversing nature and biodiversity loss.

While these commitments are all positve indications that parts of the industry are keen to change, the proof will be in tangible actions taken over the next few years. While specific outcomes of COP26 are not included in our analysis owing to the time of writing, below we outline the main goals of COP26 and what the fashion industry will need to do to respond.₈₂

COP26 Goal 1: Secure global net-zero emissions by 2050 and keep the 1.5-degrees Celsius warming limit within reach

To get on the 1.5-degrees Celsius pathway— or, in other words, limit the increase in global temperature to 1.5 degrees Celsius above pre-industrial levels — and make progress towards net-zero carbon emissions by 2050, the world needs to cut CO2-equivalent (CO2-e) emissions in half before 2030.223 Yet, the UN’s NDC Synthesis report published in September 2021, which aims to give a comprehensive picture of actions being planned or undertaken by governments that impact greenhouse gas emissions, projected a 16 % increase in emissions by 2030.224

Within the fashion industry, key parts of the supply chain could still be at risk from climate change even if the 1.5-degree pathway is maintained. Despite these risks, fashion is still one of the least environmentally sustainable industries. It accounts for approximately 2.1 billion tonnes of CO2-e emissions per year — that’s 4 % of annual global emissions. More than 70 % of these emissions comes from production processes, with the remainder from retail, logistics and product use (such as washing and drying).225 The fashion industry is resource-intensive, using significant amounts of water, land, wood and pesticides for the farming of raw materials such as cotton. On top of this, 17.5 cubic metres of textiles the equivalent of one garbage truck — is either burned or sent to landfill every second.226

Companies should consider both firming up and accelerating action on their near-term commitments. Every sector needs to focus on its own breakthrough actions if it is to meaningfully and proportionately contribute to meeting the goal of halving emissions by 2030 and progress towards net-zero emissions by 2050. Within the fashion industry, many companies have already committed to ambitious reductions in greenhouse gas emissions. Some 125 companies have committed to drive the fashion industry towards net-zero greenhouse gas emissions by 2050 through the UN Fashion Industry Charter for Climate Action, which launched in 2018.227 Most public commitments made by fashion brands in the run-up to COP26 were to reduce emissions by 30 % by 2030 (from 2015 levels or later). Some companies, such as Levi Strauss & Co., have committed to reducing emissions across their supply chain by 40 % by 2025, while others, such as H&M, are striving to be “climate positive,” reducing more greenhouse gas emissions than its value chain emits, by 2040.228

Every sector needs to focus on its own breakthrough actions if it is to meaningfully and proportionately contribute to meeting the goal of halving emissions by 2030.

Sourcing more sustainable materials, including fibres that are recycled and recyclable, regenerative and/or sourced responsibly, is a critical component of decarbonisation. As such, many brands are setting targets on their use of materials. For example, Lululemon has committed to making 100 % of its products from “sustainable” materials (that are recycled, renewable, regenerative or sourced responsibly) by 2030, while Stella McCartney has committed to using 100 % recycled polyester (from garments and plastic waste) by sourcing more sustainable materials, including fibres that are recycled and recyclable, regenerative and/or sourced responsibly, is a critical component of decarbonisation. As such, many brands are setting targets on their use of materials. For example, Lululemonhas committed to making 100 % of its products from “sustainable” materials (that are recycled, renewable, regenerative or sourced responsibly) by 2030, while Stella McCartney has committed to using 100 % recycled polyester (from garments and plastic waste) by 2025.229 Various alternative materials that offer reduced environmental impact compared to virgin raw materials are also being developed: Nike, for example, is using a product called ELeather for its Flyleather shoes. ELeather is a reusable leather, originally developed for seat covers in the transportation industry, which is made from either used shoes or scrap material.230

Despite these commitments towards more sustainable materials, however, the reduction of environmental impact by some of the alternative materials currently available is not sufficient. The industry needs to scale up closed-loop recycling processes (see “Circular Textiles” on page 72) while acknowledging that no singular solution will offer the key to emissions reduction on its own. To achieve tangible improvements, fashion will also need to invest further in areas such as material innovation and improved industrial processes and manufacturing techniques to deliver on targets.

While commitments to source and use better materials are encouraging, fashion brands will need to understand and address emissions in the entire production and consumption process down to the deepest tiers of their supply chain. This includes establishing more sophisticated tracking of emissions across all tiers in order to be able to first quantify the impact at each stage, and second to design and implement mitigation measures.

Technologies such as product passports (see “Product Passports” ) are scaling up to help address these challenges.

Beyond decarbonisation of existing business models, brands and retailers will also need to decouple from current volume-driven measures of success. The Global Fashion Agenda and McKinsey & Company’s “Fashion on Climate” report finds that if the industry could reduce the share of stock sold at a discount by 15 percentage points, it would achieve a volume and emissions decline of about 10 %, without any impact on value growth. To realistically remain on a 1.5-degree pathway, the industry should reimagine a world with smaller individual wardrobes, with more focus on longer-life garments and a flourishing resale and rental market.231

COP26 Goal 2: Adapt to protect communities and natural habitats

Although mitigating climate risk by reducing CO2-e will be critical in the long run, much of the warming likely to occur in the next decade will be the result of emissions that have already been produced.232 Over the next decade, when experts agree that temperatures are likely to warm by 1.5 degrees Celsius, almost half of the world’s population could be exposed to a heat-, drought-, flood- or water stress-related climate hazard, according to a recent McKinsey report.233

At their most extreme, these events could be life threatening. But another insidious impact is likely to be on people’s wellbeing and livelihoods. In a scenario whereby the world were to warm by two degrees above pre-industrial levels by 2050, the number of people exposed to severe heat stress could increase to 15 % of the global population, compared with less than 1 % today.234 Chronic heat stress could make it impossible to work outdoors or in rooms without air conditioning in some places, including parts of India, a critical region for cotton production.235 As climate conditions change and become more extreme, yields of raw materials could also fall in their traditional growing regions, including the south of the United States, Pakistan and Australia.236 Meanwhile, coastal and riverine flooding could jeopardise manufacturing sites in parts of Southeast Asia, such as Bangladesh and Vietnam.237 This could significantly disrupt fashion supply chains and affect business continuity, not to mention raise the volatility of demand in these key consumer markets.

Therefore, in addition to accelerating action to decrease emissions, fashion leaders need to build resilience against climate hazards into their plans. This will require making some tough choices, particularly when resources are scarce, on where to invest now rather than later; where to either invest in protection of physical assets against growing climate risks, or consider a managed retreat; and, critically, how to include community voices in decision-making.

In addition to accelerating action to decrease emissions, fashion leaders need to build resilience against climate hazards into their plans.

COP26 has put resilience and adaptation to climate risks on a par with emissions reduction as a cornerstone of tackling climate change. Vulnerable countries and communities need significant help, and COP26 offered an opportunity for a moment of global solidarity. Even in regions less vulnerable to extreme climate hazards, such as Europe, the impact of climate change is so severe that the European Central Bank predicts a worst-case scenario of a 10 % drop in the European Union’s GDP and a 30 % rise in corporate defaults as a result.238

Fashion companies need to move quickly to build resilience. In some cases, established technologies, such as flood defences or solar powered air-conditioned warehouses for workers, can be deployed in the supply chain. In others, fashion companies will need imaginative solutions, such as securing multiple raw material sources to mitigate the risk that extreme weather events destroy primary sources such as cotton. The faster companies build resilience, the better for employees, consumers and suppliers, and the greater competitive advantage established. There is, of course, a tension between creating business resilience by relocating parts or all of the supply chain while supporting vulnerable countries as they seek to secure the economic welfare of their populations. For example, as the use of virgin materials decreases and recycled materials increases, it will be the poorest and most vulnerable, including farmers and workers at virgin fibre mills, who will likely suffer the most financially. Business leaders should be prepared to make hard, long-term choices with the welfare of all stakeholders considered.

Establishing resilience is also about protecting and restoring natural environments, as biodiversity and climate agendas are critically interdependent. It is estimated that around half of greenhouse gas emissions could be eliminated through natural measures such as reforestation and limiting land degradation. However, the fashion industry contributes to significant biodiversityloss, with 23 % of the world’s insecticide used in cotton agriculture and 25 % of industrial water pollution resulting from textile dyeing and treatment.239

Fashion companies that manage biodiversity in the same way they manage value creation use impact-weighted accounts (which reflect financial, social and environmental performance) and establish measurable biodiversity targets. For example, Gucci’s “nature- positive” climate strategy aims to proactively protect forests and biodiversity by restoring mangroves, whilst investing in and incentivising farmers to shift to more sustainable practices, such as regenerative agriculture which supports soil health and water quality to enhance carbon sequestration.240

Shifting to alternative materials and investing in materials that reduce non-biodegradable waste are also critical actions for fashion companies to reduce their biodiversity impact. Several brands, including H&M, have been changing their dyeing processes in an attempt to eliminate the need for water and chemicals that pollute waterways.241

Increasingly, investors will scrutinise companies’ climate resilience as they scrutinise decarbonisation efforts today and will expect companies to disclose their climate risk exposure and mitigation plans. Over the medium term, companies are likely to unevenly bear the cost of building resilience and transitioning to net-zero emissions, investing different amounts and causing the competitive landscape to shift. Customer demands are also changing, with environmental credentials becoming a prerequisite to compete, not a differentiating factor.242 As such, companies should look to develop technological solutions to climate hazards across their ecosystems, whilst stimulating investment and assessing the carbon intensity of their full value chain.

The investments and actions required will not always demonstrate clear payback in the short term, meaning companies will have to update how they measure ROI by adjusting the time frames they assess and how they effectively incorporate competitive advantage into these decisions.

COP26 Goal 3: Mobilise finance

It is clear that decarbonisation and adaptation of operational practices both require significant investment. COP26 is the first major COP Climate Change Conference that has had such a sharp focus on the financial commitments needed to tackle climate change, especially by the private sector.

Climate finance tracked by the Climate Policy Initiative (CPI) reached an average of USD 579 billion over the two-year period between 2017 and 2018, reflecting an average increase of 25 % from the previous two years and a steady increase in financing from different types of investors — despite many investment budgets being restrained during the Covid-19 pandemic. However, even though investment has reached record levels, the annual investment that would be required to achieve a 1.5-degree scenario is estimated to be between USD1.5 trillion and USD3 trillion. Such volumes of capital must come from mainstream finance: from corporations, banks and institutional investors. In 2017, only 1 to 2 % of investments in climate adaptation projects came from the private sector.243 A core argument at COP26 is therefore that more money must be spent — up to 10 times more than in 2017 by 2030 for developing countries alone₂₄₄ — and more of that money needs to come from the private sector. This implies a radical reallocation of capital and investment, with a particular focus on flows into countries whose economies are particularly vulnerable to climate change, as well as into the technologies needed both for decarbonisation and resilience.

Fashion companies are setting up grant and venture funds which aim to target specific sustainability challenges, in both their own operations and their supply chains. These vehicles present an opportunity to harness external innovation and build credibility and internal knowledge. For example, Kering’s Regenerative Fund for Nature provides grants to farming groups, non-governmental organisations and other stakeholders to scale regenerative practices in leather, cotton, wool and cashmere production.245 Kering is also involved in a joint venture alongside Stella McCartney, Burberry and the Apparel Impact Institute, which focuses on improving the environmental impact of Italy’s luxury fashion supply chain by establishing a platform for manufacturers to coordinate, fund and scale environmental programmes.246 At the same time, many companies are ramping up investments in recycling technologies (see “Circular Textiles). One example is Infinited Fibre, which recently completed a funding round led by H&M Group and including players such as Adidas and Zalando, during which it raised EUR 30 million (USD 35 million) to boost production at its pilot plant and prepare for building its new 30000 tonnes-per- year flagship factory.247

Fashion companies are setting up grant and venture funds which aim to target specific sustainability challenges, in both their own operations and their supply chains.

Beyond specific funding vehicles, company leaders across all sectors need to give significant attention to resource-reallocation issues. However, there is still a lack of awareness and acceptance of the urgency and scale of the risk and the opportunity. Climate is still not tightly enough integrated into organisational management — too often it is an individual agenda point and siloed into teams, rather than something that underpins every decision and that is supported by executive-level advocacy.

COP26 Goal 4: Work together to deliver on commitments

Fashion companies will need to work together with both upstream partners and downstream retailers to make real progress on sustainability, as well as collaborating with non-fashion companies and technological specialists to catalyse change. No one part of the value chain can make enough impact by itself; meaningful change requires a concerted effort across the industry and sufficient investment must be funnelled into relevant technologies.

Brands need to drive sustainable decision-making at the design stage, in their choice of materials, production of waste and adoption of recycling. In many cases, brands and retailers should consider joining together to invest in research fields such as alternative materials and regenerative farming to ensure progress is made fast enough to have a meaningful impact. Coalitions are starting to form across the value chain, including the Aura Blockchain Consortium, supporting the development of product passports for materials traceability and transparency, among other things, and the Higg Index, which aims to standardise the measurement of value chain sustainability. While multi-stakeholder initiatives can divide opinion, industry-wide collaboration will be required to drive progress beyond the current baseline.

Ultimately, business leaders in the fashion industry — as in other sectors — need to increase awareness of the environmental and social impact created by the industry and the end use of its products. This will mean embedding a climate strategy to reach net-zero emissions as a core part of corporate strategy; being conscious that there is a competitive advantage in becoming a leader in sustainability; forming an innovation ecosystem to support the development of new technological solutions; and finally, mitigating for the changes ahead, including the impact on workers and jobs, by building resilience. The agenda set by COP26 for fashion is multifaceted, but it is essential to secure the future of the industry.

Disclosure: As COP26 had not yet commenced at the time of writing, specific outcomes are not reflected in this text.

In a bid to boost authentication, transparency and sustainability, brands are using a portfolio of technologies to store and share product information with both consumers and partners. To get the most from these digital ‘product passports,’ which can help brands tackle counterfeiting, differentiate themselves and build loyalty by enhancing consumer trust, businesses must coalesce around common standards and engage with pilot projects at scale.

Fashion businesses are pouring investment into digital technologies that allow unique identifiers and other digital information to be added to products. These “product passports” link information that is valuable to both consumers and partners to individual products by leveraging a combination of technologies centred around blockchain and supported by the likes of radio- frequency identification (RFID), QR codes and near-field communication (NFC). Indeed, these technologies are helping businesses to tackle significant industry pain points, such as counterfeiting and the need for more responsible and transparent business practices amid rising consumer engagement with climate change and labour conditions in fashion.

Demonstrating progress in sustainability is particularly important in gaining the trust of younger fashion consumers, as some 43 % of Gen-Zers say they actively seek out companies that have a solid sustainability reputation.248 One way to store and transparently share information on a product’s and permanent record than traditional sewn-on labels), where and how it was made, and the working conditions at the manufacturer.249

For example, Eon’s Connected Product Platform allows companies such as Pangaia and Yoox Net-a-Porter to create “digital twins” for their products and private-label collections respectively, containing information that can be updated in real time, such as details on a product’s provenance.250 Similarly, Reformation is partnering with blockchain platform FibreTrace to give customers QR-code access to information on the lifecycles of its denim garments, while TS Designs usesQR-enabled passports to certify garments are made in the US.251 Though product passports are not a silver-bullet solution to sustainability concerns — as companies still face the challenge of making sure the data they get from suppliers is accurate — they are setting higher standards for supply chain transparency and traceability for fashion.

Product passports are also supporting circularity initiatives like resale and garment- to-garment recycling. In providing detailed data on materials, they facilitate easier collection and sorting of garments for recycling at scale. Like Eon, closed-loop recycling platform Circular Fashionhas developed an open data standard that can be read by a variety of applications along the product lifecycle. The company has launched a pilot project with fashion brands such as Armedangels, as well as stakeholders in used clothes collection and sorting, to test applications for scaling garment- to-garment recycling (see “Circular Textiles” ).252 Initiatives such as the European Commission’s European Data Space for Smart Circular Applications and the American Apparel and Footwear Association (AAFA)’s call for the digitisation of apparel and footwear labelling are also supporting these kinds of efforts.253

The growth of resale businesses means it has never been more important to prove authenticity and track a product’s history, particularly in luxury.

“Consumers often remove labels from their garments, separating the garment from its legally mandated fibre content, identity, care, and origin information for the rest of its life,” wrote AAFA president and chief executive Steve Lamar in a 2020 letter lobbying the US Federal Trade Commission to support digitised labels in a technology-agnostic way. “[This] would reduce the likelihood thatthe information gets separated from a product. Consumers, even second-hand consumers, would have constant access to the information over the life of the garment, without having to sacrifice the comfort of the garment.”254

The growth of resale businesses means it has never been more important to prove authenticity and track a product’s history, particularly in luxury. Analysis from the BoF Insights report “The Future of Fashion Resale” suggests that the resale market will reach USD57 billion in sales by 2025, up from USD27 billion today,255 while second-hand marketplace ThredUp estimates that resale will grow 11 times faster than the overall clothing retail sector over the next five years.256

As resale grows, product passports will ease operational processes by offering readily available digital twins and standardised product information. These will support authentication and valuation, as well as streamline a process that was historically manual, reducing reliance on authenticator specialists who have been in significant demand on industry jobs boards.257 For example, one feature of Eon’s digital passport is to suggest the price of a garment based on its history, including who wore and owned the product, as well as repairs history and advice on marketing. Certainly, the digital authentication offered by product passports will help boost trust in second-hand luxury goods and collectibles, meaning resale platforms such as Vestiaire Collective and The RealReal stand to benefit.

Another application of product passports is in anti-counterfeiting measures. Valued at around USD500 billion a year globally, counterfeiting generates more than 60 % of that valuefrom fashion and luxury goods.258 259 The China Certification and Inspection Group is among the organisations to be making strides in the battle against counterfeiting with product passport technology. Its “one item one code” technology allows customers to scan a code and see a simple confirmation of a product’s authenticity.260 Brands are similarly ramping up their efforts. Chanel is launching a digital passport to replace physical authenticity cards in its bags, which will be accessible through a scannable metal plate in the product. This will enable the brand and consumers to immediately recognise authentic products and ensure after-sales services such as repairs are only provided for genuine bags.261

Initiatives to develop product passports are emerging in both private and open-source forums. The Aura Blockchain Consortium, a shared private platform launched by companies including LVMH and Prada in spring 2021, leverages unique codes to provide authenticated product records, including ownership history, product authenticity data and provenance of materials. When a customer buys a product, he or she receives an encrypted certificate containing information about the production process. In the open-source space, meanwhile, IBM and luxury and fashion non-fungible token (NFT) platform Arianee are partnering to pilot digital product passports for brands such as Swiss watchmakers Breitling and Vacheron Constantin.262 In addition to supporting authenticatioand traceability, several brands are leveraging these product technologies to drive brand engagement, loyalty and repeat purchasing. Prada is rolling out NFC solutions to offer personalised information and purchasing suggestions to customers who scan NFC tags embedded in products with their mobile devices. Meanwhile, Paco Rabanne has launched its first NFC-enabled fragrance, which allows customers to access digital content such as interactive games and educational features by connecting their smartphone to an NFC chip, and Breitling is leveraging digital passports to share promotions with customers and demonstrate authenticity.263

Pressure to establish supply chain transparency and adopt circular business models will fuel demand and help justify scaling pilot projects to mainstream applications.

Looking ahead to 2022, a growing number of fashion brands are set to ramp up development of product passports across various B2B, B2C and C2C use cases. Pressure to establish supply chain transparency and adopt circular business models will fuel demand and help justify scaling pilot projects to mainstream applications. At the same time, the growth of luxury e-commerce and Another application of product passports is in anti-counterfeiting measures. Valued at around USD500 billion a year globally, counterfeiting generates more than 60 %of that value from fashion and luxury goods.258 259 The China Certification and Inspection Group is among the organisations to be making strides in the battle against counterfeiting with product passport technology. Its “one item one code” technology allows customers to scan a code and see a simple confirmation of a product’s authenticity.260 Brands are similarly ramping up their efforts. Chanel is launching a digital passport to replace physical authenticity cards in its bags, which will be accessible through a scannable metal plate in the product. This will enable the brand and consumers to immediately recognise authentic products and ensure after-sales services such as repairs are only provided for genuine bags.261

Initiatives to develop product passports are emerging in both private and open-source forums. The Aura Blockchain Consortium, a shared private platform launched by companies including LVMH and Prada in spring 2021, leverages unique codes to provide authenticated product records, including ownership history, product authenticity data and provenance of materials. When a customer buys a product, he or she receives an encrypted certificate containing information about the production process. In the open-source space, meanwhile, IBM and luxury and fashion non-fungible token (NFT) platform Arianee are partnering to pilot digital product passports for brands such as Swiss watchmakers Breitling and Vacheron Constantin.262 In addition to supporting authentication and traceability, several brands are leveraging these product technologies to drive brand engagement, loyalty and repeat purchasing. Prada is rolling out NFC solutions to offer personalised information and purchasing suggestions to customers who scan NFC tags embedded in products with their mobile devices. Meanwhile, Paco Rabanne has launched its first NFC-enabled fragrance, which allows customers to access digital content such as interactive games and educational features by connecting their smartphone to an NFC chip, and Breitling is leveraging digital passports to share promotions with customers and demonstrate authenticity.263

Pressure to establish supply chain transparency and adopt circular business models will fuel demand and help justify scaling pilot projects to mainstream applications.

Looking ahead to 2022, a growing number of fashion brands are set to ramp up development of product passports across various B2B, B2C and C2C use cases. Pressure to establish supply chain transparency and adopt circular business models will fuel demand and help justify scaling pilot projects to mainstream applications. At the same time, the growth of luxury e-commerce and A success factor for widespread adoption of product passports will likely be the industry’s ability to establish common standards. “Brands are competitors, and there’s a lack of cooperation,” said Tyler Chaffo, sustainability manager at RFID labelling and supply chain solution company Avery Dennison.265 Currently, some digital passports only operate on closed platforms, while others are open-source and compatible across a range of applications. Still, there are signs that players are starting to converge around a few solutions, with Aura and Arianee frequently cited in many discussions.₂₆₆

Accessibility and affordability will also be success factors in the burgeoning product passport ecosystem. “It’s really important that there’s been a democratic process so we could create a governance structure and a standard that works for both smaller brands and big brands,” said Timothy Iwata-Durie, Cartier’s global innovation director and a member of the Aura board.267

From a commercial perspective, product passports will deliver the most advantage to players that can expand their functionality across use cases. For those who get it right, passport technologies will reinforce consumer trust, create exclusivity, support repurchase and enable more sustainable and responsible practices. To encourage scaling, standardisation and compatibility should be top priorities. As these dynamics play out, the key for brands will be to keep pace with innovation and consider collaborations selectively to meet their business objectives.

EXECUTIVE INTERVIEW

Aura Blockchain Consortium: Uniting Rivals to Make Luxury Goods More Traceable

Daniela Ott

General Secretary, The Aura Blockchain Consortium

It can’t be easy to get a group of luxury firms that have only just put their rivalries aside for the common good to march to the beat

of the same drum, but Daniela Ott is tasked with doing exactly that. As leader of the Aura Blockchain Consortium, the former Kering executive must now use delicate diplomacy to persuade others to join the

shared digital platform used by LVMH, Prada and Richemont-owned Cartier which creates ‘product passports’ for luxury goods.

— by Marc Bain

Three competitors joined hands in 2021 to create an unusual partnership in the form of the Aura Blockchain Consortium. LVMH, Prada and Richemont-owned Cartier

united behind Aura, a blockchain originally developed by LVMH and technology partners ConsenSys and Microsoft, to solve critical challenges around the traceability of luxury goods by giving each product a digital identity that provides customers with a secure, verified means to see its entire life, from the raw materials through to second- hand sales.

Aura’s general secretary is Daniela Ott, a luxury veteran who spent more than a decade with Kering. Expanding this groundbreaking but tricky alliance is not without challenges. For one, the emergence of competing blockchain technologies could fragment the burgeoning product passport ecosystem.

Aura’s effectiveness against counterfeiting is also unclear, and it has not yet persuaded some prominent brands to sign up. Ott is nonetheless determined to create a “digital twin” featuring theoretically tamper-proof digital certificates of authenticity for every product sold in the luxury industry — and to use Aura to do so.

Aura has been signing new companies up, but others remain hesitant to join. Two big names that remain absent are Kering and Chanel. Why is that? Are brands concerned about revealing sensitive information, such as their suppliers, to competitors, or do they see creating theirown product passports as a competitive advantage if their system is somehow better?

Actually, it’s an advantage to use one solution, especially if you have the same issues, you have the same suppliers, you have the same distributors, and you have the same needs. Having one system makes it easier for everybody. I think it’s more that we just launched in April [2021], and blockchain in itself is hard. It’s not just that you need to have your use case ready. You need to link it up internally in your organisation, to make sure you have the data you actually put on the blockchain. Your marketing teams have to know the message you want to pass [on]. We make it easy but still you must define what you want to do with your passport. [So] I think it’s a journey.

Luxury companies are not known for jumping on emerging technologies. What gives the companies leading this charge confidence in blockchain?

I think doing it together as a consortium helps. I would say also I think they learned the lesson of being too late in the e-commerce space. I think it helps that we have a private permission-based blockchain where they can decide which information to give access to or not. In a public blockchain, it’s very easy to see that you had a drop in production. But it’s the brand who decides whether, “I’m giving access to the consumer this information,” or “I don’t give access to how many units I put on the blockchain today.” I think that also gives some reassurance.

“Actually, it’s an advantage to use one solution, especially if you have the same issues, you have the same suppliers, you have the same distributors, and you have the same needs.”

Aura’s member brands are at different stages in putting their goods on the blockchain. Customers can see the history of products from Bulgari and Hublot, for instance. But if I were to check the information on the products currently available, what sorts of details will I see?

There are brands who are showing basic information: when it was produced, the serial number, the price point, all the fabric which is involved, where the fabric is coming from — I would say classic information about traceability. In terms of a watch brand, they would add a guarantee, a certificate of authenticity, and they would be adding a specific certificate for watches that the watch actually keeps time. We are working right now on a diamond traceability certificate — this is the Aura diamond traceability committee we are putting together with our jewellery brands. Once we go live with that over the next few months, you will be sure where the diamond has actually come from, and also the grading of the diamond.

What share of goods made by Aura’s members are already on the blockchain?

What I can say is that we have double-digit millions of products on the blockchain.

Is the ambition to eventually reach 100 % of products?

That’s my end ambition, yes. I think every physical product needs a digital twin. I’m absolutely convinced about that. Do these digital twins enable a new type of relationship with customers, or is it more about enhancing the methods brands were already using?

It’s definitely a new relationship. It’s on a different level, that kind of traceability which you can actually have from the beginning of the value chain down to resale. Having an authenticity certificate is new, having all these certificates in one place, being able to directly communicate, this is a whole new level of touchpoint. Especially for young consumers, authenticity and traceability are a must, so if [they’re] a must, how do you get that in a cost-effective way to a large number of products? We couldn’t do that before.

For the product passport ecosystem to work well for consumers, it’s important to maintain a certain degreeof compatibility, but what about the actual interface? Will there be any sort of standardised interface for all goods on Aura, or willindividual brands each launch their own app or site?

Aura will be a non-profit, so our aim is always to be agnostic. If you want to show the information via an app or a website, this is really up to the brand to decide. I think most brands will integrate it into their own storytelling. It’s important that it’s the voice of the brand.

Could that storytelling be enhanced through blockchain, particularly around raw materials or production, by adding photos or video for instance?

What’s really nice about blockchain is that you can put really high [quality], rich data on it in terms of videos. I have this dream that you can actually see the person who manufactured the watch or the person who manufactured the bag. The nice thing about it is this is not just for the first 10 customers. If I pass it down to my daughter, maybe she will be able to see that as well, or in resale.

What about the transparency aspect? Are luxury brands ready for the level of scrutiny into the environmental and social impact of their products that comes with showing a product’s history at a very granular level, going back to the raw materials?

In luxury, I think this is less of a question than in premium or other sectors. One of the limitations is if you don’t have a good relationship with your suppliers, or if you don’t have the information, it doesn’t help you to have a blockchain. It’s not a magic wand which just makes it all good. You must know your suppliers down the line and then you can ask them to put the

information on the blockchain. If they put false information on the blockchain, it’s still going to be false and the blockchain doesn’t help you anyway. It’s garbage in and garbage out.

A customer of Hublot can see their watch’s information and e-warranty simply by taking a photo through an app. Is that going to be the model for most goods, or will some require physical markers like QR codes or NFC chips?

We are agnostic. AI image recognition, which we are a big believer in, I think will work for perfumes. How are you actually going to recognise each perfume bottle? Because that’s quite tricky, and it’s really about the light when you take this picture of that bottle. This is the same for buying spirits. For watches, it’s AI image recognition. For clothing, I think it’s more QR code. For accessories like a bag, it’s easier to put a chip in. For precious carpets, we are looking at an NFC tag. There are these different tagging solutions, and it depends on the product itself.

One of the main advantages of using blockchain — and indeed one of the main motivations for competitors to unite around this technology inthe first place — is that it can give shoppers an easy way to verify authenticity. But some consumers knowingly buy fakes for their lower cost and counterfeiters continue to get more sophisticated in the ways they dupe shoppers, like some who have sold fake bags complete with fake NFC tags. Is the arms race between counterfeiters and luxury companies just going to continue, no matter what Aura does?

I would say especially QR codes, that’s probably the easiest, because you literally can cut it out. For a tag in a handbag, you literally would need to destroy the handbag. The beauty of having a consortium is that we have the time to vet these different solutions or actually invest in some of the solutions, advance them further and try them out at separate brands. I think the technology which we are investing in will always be more advanced, but definitely there are things to take account of. What new developments are there around the corner?

We are going live very soon with Aura Light. We signed on a few members, which we will also announce over the next few months. We are also working on our NFT platform, which we hope will go live in a few months.

What is Aura Light?

Aura Light is sort of our plug- and-play. The fee is much lower. Our standard [version] you can actually customise much more, so that is more for larger brands. The APIs and the [software development kits] are pretty much the same, but for Aura Light we have, for instance, landing pages which are available and the whole process is much easier. We actually manage the cloud for you.

How can brands measure their return on the investment for joining Aura?

Given that blockchain is so new, we don’t have ROI figures as such yet. If you want to have a quick ROI, it’s definitely a digital product, because that gives you additional revenue. When I say digital product, that can go either from digital collectibles like NFTs or virtual products. In terms of how much more you’re selling becauseyou can provide a certificate of authenticity, ownership, a diamond traceability certificate, Ithink that will still take a little bit of time to have an ROI.

This interview has been edited and condensed.

Arguably, it has never been more urgent for fashion leaders to build resilience against cyber attacks. Cyber crime is becoming increasingly common and sophisticated, and consumers are shopping online more frequently and enthusiastically, giving businesses access to valuable data in the process. The concurrent growth of both activities leaves companies increasingly vulnerable to risks associated with data security and — ultimately — with company reputation.

The pandemic-induced acceleration of e-commerce uptake has played a role in heightening these risks. With e-commerce’s share of global fashion sales nearly doubling between 2018 and 2020 in some regions,268 momentum has been building for further growth. By 2025, e-commerce is expected to account for one third of all global fashion sales, reaching 40 % and 45 % in the US and China respectively. A record number of cyber attacks took place worldwide in 2020, resulting in significant data losses across industries.269 Retail, including fashion retail, was the fourth most-attacked industry, with companies across different categories and value segments suffering breaches.

Events compromising the integrity, confidentiality or availability of data in retail rose by 152 % in 2020 compared to 2019, and the number of security breaches increased by 33 %.270 Several fashion companies have already experienced severe attacks, such as Hudson’s Bay Company’s Saks Fifth Avenue and Lord & Taylor, which were victims of the theft of more than 5 million credit and debit card numbers in 2018,271 and Neiman Marcus, which more recently suffered a data hack on the personal and payment data of 4.6 million online customers in 2021.272

“[Cyber crime] is getting worse for two reasons,” said Lance Spitzner, senior instructor at the US-based SANS Institute, a cooperative for cyber security professionals. “It’s becoming more and more profitable, so cyber criminals are going to follow the money… [and they] are getting much better at it, too. It’s become an entire industry now… [with] the cyber criminal community specialising in different fields.”273

If fashion leaders are to protect their e-commerce growth in 2022 and beyond, they must shore up their cyber defences. That means reducing data risks throughout the data handling lifecycle, through collection, use and disposal, and in operations spanning the entire value chain.

In product development, for example, processes including design, drafting of manufacturing standards, certification, sketching and prototyping have been widely digitised, and the data is now routinely stored online, meaning that intellectual property (IP) in the digital realm requires more robust protection. With the rise of valuable digital assets such as NFTs, the need to protect online assets will only intensify.

In the e-commerce sales environment, distributed denial-of-services (DDoS) or ransomware attacks could lead to entire website or app shutdowns, directly impacting revenues. For example, one of Brazil’s largest clothing store chains, Lojas Renner, faced a ransomware attack on its e-commerce system in August 2021 which resulted in the shutdown of its systems and operations.274

E-Land suffered a ransomware attack in 2020 that caused 23 of its 50 stores to close.276

Another critical weak spot for fashion businesses is in customer data collection and handling. With the personalisation of customer experience increasingly playing a role in online interactions and companies seeking out an even wider array of data points to inform which products are brought to market, customers are sharing more personal data than ever before. This includes their names, addresses, location history, preferences, payment card data, shopping history, loyalty programme information and even information processes including design, drafting of manufacturing standards, certification, sketching and prototyping have been widely digitised, and the data is now routinely stored online, meaning that intellectual property (IP) in the digital realm requires more robust protection. With the rise of valuable digital assets such as NFTs, the need to protect online assets will only intensify.

Digital risks associated with sales are not confined to e-commerce, however. Stores are increasingly augmented with technology, both on the shop floor and at checkout. Premises with virtual fitting rooms, in-store tablets and customer apps are vulnerable to attacks that can cause operational failures. In food retail, the supermarket chain Coop Sweden was the victim of a ransomware attack on a software supplier in 2021, which led to the closure of around half of its physical stores. The attackers demanded USD70 million to restore data from all companies affected by the attack.275 Similarly, South Korean fashion conglomerate in the e-commerce sales environment, distributed denial-of-services (DDoS) or ransomware attacks could lead to entire website or app shutdowns, directly impacting revenues. For example, one of Brazil’s largest clothing store chains, Lojas Renner, faced a ransomware attack on its e-commerce system in August 2021 which resulted in the shutdown of its systems and operations.274

Another critical weak spot for fashion businesses is in customer data collection and handling. With the personalisation of customer experience increasingly playing a role in online interactions and companies seeking out an even wider array of data points to inform which products are brought to market, customers are sharing more personal data than ever before. This includes their names, addresses, location history, preferences, payment card data, shopping history, loyalty programme information and even information about their body shape and size. Not only does this increase the risk of improper data handling internally, it can also expose companies to risk externally when they share customer data with third parties — and when those third parties are located in different legal jurisdictions, they are subject to different privacy and data laws.

Another critical weak spot for fashion businesses is in customer data collection and handling.

The sift to direct-to-consumer business models has both increased the potential to collect consumer data and made brands more vulnerable to breaches and attacks. In September 2021, fashion and beauty subscription service FabFitFun agreed to a monetary settlement of USD625,000 in response to a claim that it failed to adequately protect and secure consumer data against hacker data scraping, which resulted in a data breach that compromised customers’ payment card information.277

Attackers can harvest such data to sell to third parties or to attack customers directly. Furthermore, fashion brands’ presence on a growing array of social media platforms across international markets exposes both companies and employees to additional threats, including the accidental or deliberate leaking of data that could cause harm to brands. “Whatever cyber protection you had last year, last quarter, last month, yesterday, it’s not going to be enough for tomorrow,” said Stefan Larsson, chief executive of PVH Corporation, the parent company of Calvin Klein and Tommy Hilfiger. “To me, it starts with an awareness that the risk is… increasing, and getting really close to it, [and then] getting humility across the organisation that this is a continuous ongoing work of improvement.”278

Alongside financial and reputational drivers, there is growing regulatory pressure on fashion companies to tighten cyber and data security, largely sparked by Europe’s General Data Protection Regulation (GDPR). The consequences for non-compliance can be severe. In July 2021, a Luxembourg government entity alleged that the EU law had been breached by Amazon, prompting it to level a USD886.6 million fine against the e-tailer.279

In the US, one example of increased legislation is the California Consumer Privacy Act (CCPA) which took effect in July 2021. It gives consumers the right to know what personal data a company has access to and who it is shared with.280 In Brazil, the Lei Geral de Proteção de Dados (LGPD) came into force in 2021. The law imposes penalties of up to 2 % of annual revenues on companies that fail to protect customer data.281 Meanwhile, China’s new data security law which came into effect in November 2021 will regulate how companies collect and handle personal data. It also aims to ensure data is protected when transferred outside the country.282

Alongside financial and reputational drivers, there is growing regulatory pressure on fashion companies to tighten cyber and data security.

There’s a great deal of confusion, because there are so many standards out there [across different jurisdictions]… as well as a desire to — if we can — get global harmonisation, or at least within the US have a federal standard that supersedes state standards,” said Susan Scafidi, founder and academic director of the Fashion Law Institute at Fordham Law School in New York. “Hanging over all of this is this question of who owns our personal data, and who has the right to exploit it, and how.”283

There is evidence that consumers are increasingly aware of their data rights. In 2019, around 60 % of European consumers knew that rules exist to regulate the use of their data, an increase from around 40 % in 2015.284

However, consumer attitudes remain uneven across jurisdictions. Consumers in the US and Europe are more concerned about corporate accumulation of personal data, while those in Brazil and China are more comfortable trading data privacy for personalised services.285

In aggregate, the costs of data breaches and ransomware attacks are significant. Direct costs could include penalties and fees, lawsuits, remuneration to customers and the cost of recouping data. Experience shows that significant data breaches can cost companies tens of millions of dollars.286 There are also indirect costs associated with a potential loss of consumer trust and the struggle to acquire new customers following an incident.

Though complex cyber security measures often require significant investment, there are ways for SMEs and companies with fewer resources to take steps to improve their security. According to Spitzner, since the majority of attacks are still somewhat rudimentary, company leaders should at least focus on the basics. “If you don’t know where to start, start improving your defences in phishing and passwords,” he said.287

In an increasingly complex online ecosystem, there is an imperative for fashion companies to boost their operational resilience when it comes to cyber security and allocate a greater proportion of their budget to such defences. That means assessing and actively managing cyber and data risk exposure in the business itself, its third parties and its value chain. Leaders will need to take a risk-based approach, building in-house knowledge and resources while also considering leaning on external support from cyber security firms. Other industries have concentrated these efforts around a dedicated role such as the chief information security officer, who closely ties into legal and privacy teams.

Data is becoming both a strategic asset and a source of financial, reputational and operational risk. To meet customer expectations and comply with regulation, companies should put in place clear standards for the collection, use and storage of data. Moreover, they need to increase awareness of — and accountability for — threats while testing their cyber resilience through initiatives such as training frontline personnel on the sensitivity and handling of data. To prepare employees for the occurrence of a breach or attack, they should regularly organise cyber-attack simulations to test their response practices in real time, including the handling of communications to internal and external stakeholders. While there are many competing items on the C-suite agenda, cyber risk cannot be neglected.

Five Imperatives to Protect Fashion Businesses from Cyber Risk

In an increasingly digitised fashion economy, cyber risks are rising fast. To protect their customers, business operations and creative assets, fashion companies need to strengthen their defences, test regularly and embed cyber resilience into decision-making across the business. The benefits of getting this right will include both a reduction in risk and an uptick in performance.

by Benjamin Klein. The author of this article focuses on cyber security strategy and transformation at McKinsey. This article draws on a larger body of research on cyber security. The latest report in this series is Organizational Cyber Maturity: A Survey of Industries.294

Cyber attacks and data breaches are among the top risks for fashion companies, their customers and the wider economy. The theft of corporate, customer and employee data or funds can reverse years of hard work, undermine relationships and have a significant impact on reputation and performance. The number of cyber incidents — including attempts to gain illegal access to a system, network, infrastructure or device for the purpose of causing damage or harm — is rising fast. Publicly reported US data breaches were up 38 % in the second quarter of 2021 compared with the first quarter, and breaches in the first half of the year alone reached 76 % of the total reported in 2020.288

Cyber security risks exist across a range of fashion industry processes, from digital design and data analytics to online transactions and supply chain operations. Many back-office systems have only recently been digitised, meaning they present a potential point of weakness for fashion leaders and security teams who had not previously been required to identify, assess and mitigate potential risks in those areas. Indeed, shifting ways of working create constant challenges, requiring flexible decision-making muscle and continuous re-invention of defences. There are two recent evolutions in fashion industry practices that have increased cyber vulnerabilities.

The first is a movement toward more agile ways of working. New products and services are increasingly developed and brought to market through fast-paced iterations using agile methods, where rapid timelines often do not allow for rigorous risk checks. Security teams must be involved early in the development process and embedded into the full digital lifecycles of new products and services. The second is the ongoing evolution of technologies. Increasing use of cloud computing, artificial intelligence and machine learning is exposing companies to more cyber risks by widening the scope for attack. Security teams must be innovative in finding ways to apply common security patterns and methods to new technologies.

Cyber risk is on a long-term upward trend that accelerated during the Covid-19 pandemic, partially as a result of widespread adoption of work- from-home patterns and technologies and soaring demand for e-commerce. Indeed, online retail

has been one of the most attacked sectors over the past year, accounting for 10.2 % of all attacks across industries.289 Given the growing frequency and severity of incidents, regulators are requiring businesses to protect themselves, their partners and their customers, and punishing those that fail to do so. Europe’s General Data Protection Regulation (GDPR) imposes fines for non-compliance of as much as 4 % of a company’s global annual revenues.

A challenge for companies looking to invest in cyber defences is that the cost of initiating an attack is significantly lower than that of protection. This creates an asymmetric battlefield in which hackers, companies, state-sponsored agencies and other perpetrators can enter systems with relative ease. Moreover, for victims, the cost of being attacked continues to rise. The average cost of a data breach rose by nearly 10 % year on year in 2021 to USD4.24 million, the largest single annual increase in seven years, according to IBM’s Annual Cost of Data Breach Report 2021.290 In addition, the longer that systems remain compromised the more the costs mount.

A challenge for companies looking to invest in cyber defences is that the cost of initiating an attack is significantly lower than that of protection.

Across industries, corporate approaches to cyber security are maturing, with companies acquiring new capabilities and bolstering their resilience. Banking and healthcare are among the most mature industries when it comes to cyber resilience, while fashion has a long way to catch up. In response, fashion decision-makers need to adopt a dual mindset, reconciling short-term needs created by the pandemic with the longer-term demands of the digital economy. To increase resilience, security should be embedded into products and processes, while customers, partners, third parties and regulators should also be incorporated into enterprise-resilience management.291

The rewards of doing so are clear for decision-makers: there is a direct relationship between cyber resilience and business performance. According to a recent McKinsey survey, higher cyber security maturity correlates with better margins, so the payoff from strong risk management extends beyond security.292

A successful roll out of improved cyber capabilities should be predicated on action across five key areas:

Identify the playing field and risk environment.

Cyber security leaders should focus on identifying relevant cyber risks (including potential “black swan” events) across their value chains. That starts with understanding legal and regulatory ground rules, and moving to a risk-based approach. This recognises that not all assets are created equal, and not all can be equally protected. It is vital for business leaders to take a global view of both the company’s operations and its supply chains, and to communicate cyber security requirements to suppliers and third parties. Insurance against cyber attacks is an option, but it is worth reading the small print; there are likely to be areas of risk that are not covered, and market conditions are changing rapidly.

Build capabilities to prevent cyber attacks.

Rules and standards should be developed (such as acceptable use policies for email and anti-phishing guidelines) and technical prevention measures should be deployed across systems, including data encryption and next-generation firewalls. While some systems may need an extra level of protection, a general baseline is essential, such as keeping software up to date and regularly scanning systems for vulnerabilities. Where the cyber risk extends to production and manufacturing systems or other connected devices, measures should be expanded into those areas, too.

Reinforce the ability to detect and respond to cyber attacks.

The traditional focus of cyber security has been on prevention, but the spotlight is now moving towards detection and response, acknowledging that attackers will inevitably succeed in breaching systems. Internally, that means closely monitoring systems and applications, as well as encouraging employees to report suspicious activities.

Customers, partners and third parties should be fully incorporated into both detection and response measures. Externally, businesses should keep a close eye on cyber threat intelligence and be on constant alert, even if their own mechanisms have not yet triggered an alarm.

The traditional focus of cyber security has been on prevention, but the spotlight is now moving towards detection and response.

Clarify responsibilities across the business.

Clear roles and responsibilities are vital to cyber resilience. Companies need to define what “good” looks like, who owns which part of cyber security and how relevant capabilities and skills should be developed. It is essential for the company’s front line personnel and anyone who is not an IT or security professional to understand their role in identifying and mitigating cyber risk, and to know what level of support they can rely on. Some companies have created the role of chief information security officer (CISO), an executive who defines and leads the overarching approach to cyber security, establishes central cyber security capabilities and helps to build capabilities across the business. While companies will need to build in-house capabilities in certain areas, they can also consider external support.

Simulate the worst case and build muscle memory.

Leading organisations test their plans and prepare for the worst by carrying out attack simulations. The aim is to assess decision-making, ensure clarity of roles and responsibilities, including decision-making power, and identify weaknesses. This enables companies to develop an effective response mechanism and improve upon their reaction speed in the event of a real attack.

Companies that lead in cyber security are defined by their outstanding performance in several key areas, including maintaining a low “click rate” in employee phishing programmes;293 regularly revisiting and updating cyber security priorities; deploying solutions for managing applications; scanning the IT environment for vulnerabilities; and sourcing intelligence on threats. As an overarching principle, senior managers should incorporate cyber risk into all decision-making. In this way, they will get on the front foot and ensure the organisation’s defences are as resilient as possible.

TALENT CRUNCH

Companies that rely on brand appeal or the allure of fashion to attract and retain talent will need to raise their game as competition from both within and outside the industry intensifies, leading to more vacancies next year. As employees from upper management to the retail front line reconsider their priorities, companies must refresh their talent strategies for an increasingly flexible, diverse and digitised workplace.

Fashion companies face a talent deficit in the year ahead.295 Amid all-time-high vacancy rates, businesses are struggling to attract and retain talent — particularly in digital, creative and commercial roles. Employees now have more choice than ever about where, when and how to work in a rapidly evolving job market. To complicate matters further, shifting employee priorities are changing the way people think about job satisfaction. As a result of these and other challenges, there will continue to be a shortage of interested, qualified workers in 2022.

Fashion’s public image is only adding to the challenge. Employee concerns over the industry’s environmental and social impact, in addition to inadequate progress on diversity, equity and inclusion (DE&I), are having a real effect on its desirability.296 Indeed, 49 % of fashion professionals believe the industry has lost some appeal as an employer in the past 18 months, a BoF survey shows, with the industry’s reluctance to change and poor sustainability credentials cited as common reasons. In the C-suite, the proportion rises to 56 %. 297

Given these attitudes, fashion companies need to adapt to stay competitive, improving employment conditions and reimagining workplace cultures to reflect changing talent needs.

There [may be] a perception among some fashion companies that they are ‘too big to fail,’ … [or a notion that employees should feel] ‘lucky enough to be here,’” said Caroline Pill, London-based partner at fashion and retail executive placement firm Kirk Palmer Associates. “[But] people are now attracted to [factors like] ‘what is my impact in the bigger scheme of things?’ [so]… companies who are not going to adapt are going to struggle.”298

One contributor to the talent crunch is the impact of the Covid-19 pandemic on business models. With e-commerce’s share of global fashion sales nearly doubling between 2018 and 2020 in some regions,299 as even digital laggards got in on the act, the imperative to secure the best digital talent became more urgent.300 With online acceleration came a plethora of new vacancies, as companies scrambled to hire for roles such as authenticators for fashion resale platforms, analysts and data scientists, reflecting brands’ increasing emphasison big data.301 Other specialist roles, such as those relating to sustainability, have also proved challenging to fill.

At senior levels, brands saw a wave of resignations in 2021, with some company leaders leaving fashion for other sectors like technology.302

Indeed, a significant proportion of C-suite executives remain on alert for opportunities in other industries, with 34 % saying they have considered leaving the fashion industry in the past 18 months.303 This is a common sentiment across job levels, with nearly half of all fashion professionals in the BoF survey reporting that they have considered moving to another sector.304 Among this group of potential leavers, 60% cite a desire for a deeper sense of purpose as one of their top three reasons, followed by 45 % citing better salary and benefits.305 Tellingly, only 14 % of this group indicate that industry prestige is one of their top three reasons to leave or remain in fashion.

Brands saw a wave of resignations in 2021, with some company leaders leaving fashion for other sectors like technology.

These trends are reflected in the wider economy. Across sectors, a significantly higher proportion of the global workforce is considering leaving their employer this year compared to previous years. Coupled with the specific challenges facing fashion, this suggests a refreshed approach to employer branding and retention strategies will be required in the year ahead.306 In particular, revised policies will be needed on the front line.

Retailers have struggled to staff their stores and distribution centres in 2021, while rising e-commerce order volumes have challenged in-store fulfilment.307 Additionally, there were waves of redundancies in the same year amid widespread company restructuring and store and department closures. As a result, some workers re-evaluated their priorities and opted to move away from arduous, low-paid work.

One critical factor in the talent crunch is wage levels: 51 % of fashion professionals in Indeed, a significant proportion of C-suite executives remain on alert for opportunities in other industries, with 34 % saying they have considered leaving the fashion industry in the past 18 months.303 This is a common sentiment across job levels, with nearly half of all fashion professionals in the BoF survey reporting that they have considered moving to another sector.304 Among this group of potential leavers, 60 % cite a desire for a deeper sense of purpose as one of their top three reasons, followed by 45 % citing better salary and benefits.305 Tellingly, only 14 % of this group indicate that industry prestige is one of their top three reasons to leave or remain in fashion.

These trends are reflected in the wider economy. Across sectors, a significantly higher proportion of the global workforce is considering leaving their employer this year compared to previous years. Coupled with the specific challenges facing fashion, this suggests a refreshed approach to employer branding and articulating their corporate purpose, values and career development opportunities.

In 2022, authenticity, flexibility and employee wellbeing will prove to be stronger pulls than ever. Some companies have already made public moves to demonstrate these values: Nike closed its offices for a week to give staff a “mental health break,”314 while Tapestry plans to extend remote working as long-term solutions for some employees.315 Hybrid home and office working can also boost loyalty. Some 46 % of fashion respondents to the BoF survey say flexible working is one of their top three most important factors when choosing to remain with their employers.316 Hybrid working is set to become table stakes in some markets, alongside flexible working hours, and reluctant or slow-moving brands are likely to lose out to their more adaptable peers.317 Where hybrid working is not possible, on-site employees will demand other flexible conditions.

In 2022, authenticity, flexibility and employee wellbeing will prove to be stronger pulls than ever.

Employees today want their employers to reflect their values, meaning that a company’s position on corporate social responsibility (CSR) issues, including sustainability and DE&I, will play a big role in attracting and retaining talent.

Indeed, one recent study revealed that 64 % of Millennials said they would not take a job if the employer did not have a strong CSR policy.318 In addition, some 83 % say they would be more loyal to an employer that helps them contribute to social and environmental causes.319 That said, when putting their values into practice in different markets and working cultures, companies need to ensure they take local sensitivities and priorities into account.

“[Our values] are not different in any region [and] that’s very important to us… but there may be nuances to the way that a goal is achieved…[in markets as distinct as China and Brazil, for example, so we have] a level of independence in each geographical region, to do what’s right by that culture and that country. The end goal is still aligned,” said Sian Keane, chief people officer of luxury e-tailer Farfetch.320

“[We have] a level of independence in each geographical region, to do what’s right by that culture and that country.”

There is plenty of evidence to show that gender-diverse and ethnically diverse companies financially outperform their peers.321 However, there is still little diversity at the top of fashion companies, with senior roles regularly dominated by white men — one of the only exceptions being the chief diversity officer role.322 Some 42% of fashion professionals rate the industry’s performance as “poor” or “very poor” in prioritising DE&I as a core value, the BoF surveys shows.323 According to a separate survey by the Council of Fashion Designers of America (CFDA) and PVH, industry professionals most frequently describe the state of DE&I in fashion as “evolving” and “improving,” while less than half of respondents believe actions taken in 2021 will lead to lasting change.324 Furthermore, some 50 % of employees of colour say that a career in fashion is not equally accessible to all qualified candidates.325

Still, some companies are taking steps to show employees, consumers and investors that improving DE&I is a priority. In 2021, Target and Nordstrom were among the companies to publish more detailed employee demographic information, taking responsibility for the lack of diverse representation at leadership level and committing to regular updates on progress. Prada, working with the Dorchester Industries Experimental Design Lab, launched a three-year programme for artists of colour, aiming to recruit talent from outside the company’s regular Italian fashion school recruiting grounds.326

Over the coming year, the fashion industry’s progress on DE&I and sustainability will continue to be put under the spotlight, with brands held accountable by their employees for putting their public values into practice.327 Listening and responding to these shifts will be crucial for many brands that are aiming to attract a new, diverse generation of talent. Companies that lose momentum and fail to demonstrate progress, conversely, could end up closer to the bottom of employer league tables. These measures are also key to ensuring the relevance of their brands with customers.

While many of the forces currently shaping the fashion industry employment landscape have evolved slowly over time, there is now an urgency to implement changes. Companies that have long relied on the inherent allure of the industry and the power of their brands to secure the best talent will need to accelerate their efforts to improve workplace culture — ensuring that employees are sufficiently represented in key decision-making processes and that the company is “walking the talk” when it comes to demonstrating their values. In theyears ahead, these actions will draw a line between employers that win the battle for talent and those left behind.

EXECUTIVE INTERVIEW

Farfetch: Adapting to the New Talent War

Sian Keane

Chief People Officer, Farfetch

Farfetch chief people officer Sian Keane is passionate about ‘not encouraging microcultures within the business,’ especially between creative and tech specialists, as she believes that weakens the luxury e-tailer’s common thread of values. But with the fashion industry facing a talent deficit in the year ahead and workers expecting more flexibility, it will be hard for companies to strike the right balance across recruitment and retention strategies as different specialists expect different things from workplace culture.

— by Sheena Butler-Young

E-commerce companies like Farfetch have long prided themselves on an ability to attract a healthy mix of talent from both the tech sector and the fashion industry, but the war for talent has only intensified in recent years. It could get even tougher next year, as fashion companies battle to secure the specialists they need.

A tighter labour market, where workers scrutinise everything from a company’s sustainability record to its inclination to offer flexible working environments, means it will be just as important for people leaders to have an ironclad recruitment and retention strategy as it is for them to be ready to pivot on a dime.

Sian Keane, the UK-based luxury e-tailer’s chief people officer, believes that the talent challenges that have arisen from the pandemic are not necessarily more difficult than those of the past, but simply different in nature. Among her concerns for the future are the number of women leaving the workforce and the challenges associated with building and replenishing pipelines that feed diverse talentinto a business whose workers and consumers are increasingly global. But despite the pressures that are likely to mount across the industry in 2022, Keane sees opportunities in the “borderless society” that has emerged since remote and hybrid working took hold. “Now we’ve got access to people who may not have considered leaving their job before,” she says.

A lot has been said about the impact of the Covid-19 pandemic on people’s values and their attitude towards work. How has this played out at Farfetch?

The two things we really think about are around meaning.

People need to be connected to meaningful work. The second is making sure that we create a very strong sense of belonging.

That’s something that has always been an important factor at Farfetch and is something that we know our people value, as we’ve learned through our employment engagement surveys. But creating a sense of belonging in a hybrid world is a new challenge.

How have you done that — created a sense of meaning and belonging — with remote work in play?

Learning is something we had always invested in, but as soon as we went into working-from-home mode, we really fast-tracked a lot of our digital learning tools so that people could learn remotely and still be able to access that level of training. Thinking about how we can make sure that people feel they’re continuing to grow their own careers and thrive in a hybrid and remote world is something that we’ve really leaned into. We just launched a very structured programme around personal development plans for everyone and that started from some of the work that we were doing under diversity and inclusion. Then, we accelerated that for all our [employees], because I think ensuring that everyone feels as though they’re connected to their future career is quite important.

In what significant ways have recent social justice movements and protests, especially those in the summer of 2020, changed how you think about recruitment and employee retention?

The first thing we did is host listening sessions with our internal communities to find out what they’re really experiencing and feeling in their personal lives as well as their professional lives. Then we built a “positively inclusive” strategy against that, so that we are responding to not just what we’re hearing externally, but what our people are really feeling and experiencing internally. We created our Farfetch commitments, which are about creating a values-driven experience for all our [employees]. One of those commitments is around increasing the pipeline of diverse talent and increasing senior representation internally. The second thing is trying to [address] the skills gap. This is really important because the challenge that we have faced, with regards to hiring and recruiting more diverse talent, is how to access talent in the first place. So that may be thinking about partnerships with external businesses and organisations; it might be broadening where you look for talent to access a broader set of demographics and people from socio-economic backgrounds. We will be watching very closely and monitoring the impact of some of those partnerships on the diversification of the way that we recruit. Internally, we’re making sure that we’re collecting the data — and we’re still on a journey with this — to be able to ensure that our promotions, progression, development and the decisions that we make are having a positive effect on the diverse pipelines that we already have.

Broadly speaking, is it harder for you to recruit now than it was a year ago?

I don’t think it’s harder for us to recruit now than it was a year ago; we just have different challenges than we did a year ago. We’ve certainly increased and leaned into the hiring, training and development of our talent acquisition team more than ever. We’re seeing that shine through in some of the numbers. However, some of the challenges that weare facing are the compensation strategy and the challenges that we see around competitors from a remote working point of view.

We want to have a very strong balance between home and office- based work because we think socialisation and collaborationis critically important to our long-term culture, so we’re not a remote business. There’s also a number of new start-ups and businesses that have been born out of the pandemic that may be attractive to people as they’re considering job moves. Then we see things like saturated talent markets. There are geographies where we need to keep shifting and moving to be able to access talent from different sources. Of course [having] avenues for a more diverse pipeline of talent is something that is hard for businesses to do [but] they really have to make an effort. This kind of sentiment — the war for talent — is something that has been around my entire career, [but what’s different now is where the] demand is, and where you’re seeing it pivot, and being fast enough to make decisions and adapt your processes and hiring policy practices to support that.

As both an e-commerce company and a fashion player, Farfetch must recruit from both tech and fashion circles. How do employees’ expectations tend to differ from these groups, and are they evolving in different ways now?

Fashion businesses are starting to look for people who come from a technology background, and technology businesses are looking for people who come from a fashion background. Whereas for Farfetch, that’s been front of mind since day one as we’ve always been a mixture of both. Our ultimate aim is to create one community at Farfetch, although we’re not blind to the fact that there might be differences in desires of how those things come to life from an employee experience. For example, some of the initiatives or ways of working that we put in place for our technology community and our engineers would differ greatly from the experience that we might have for the commercial or the fashion side of the business. But one thing that we have done that we felt quite strongly about is not encouraging microcultures within the business. Farfetch values… are Farfetch values [across the entire business]. They’re not different in any region and we believe it’s a common thread between the broad range of specialists that we have within the business because we really have come together as both fashion and technology specialists. That’s very important to us. Another thingis that we actually embrace our difference. We don’t try to be Slack, Google, Facebook or anything else like that.

Farfetch has more than a dozen offices and locations across 10 countries, which employ more than 5000 people. With such a global view, would you say that the talent shortage is palpable right now, especially in terms of digital and technical skills?

When I joined Farfetch, there were 100 people and now there’s more than 5,000. There are more vacancies than ever in the world right now, certainly in the UK. It’s already quite easy for people to think about leaving a company.

Then, when you add on the digital expertise side of the equation, put Brexit on top of that, and the fact that it’s much harder to travel now, these are all the sorts of things that are starting to erode access to talent. By the same token, businesses can benefit from movements of talent. We’ve certainly seen increases in success in hiring, because now we’ve got access to people who may not have considered leaving their job before.

Is diversifying how you look for tech talent as well as engaging under represented groups helping Farfetch avoid the talent shortage?

Absolutely. Then there’s the other side of things; our consumers are increasingly becoming more global. In order to engage with your consumers, you need access to more native-language speakers than you had before. We’re seeing demand for stylists from Germany, Romania, Bulgaria, Poland and places that we hadn’t seen before. It’s about being able to access talent from other regions that we may not have been heavily leaning into before the pandemic.

What are the most concerning issues surrounding talent recruitment and retention for the fashion industry, as we head into 2022?

The movement of talent. We put a huge amount of effort into hiring, nurturing and growing our Farfetchers internally, so our talent pool is very precious to us. Being such a values- and culture-driven business, we want to ensure that we have as much as possible in place so people don’t feel as though their heads need to be turned to other businesses. That’s why we have our internal engagement surveys and things set up around access to our people communities and our people processes. Those things allow us to understand why people may get itchy feet and be able to mitigate that before they’re considering leaving the business. The other concern is the rate of females leaving the workforce and what might therefore happen in the long term to the successes that come from business investments in increasing gender balance within the workforce.

This interview has been edited and condensed.

MCKINSEY GLOBAL FASHION INDEX

Sportswear and Luxury Emerge as Star Sectors Amid Broader Value Destruction

As the industry comes to terms with record levels of value destruction, a subset of players tapping into shifting consumer behaviour and resilient geographies will consistently outperform the market.

Key Insights

The impact of the pandemic in 2020 meant the industry posted negative economic profit for the first time in at least a decade, causing record levels of industry consolidation in 2020 and
A record 69 % of fashion companies destroyed value in 2021, reaching new depths of negative economic profit and dragging down overall industry
Fashion’s recovery looks set to be V-shaped, as performance in the first half of 2021 points to a possible return to positive economic profit by
The companies on this year’s ‘Super Winners’ list remained relatively stable in comparison to the list published in The State of Fashion 2020, with particularly strong performance from sportswear and luxury

Looking Ahead — Big Bets for 2022

This year, we also assessed the top 20 companies by their market capitalisation, to identify where valuations have grown above marketlevels and understand future trends based oninvestor expectations. In addition to the continued strength of sportswear and luxury, three additionalfocus areas for investors were jewellery, Chinese companies and disruptive business models. Jewellery companies (particularly fine jewellery) saw gains in market capitalisation that reflected overall luxury resilience and rising consumer demand for investment pieces.335 The branded fine jewellery segment is expected to grow by between 8 and 12 % from 2019 to 2025.336 Richemont saw its valuation increase by 40 % from December 2019 to September 2020, and Chow Tai Fook doubled its market capitalisation in the same period. Titan, a leading Indian jewellery player, realised the fruits of its pre-pandemic investment in omnichannel and continuedformalisation of the Indian jewellery market andsaw an increase in market capitalisation of 80 %.337

Overall, three Chinese companies, AntaSports, Li Ning and Chow Tai Fook, were among the top 20 and showed the highest market capitalisation growth across all players. Forexample, Li Ning increased its market capitalisation by a multiple of 3.9 during the period. These players benefited from the repatriation of Chinese spend as consumers embraced local brands, particularly as global travel was restricted.338 As travel disruptions are likely to continue through to the beginning of 2023, meaning consumers increasingly shop localvia domestic travel and duty-free shopping, China’s local fashion sales growth will continue to benefitthrough 2022 and beyond.

Finally, companies with business models that aligned with accelerated shifts in consumer behaviour during the pandemic are being rewarded. For example, online clothing marketplace Zalando saw its market capitalisation rise by a factor of 1.9 amid surging consumer demand for e-commerce.

Majority private-equity owned Burlington also crept into the top 20 on a market capitalisation basis, as investors rewarded its big bets on the value segment, taking advantage of the reshuffle of market share, consumer loyalties and retail space that is likely to continue to play out among players in the industry in 2022 and beyond. Burlington opened 100 discount stores in 2021 alone.339

In terms of outright stock market performance, the top 20 by market capitalisation outperformed the rest in 2020, reflecting comparatively lower revenue declines (minus 4 %, compared with minus 20 % across the industry). Several of the top 20, and particularly sportswear and jewellery players,even saw revenues rise. The EBITA margins ofthe top 20 were around 12 % on average in 2020, compared with 3 % across the industry.

Meanwhile, profit margins of both groups saw similar 3 to 4 percentage point declines. While the tide is turning with 2021 and 2022 looking significantly more positive for the global fashion industry than the previous two years, the shakeout is not over as weaknesses exposed during the Covid-19 pandemic will continue to plague the industry. However, those that are ablet o pivot quickly to meet the changing expectations of consumers, while appropriately managing inventory and supply chain costs, will leapfrog ahead into a new dawn of recovery.

Signs of a V-Shaped Recovery

Despite the losses experienced in 2020 and 2021, investors are optimistic about the industry’s earnings potential, ascribing some 43 % of enterprise value to reported earnings projections discounted to perpetuity in 2021,329 and 57 % to future earnings growth. In most other consumer industries, this ratio is typically closer to 50:50, which suggests investors in the fashion industry are bullish on its value-creating potential in the long run. Still, to drive long-term value creation, fashion companies have their work cut out. The pressure is on for decision-makers to focus on scaling growth, as well as finding operational and capital efficiencies.

Recent evidence suggests that the worst is over in many markets, with positive signs that the industry is delivering on investor expectations. In the first half of 2021, 280 listed companies that published results reported aggregate top-line growth of 5.3 %, compared with the same period in 2019. The luxury segment outperformed, posting growth of 16 %, compared with the rest of the market at around 4 %.330 Digital pure play companies also outperformed, as did sportswear brands and some discounters. On the other hand, offline players such as large department stores and some mid-market fashion brands lagged.

Among the same cohort of companies, net operating profit after tax was up 22.7 %t from 2019 levels in the first half of 2021, resulting in a corresponding aggregate 1.4 %age point improvement in margins. Looking ahead to the remainder of 2021 and beyond, profits are expected to see a stronger recovery than revenues because the cost base remains lower than 2019. This follows significant cost cutting in 2020, much of which will persist for the next few years. However, cost uncertainties will remain in the short to medium term, as input cost rises due to ongoing supply chain congestion could temper margins.331

Given the significant declines in invested capital in 2020, we could assume that stronger revenues and operating profits have been achieved with less invested capital in 2021 than in 2019.

Total invested capital fell by 6 % between 2019 and 2020, partly because of bankruptcies and restrained investments. The evolution of investment patterns over 2021 also remains uncertain however, partly because market consolidation could contribute to a rise in invested capital through creation of goodwill.

Overall, strong revenues and operating profits combined with potentially lower invested capital in 2021 means we anticipate positive economic profit overall in 2021, with some possibility that it will even exceed 2019 levels.

However, factors such as the impact of ongoing supply chain disruptions mean that predictions are inherently uncertain, as some companies are already noting.

Growth observed among listed companies in the first half of 2021 is in line with the McKinsey Fashion Scenarios predictions for the full year, which takes a more conservative view of H2 2021 in light of supply chain concerns, and accounts for lower top-line performance of non-listed companies and revenues lost through bankruptcies. Overall, McKinsey Fashion Scenarios project the total industry to reach 96 to 101 % of 2019 levels in 2021, with luxury driving recovery and reaching 105 to 115 % in the same period.

Further Polarisation — New Depths in the Industry’s Bottom Performers

Until this year, the evolution of economic profit within performance quintiles has reiterated an established narrative: economic profit gravitating towards the most successful companies.

While all quintiles saw declines in economic profit in 2020, the relative impact on the top versus the bottom contributed to further polarisation, driven by dramatic declines in economic profit for the bottom quintile, which fell by 109 %age points from 2019 levels. This is relative to the 60-percentage-point drop of the top quintile. Unlike previous years, where the story was one of “winners take all,” the story in 2020 shifted to one of severe value destruction. Similarly, 2020 revealed a steadily expanding group of value destroyers that delivered negative economic profit. Accelerating a trend that has been developing for a decade, a record 69 % % of companies destroyed value in 2020, compared with 61 % in 2019 and just 28 % in 2011. Underlying this longer-term polarisation is a continuing shift in consumer behaviour, with the highly populated mid-market suffering at the expense of a relatively few dominant luxury, value and sportswear players. Companies that transformed from value creators in 2019 to significant value destroyers in 2020 strongly represented the mid-market, alongside discount players and department stores, which all rely heavily on physical channels and therefore have been disproportionately impacted by lockdowns. As in-store retailing rebounds, some of these players will return to value creation, as already observed in the discount segment.

Last year, we warned that the increasing share of value destroyers could imply that companies will struggle to re-finance, as they cannot earn their cost of capital. This has played out in the 7 % of fashion companies in our dataset that either filed for bankruptcy or were sold in 2020 and 2021. Given the high proportion of value destroyers, financial distress and resulting consolidation is likely to continue.

Drivers of Value Creation in 2020

Luxury and sportswear have consistently contributed a large share of positive economic profit to the fashion industry, each contributing some 20 % of economic profit among value creators every year in the past five years. Sportswear has been growing steadily for some time, with total economic profit by the sector’s value creators growing every year from 2012, doubling in total over the eight-year period. Given the destruction of value in other sectors, 2020 was a breakout year for sportswear, with 42 % of positive economic profit contributions in the industry coming from sportswear companies and making it the largest contributor byfar.332 Showing their resilience, 14 sportswear companies were value creators in 2020, and 15 were value creators in 2019. By comparison, in many other sectors, the propensity to become value destroyers in 2020 was much higher.

The geographic distribution of economic profit contributions in sportswear is also shifting eastwards. China-based companies contributed 16 % of positive economic profit in 2020compared to 9 % in 2017, driven largely by Anta Sports and Li Ning. Outside China, the largest value creators were North American players, including Nike, Lululemon and Dicks Sporting Goods.

Luxury also demonstrated resilience in 2020. EBITA margins in luxury and affordable luxury dipped from a 10-year average of around 19 % to 16 %, but remained within their historic range, contrary to other value segments.

Luxury top lines fared relatively well, with the smallest revenue declines in 2020 compared with other segments. Underlying this was strong performance in China, as well as the fact that most luxury companies succeeded in accelerating digital sales through 2020. Another factor was cost control, where the luxury segment successfully maintained costs roughly in line with revenues, with the aggregate ratio of selling, general and administrative expenses (SG&A) to revenue only increasing by 1.4 percentage points from 2019 to 2020.

Margins in other segments were under pressure in 2020, trending below historic ranges. Within our sample of listed companies, value and discount revenues fell by around 17 % from 2019, amid weak consumer sentiment and the segments’ reliance on physical store networks.

The cost of maintaining stores also prevented companies from reducing costs in line with revenues, and there was an increase in the share of SG&A to revenue of around 4 percentage points from 2019 to 2020. The mid-market and premium segments, meanwhile, saw revenue declines of 17 % and 13 % respectively. However, these segments were able to manage costs more effectively and saw increases in SG&A to revenue ratios of 1 to 2 percentage points in 2020. Internet retailers also outperformed in 2020 and 2021, reflecting the massive shift to e-commerce. In market capitalisation terms,

internet retailers were trading 112 % higher in September 2021 than in December 2019, compared with the rest of the industry which was trading 28 % higher. Still, this was a much narrower gap than during the height of lockdowns, when valuations of online players peaked and those across the rest of the industry reached their nadir.

Super Winners — A Mostly Consistent Story

In previous versions of the MGFI, we have highlighted a winner-takes-all trend in the fashion industry that has created a group of “Super Winners.” In last year’s report, we were unable to publish the list, due to different reporting periods for financial year results, which distorted economic profit results due to varying levels of exposure to the pandemic during the months captured in full-year results. This year, we are taking a different approach, calculating the average economic profit contributed by each company over a two-year period, covering financial years 2019 and 2020.

This approach helps to smooth distortions created by market disruption over the past 18 months. To supplement this view, we also ranked the top 20 based on market capitalisation to identify trends emerging beyond current performance indicators.

Our latest group of Super Winners reflects the resilience of luxury and the spectacular growth of sportswear. The top five Super Winners, based on average economic profit over 2019 and 2020, were Nike, Inditex, Kering, LVMH (including Tiffany) and Hermès. The luxury players in this group continue to benefit from demand for bags, luxury jewellery and ready-to-wear from wealthy customers, whose earnings were less impacted by the pandemic and whose funds saved on travel and entertainment were reallocated towards luxury goods. A new entrant on the list from The State of Fashion 2020 report, ranking at number 19, was Moncler with strong growth in China and e-commerce channels.333 In addition, jewellery players contributed significant economic profit during the period, boosted by Pandora, which saw excellent turnaround performance, doubling their online sales during the pandemic — a result of the previous years’ investments in digital capabilities and data, and increased brand desirability.334

The changes in category focus of some shoppers accelerated existing strengths in sportswear, athleisure and outdoor brands as people sought out comfortable work-from-home and home workout attire. Sportswear giants Nike, Adidas, Anta Sports and Lululemon remain on the Super Winners list this year, with Anta Sports moving up the ranking and posting more economic profit than observed in the 2020 report, benefitting from Chinese breakout growth and domestic spend on local brands. In addition, all new entrants to the list this year, namely JD Sports, Deckers and Moncler, come from the sports and outdoors category. Other players benefitted from a strong business in underwear, nightwear and casualwear during the period.

Some Super Winners saw declines in economic profit during the period, with market valuations also growing slower than the industry average. Indeed, value and discount players saw earnings drop due to their physical stores halting sales during the pandemic. Additionally, mid-market fashion players saw economic profits decline in 2019 and 2020 compared to 2018, and saw their valuations grow in line with or slower than the industry average. These players saw revenue fall as spending in the category decreased overall. Particularly in Europe and the US, where lockdowns were extensive, shoppers also shifted some of their spend on clothing to essential retailers such as grocers.

Looking Ahead — Big Bets for 2022

Jewellery companies (particularly fine jewellery) saw gains in market capitalisation that reflected overall luxury resilience and rising consumer demand for investment pieces.335 The branded fine jewellery segment is expected to grow by between 8 and 12 % from 2019 to 2025.336 Richemont saw its valuation increase by 40 % from December 2019 to September 2020, and Chow Tai Fook doubled its market capitalisation in the same period. Titan, a leading Indian jewellery player, realised the fruits of its pre-pandemic investment in omnichannel and continued formalisation of the Indian jewellery market and saw an increase in market capitalisation of 80 %.337

Overall, three Chinese companies, Anta Sports, Li Ning and Chow Tai Fook, were among the top 20 and showed the highest market capitalisation growth across all players. For example, Li Ning increased its market capitalisation by a multiple of 3.9 during the period. These players benefited from the repatriation of Chinese spend as consumers embraced local brands, particularly as global travel was restricted.338 As travel disruptions are likely to continue through to the beginning of 2023, meaning consumers increasingly shop local via domestic travel and duty-free shopping, China’s local fashion sales growth will continue to benefit through 2022 and beyond.

In terms of outright stock market performance, the top 20 by market capitalisation outperformed the rest in 2020, reflecting comparatively lower revenue declines (minus4 %, compared with minus 20 % across the industry). Several of the top 20, and particularly sportswear and jewellery players, even saw revenues rise. The EBITA margins of the top 20 were around 12 % on average in 2020, compared with 3 % across the industry. Meanwhile, profit margins of both groups saw similar 3 to 4 %age point declines.

While the tide is turning with 2021 and 2022 looking significantly more positive for the global fashion industry than the previous two years, the shakeout is not over as weaknesses exposed during the Covid-19 pandemic will continue to plague the industry. However, those that are able to pivot quickly to meet the changing expectations of consumers, while appropriately managing inventory and supply chain costs, will leapfrog ahead into a new dawn of recovery.

www.mckinsey.com

www.businessoffashion.com

A note from the TextileFuture Team: WE HAVE WILLENTLY OMITTED THE PART IN VIEW TO THE BEAUTY BUSINESS, BECAUSE THESE FINDINGS ARE N O T SO RELEVANT TO OUR READERS. Should you be interested, you can download the entire Fashion Report here and read also the Beauty Part.

Newsletter of last week

State of Fashion 2022: An uneven recovery and new frontiers (Part 1) https://textile-future.com/archives/81331

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

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by Virginia