Professional Documents
Culture Documents
Fashion 2020
Coronavirus Update
The State of Fashion 2020 — Coronavirus Update
2
CONTENTS
Introduction 6
ECONOMY
GLOBAL
GLOBAL ECONOMY
01: Survival Instincts 10
CONSUMER SHIFTS
CONSUMER
02: Discount Mindset 16
SHIFTS
03: Digital Escalation 20
In-Depth: For Luxury, an Acceleration of the Inevitable 24
As founder, editor-in-chief and Based in Frankfurt, Achim Anita Balchandani is a Partner As global senior expert in
chief executive of The Business Berg leads McKinsey’s Global in McKinsey’s London office, McKinsey’s Apparel, Fashion
of Fashion, Imran Amed is Apparel, Fashion & Luxury and leads the Apparel, Fashion & Luxury group, Saskia
one of the fashion industry’s group and is active in all & Luxury group in the United Hedrich works with fashion
leading writers, thinkers and relevant sectors including Kingdom. Her expertise companies around the
commentators. Fascinated by clothing, textiles, footwear, extends across fashion, world on strategy, sourcing
The State of Fashion 2020 — Coronavirus Update
the industry’s potent blend athletic wear, beauty, health and beauty, specialty optimisation, merchandis-
of creativity and business, he accessories and retailers retail and e-commerce. She ing transformation, and
began BoF as a blog in 2007, spanning from the value end focuses on supporting clients sustainability topics — all
which has since grown into the to luxury. As a global fashion in developing their strategic topics she is also publishing
pre-eminent global fashion industry and retail expert, responses to the disruptions about regularly. Additionally,
industry resource serving a he supports clients on a broad shaping the retail industry she is involved in developing
five-million-strong community range of strategic and top and in delivering customer strategies for national garment
from over 200 countries and management topics, as well as and brand-led growth industries across Africa, Asia,
territories. Previously, he was on operations and sourcing- transformations. and Latin America.
a consultant at McKinsey related issues.
in London.
Felix Rölkens is part of the As global markets editor of Jakob Ekeløf Jensen is a
leadership of McKinsey’s The Business of Fashion, consultant in McKinsey’s
Apparel, Fashion & Luxury Robb Young oversees content London office, specialising in
group and works with from Asia-Pacific, the Middle Apparel, Fashion & Luxury.
apparel, sportswear and pure East, Latin America, Africa, He has supported several
play fashion e-commerce the CIS and Eastern Europe. global fashion companies
companies in Europe and He is an expert on emerging as well as investors looking
North America, on a wide range and frontier markets, whose at fashion assets across
of topics including strategy, career as a fashion editor, Europe, on topics including
operating model and merchan- business journalist, author and e-commerce, strategy, value
dising transformations. strategic consultant has seen creation and M&A.
him lead industry projects
around the world.
4
ACKNOWLEDGEMENTS
The authors would like to thank all members of The Business of Fashion and the McKinsey community for their contribution to the
research in this report.
The wider BoF team has also played an instrumental role in creating this report — in particular Amanda Dargan, Anouk Vlahovic,
Casey Hall, Christina Yao, Hannah Crump, Jael Fowakes, Kate Vartan, Lauren Sherman, Niamh Coombes, Nick Blunden, Olivia
Howland, Queennie Yang, Sarah del Corral, Vikram Alexei Kansara and Zoe Suen.
The authors would like to thank Kilian Graulich and Tiffany Wendler from McKinsey’s Berlin and Stuttgart offices respectively for
their critical roles in delivering this report. We also acknowledge the following McKinsey colleagues across the global teams for their
support and contributions to this report: Laura Gallagher, Aimee Kim, Alex Sukharevsky, Althea Peng, Amelia Newland, Annika
Reinelt, Antonio Achille, Antonio Gonzalo, Clarisse Magnin, Colin Henry, Colleen Baum, Daniel Zipser, Danielle Bozarth, David
Barrelet, Ellie Baker, Franck Laizet, Hanna Grabenhofer, Hannah Yankelevich, John Hooks, Karl-Hendrik Magnus, Miriam Lobis,
Nadya Snezhakova, Raphael Buck, Ryan Shultz, Sajal Kohli, Sakina Mehenni, Stijn Kooij, Thomas Tochtermann, Ulric Jerome. We’d
also like to thank Adriana Clemens for external relations and communications.
In addition, the authors would like to thank Joanna Zawadzka for her creative input and direction into this State of Fashion report,
Anna Kövecses for the cover illustration and Getty Images for supplying imagery to bring the findings to life.
5
INTRODUCTION
Even before the coronavirus disrupted confront a disorientating future and vulnerable
financial markets, upended supply chains and workers face hardship and destitution. With this
crushed consumer demand across the global special Coronavirus Update to The State of Fashion
economy, fashion industry leaders were not 2020, we have taken a stance on what our “new
optimistic about 2020. The industry was already normal” will look like in the aftermath of this black
“On High Alert” and executives expressed pessimism swan event, analysing surveys, data and expert
across all geographies and price points in our annual interviews to provide insight for fashion profession-
report, The State of Fashion 2020, released late last als as they embark on the 12- to 18- month period
year. But fast forward a few months and fashion’s after the dust settles.
outlook has gotten dramatically and suddenly
bleaker. As an industry, we are now on red alert. The Black Swan and Fashion
The crisis is affecting our daily lives, Covid-19 could spur the biggest economic
contraction since World War II, hitting every sector
instilling anxiety and uncertainty in from finance to hospitality.1 Yet fashion, due to its
the minds of almost everyone. discretionary nature, is particularly vulnerable.
The average market capitalisation of apparel, fashion
This unforeseeable humanitarian and and luxury players dropped almost 40 percent
financial crisis has rendered previously planned between the start of January and March 24, 20202
strategies for 2020 redundant, leaving fashion — a much steeper decline than that of the overall
businesses exposed or rudderless as their leaders stock market.
6
Humanitarian repercussions are expected The interconnectedness of the industry is
to outlast the pandemic itself. Dire consequences making it harder for businesses to plan ahead. Just as
for fashion, one of the biggest industries in the world China inched through recovery, outbreaks worsened
generating $2.5 trillion in global annual revenues3 in Europe and the US. But it is in the developing world,
before the pandemic hit, entails joblessness or where healthcare systems are often inadequate and
financial hardship for people across the value poverty is rife, that people will be hit the hardest. For
chain — from those harvesting the fibres used to workers in low-cost sourcing and fashion manufac-
make textiles to shop assistants selling the finished turing hubs such as Bangladesh, India, Cambodia,
fashion product. Honduras and Ethiopia, extended periods of unem-
We estimate that revenues for the global ployment will mean hunger and disease.
fashion industry (apparel and footwear sectors) will
contract by 27 to 30 percent in 2020 year-on-year,
Though the duration and
although the industry could regain positive growth
of 2 to 4 percent in 2021.4 For the personal luxury ultimate severity of the pandemic
goods industry (luxury fashion, luxury accessories, remains unknown, it is apparent that
luxury watches, fine jewellery and high-end beauty),
the fashion industry is just at the
we estimate a global revenue contraction of 35 to 39
percent in 2020 year-on-year, but positive growth beginning of its struggle.
of 1 to 4 percent in 2021.5 If stores remain closed
for two months, McKinsey analysis approximates The crisis is affecting our daily lives,
that 80 percent of publicly listed fashion companies instilling anxiety and uncertainty in the minds
in Europe and North America will be in financial of almost everyone. Indeed, consumer pessimism
distress. Combined with the McKinsey Global about the economy is widespread, with 75 percent of
Fashion Index (MGFI) analysis, which found that 56 shoppers in the US and Europe believing that their
percent of global fashion companies were not earning financial situation will be impacted negatively for
their cost of capital in 2018, we expect a large number more than two months.4
of global fashion companies to go bankrupt in the next Though the duration and ultimate severity
12 to 18 months. of the pandemic remains unknown, it is apparent
that the fashion industry is just at the beginning
of its struggle. By causing blows to both supply
It is in the developing world, where
and demand, the pandemic has brewed a perfect
healthcare systems are often storm for the industry: a highly integrated global
inadequate and poverty is rife, that supply chain means companies have been under
immense strain as they tried to manage crises on
people will be hit the hardest. For
multiple fronts as lockdowns were imposed in rapid
workers in low-cost sourcing and succession halting manufacturing in China first,
fashion manufacturing hubs such then Italy, followed by countries elsewhere around
the world.
as Bangladesh, India, Cambodia,
A freeze on spending is aggravating the
Honduras and Ethiopia, extended supply-side crisis. Widespread store closures for
periods of unemployment will mean an industry reliant on offline channels, coupled
with consumer instinct to prioritise necessary
hunger and disease.
over discretionary goods, hit brands’ bottom lines
7
INTRODUCTION
and depleted cash reserves. Even online sales have once the immediate crisis subsides. Even after
declined 5 to 20 percent across Europe, 30 to 40 witnessing waves of insolvencies, industry leaders
percent in the US and 15 to 25 percent in China.5 will need to get comfortable with uncertainty
and ramp-up their future-proofing efforts as the
Once the Dust Settles potential for further outbreaks and lockdowns loom.
8
FIVE THEMES FROM THE CORONAVIRUS UPDATE
30
01.
%
GLOBAL ECONOMY
02.
56
said special
As deep discounting plagues retailers for the remainder of 2020, promotions were
a decade-long build-up of bargain shopping culture will be an important factor
exacerbated by a rise in anti-consumerism, a glut in inventory and when shopping
for clothes in the 4
cash-strapped consumers looking to trade down or turn to off-price weeks leading up to
CONSUMER SHIFTS
03.
>700%
livestreaming
Social distancing has highlighted the importance of digital on Chinese
channels more than ever and lockdowns have elevated digital e-commerce
website Taobao
as an urgent priority across the entire value chain but, unless
since the outbreak
companies scale up and strengthen their digital capabilities in of Covid-19
the recovery phase of the crisis, they will suffer in the longer
term. Consumers will continue to demand more in this space
and brands must act fast to deliver.
80 %
04.
05.
10
01. SURVIVAL INSTINCTS
GLOBAL
ECONOMY
01. SURVIVAL INSTINCTS
11
GLOBAL ECONOMY
of consumers surveyed in McKinsey & Company’s of different plays of pandemic containment and
Covid-19 Consumer Pulse Survey said they are the ensuing economic response. The McKinsey
cutting back on spending, while 48 percent agreed Global Institute (MGI) describes four different
that economic uncertainty is preventing them from scenarios for the crisis to develop (see Exhibit 1).
committing to purchases they would otherwise have In each scenario, the spread of Covid-19 is eventually
made.13 With the US reporting a record 6.6 million controlled and catastrophic structural economic
unemployment claims filed in one week between damage is avoided. Scenarios form a V-shape if
March 22 and 28,14 and Chinese unemployment economic rebound is strong, and a U-shape if
figures at a record 5.7 percent in February, discre- economic recovery is slower. The recovery curves
tionary spending will take a backseat. are distinguished further by the speed and effec-
In the event that a vaccine is developed, some tiveness of the virus containment.17 However, any
shoppers in certain markets might respond with scenario will likely disproportionately affect the
a momentary “euphoric” spike in consumption, fashion industry given its discretionary nature,
suggested Solca. This is similar to murmurings in and the industry’s recovery will lag behind the rest
Tailoring department of Cieffe Company, a high fashion company that is reinventing itself to produce hospital products. Massimo Cavallari/Getty Images
The State of Fashion 2020 — Coronavirus Update
12
13
GLOBAL ECONOMY
as India and Indonesia, have been severely hit by the growth opportunities will depend largely on the way
lockdown of production facilities, leaving millions each country manages the pandemic. With a human-
without jobs and weakening their position in the itarian crisis unfolding in emerging markets like
global value chain. Similarly, we expect markets India, fashion players will now need to re-evaluate
that have been under economic distress before the strategies for which stores to re-open and when,
crisis — such as Venezuela and Nigeria — to require and how their supply chain can best support the
more time to restore growth, owing to their inherent ramp-up.
political instability.
In the west, there will be different rates of Companies must adopt a recovery
return of consumer confidence based on the speed position based on impact severity
and effectiveness of government support and how
severely hit the country has been by the pandemic, to help prepare for the deployment
with countries like Italy, Spain and France of a recovery action plan.
potentially faring worse than Germany.
The State of Fashion 2020 — Coronavirus Update
Looking ahead, businesses will have to In the event that collateral economic damage
review their operating models. While implementing from the pandemic continues for an extended
short-term interventions — like cutting costs and period of time, brands should review cost bases to
production, securing liquidity and adjusting product identify measures for quick wins, set up employee
assortments, which have been the highest priority plans to assess workforce decisions, and rationalise
in urgent reactions to the crisis — companies now overhead spend to plan for potential store closures.
need to consider actions for the recovery period and On the supply chain side, fashion companies should
implement resiliency into their planning. learn from this global trade disruption that the
value chain must be re-invented. This includes
In the west, there will be different reviewing production regularly to identify potential
disruptions before they happen in order to cushion
rates of return of consumer the blow when they come to pass and strengthening
confidence based on the speed regional integrated supply chains. It also means
and effectiveness of government exploring nearshoring activities to bring flexibility
and autonomy to their production facilities. Broadly
support and how severely hit the speaking, non-core assets and activities should be
country has been by the pandemic. divested and stopped to streamline current offerings
and ensure efficient execution.
Companies must adopt a recovery position Speed and adaptability are of the essence
based on impact severity to help prepare for the for this crisis. But when the first signs of normalcy
deployment of a recovery action plan. This means do begin to emerge, companies are cautioned not to
reassessing their geographical footprint, store be complacent. Instead, they must double-down on
network and growth opportunities, while also recovery and resiliency measures for this will be a
looking for any emerging whitespace, be it during time of unprecedented transformation for the global
recovery or an extended crisis period. In The State fashion industry. Only then can companies begin to
of Fashion 2020 report, the biggest growth was decipher what their “new normal” actually looks like.
predicted for emerging Asia, with rising opportu-
nities in India and Southeast Asian nations like
Indonesia.20 However, the preservation of these
14
01. SURVIVAL INSTINCTS
Exhibit 1:
U-SHAPED V-SHAPED
A C
Virus contained and slow recovery Virus contained and strong growth rebound
PANDEMIC CONTAINMENT
B D
Effective response,
but (regional) virus
resurgence
Virus resurgence and slow long-term growth Virus resurgence and return to trend growth
SOURCE: “SAFEGUARDING OUR LIVES AND OUR LIVELIHOODS: THE IMPERATIVE OF OUR TIME”, MCKINSEY & COMPANY, MARCH 2020
15
CONSUMER
SHIFTS
The State of Fashion 2020 — Coronavirus Update
16
02. DISCOUNT MINDSET
17
CONSUMER SHIFTS
stock incineration, no longer feasible in times of work with wholesalers and e-tailers — which might
heightened transparency and sustainability-con- even include inventory swaps to prevent them from
scious consumers. discounting their products.29 (Multi-brand retailer
Even after the dust settles, financial turmoil Net-a-Porter had 30 percent of its assortment on
stemming from the crisis will continue. McKinsey markdown as of March 2020, compared to only 1
and Oxford Economics analysis shows that, even in percent in 2019).30 As boutiques struggle with store
the most positive economic recovery scenario, GDP closures and overstock problems, and as grey market
will only return to pre-crisis levels by the end of counterparts in countries such as China cancel
2020, or even the beginning of 2021.26 As consumer orders, marketplace model e-tailers like Farfetch
spending in most advanced economies accounts for will be well-positioned to facilitate the liquidation
roughly two-thirds of the economy, and about half of large volumes of cheap stock. This will create
of that is discretionary spend, fashion companies tensions with brand-owners, however, as they will
will be left grappling with price deflation and a sharp want to take a more discreet approach.
drop in demand across the board. Evidence from
The State of Fashion 2020 — Coronavirus Update
previous crisis shows that it may take up to two years The pandemic will bring values
to fully restore consumer confidence,27 with early
numbers from China showing that apparel sales
around sustainability into sharp
were still down by 50 to 60 percent in the first month focus, intensifying discussions and
after stores re-opened.28 further polarising views around
We expect different market categories to
be impacted by the discounting wave to varying
materialism, over-consumption and
degrees. Mid-market brands and retailers will be irresponsible business practices.
hit hardest, as cash-strapped shoppers trade down
to the value segment for essentials and middle- Moving forward, the “off-price deception”
class consumers turn more to heavily discounted trend witnessed in The State of Fashion 2018
affordable luxury and premium goods. report — which highlighted the danger of off-price
cannibalising full-priced sales — will soon reach a
In the luxury segment, we expect new phase, as growth in the discount sector puts
consumers to return more quickly to companies at risk of margin erosion. Premium
discount retailers with effective merchandising
paying full price for quality, timeless and strong customer service, like The Outnet and
goods, as was the case after the Yoox online and McArthurGlen offline, will become
2008 financial crisis. mainstream by offering discreet and large-scale
avenues for excess stock disposal. As in 2008,
In the luxury segment, we expect consumers new digital players will also emerge to seize the
to return more quickly to paying full price for opportunity to dispose of excess stock. But caution
quality, timeless goods, as was the case after the is advised: for companies engaging with a growing
2008-2009 financial crisis. For luxury brands, cohort of anti-consumerist shoppers, significant
however, the discounting challenge is exacerbated by discounting and traffic driving could be construed as
the need to preserve reputation and image, making tone deaf.
it crucial to avoid steep discounting, or at least The pandemic will bring values around
discount in a more controlled way through off-price sustainability into sharp focus, intensifying
channels. Brands will need to find innovative ways to discussions and further polarising views around
18
02. DISCOUNT MINDSET
19
03. DIGITAL ESCALATION
If ever there was a time to turbocharge third quarter ended February 2934 — leveraged
digital, it is now. The global pandemic’s shutdown Taobao livestream bloggers during lockdown in
of offline retail channels has pushed digitally China, while local fashion group Peacebird grew
inept fashion companies to the brink. With no or retail sales as a result of innovative customer
limited avenues to recover lost sales, purely offline engagement on their WeChat channel, which
players whose revenues hinge on brick-and-mortar featured over 100 live broadcasting sessions with
sales have been hit hardest. Many multi-channel influencers and drew over one million consumers.35
businesses have had their first glimpse of what it
takes to be truly digital-first, and this step change in Consumers increasingly
consumer adoption is likely to stick when we emerge embraced digital solutions for
from the crisis.
Almost overnight, the global fashion
shopping, entertainment and
industry’s reliance on digital channels has communications thanks to the
accelerated faster than anyone could have response of brands and retailers
anticipated prior to the crisis. This could spell
trouble for department stores and speciality retail,
who quickly enhanced their
in addition to smaller players incapable of adapting digital capabilities by launching or
to a digital-first mentality. improving innovative new channels.
But there is a silver lining emerging in Asia.
Evidence from China suggests that consumers there Social media platforms in the region
increasingly embraced digital solutions for shopping, have also seen pockets of momentum and have
entertainment and communications thanks to delivered much-needed solutions for some brands
the response of brands and retailers who quickly and retailers. WeChat saw a 159 percent boost in
enhanced their digital capabilities by launching or transaction volume for fashion brand mini-pro-
improving innovative new channels. Nike — whose grammes (brand-powered app-in-apps embedded
digital sales in the region grew 36 percent in the within its interface) between January and February
20
03. DIGITAL ESCALATION
2020 during the peak of China’s outbreak.36 modes of engagement. People will acclimate to the
WeChat offers features that allow store assistants wider digitisation of consumer journeys as digital
to message consumers and complete purchases, content creation becomes their primary mode of
generating a much-needed revenue source for brands brand interaction. According to a McKinsey survey,
operating in the quagmire of a crisis. Through almost a quarter of US and European consumers
WeChat Groups and WeChat Work, companies are expect to increase their spend via social channels in
able to engage clients and integrate their profiles April 2020.39 As the crisis also pushes 13 percent of
into their brand’s account. European consumers to browse online e-tailers for
Other digital solutions used by retail the first time,40 brands should take the opportunity
assistants during the lockdown in China included to become not just more digitally adept, but to
livestreaming sessions on WeChat or platforms become digital frontrunners.
such as Yizhibo, which effectively turned empty
luxury brand stores into virtual shopping stages As the crisis also pushes 13
hosted by the staff. As seen on apps like Xiaohongshu percent of European consumers
and Taobao, brand-to-shopper video chats and
broadcasted influencer-curated assortments were to browse online e-tailers for the
well-received, with the number of Chinese brands first time, brands should take
livestreaming on Taobao up by 700 percent.37 the opportunity to become not
In March 2020, executives like Giovanni
Pungetti, Greater China and APAC chief executive just more digitally adept, but to
of OTB Group, which controls brands Marni, Diesel become digital frontrunners.
and Maison Margiela, embraced experiments
with livestream commerce.38 “It’s a completely “Working from home or staying at home
different way of doing business for us [but] we have may well drive more non-work screen time, which
been able to reach every corner of China [and] we would give marketers additional shots on goal,” said
have been able to make some business,” he said. “I Simeon Siegel, managing director and senior analyst
always underline this to our shareholders in Italy: at BMO Capital. However, marketing opportuni-
everything we are learning in this moment…will be ties may not translate into much-needed revenue.
an added weapon we can use to increase and grow “Whether they convert is another story,” he said.41
[more broadly elsewhere] when things get back to Indeed, the broader outlook for online is
normal,” he added. challenging. Despite the aforementioned uptick in
social commerce, 44 percent of US and European
“It’s a completely different way of consumers expect to decrease online purchases
overall, which is not far behind the 49 percent
doing business for us but we have who expect to decrease offline purchases as of
been able to reach every corner of April 2020.42
China and we have been able to Though much about the pandemic’s duration
and trajectory remains uncertain, businesses can
make some business.” expect that recovery will be a gradual process
as society adjusts to the new normal, consumers
For strong players looking to accelerate continue to avoid large crowds and social distancing
demand online, staying ahead of fashion’s digital rules remain in force. Even after stores begin to
step change will mean adopting these next-level re-open, fashion’s digital step change demands
21
CONSUMER SHIFTS
that companies change their mindset and begin to model that prioritises digital growth in an integrated
operate like pure digital players: rather than asking way with cutting-edge customer experience. It is
what benefits online can offer offline channels, important to remember that digital channels are not
players should ask how their brick-and-mortar a “silver bullet” to compensate for the shortfall in
presence can support e-commerce sales. Digital revenue from stores — in making this switch, some
plans should be prioritised when it comes to talent, businesses may become smaller, at least for a while,
time, allocated inventory and future investments, which will open up the need to revisit their operating
and marketing spend should be shifted to digital model as they adjust to the new reality.
channels, with ROI precisely tracked.
The strongest players will quickly scale up
Exhibit 3:
and strengthen their digital capabilities, which will
allow them to capitalise on future opportunities and Consumers expect to spend
protect their businesses from risks. Investing more more via online and social
in existing digital capabilities — such as improving
channels than through offline
The State of Fashion 2020 — Coronavirus Update
digital will continue long after the immediate crisis, OFFLINE ONLINE SOCIAL
but for most fashion players, it will come at a cost.
Since digital channels can be less profitable than SOURCE: MCKINSEY & COMPANY COVID-19 APPAREL & FASHION SURVEY,
27 - 29 MARCH 2020
physical retail, players need to establish a balanced
22
23
IN-DEPTH
by Lauren Sherman
Chanel luxury clothing store closed in Turin, Italy during the nationwide lockdown to control the coronavirus pandemic.
The State of Fashion 2020 — Coronavirus Update
It’s true that the House of Chanel survived when LVMH’s marquee brands began swelling in
multiple world wars, the stock market crash of 1988, size, and competitors like Kering and Richemont
the Great Recession, and many other world-chang- began building their own formidable stables.
ing, life-altering events. So did Gucci, Louis Vuitton In many ways, the coronavirus pandemic
and Prada. But the modern luxury industry as we is the first global crisis that will deeply impact the
know it — where brands are multi-billion dollar sector since the industry morphed into a virtual
powerhouses, employing hundreds of thousands oligopoly. How will it fare? The short answer: expect
of people across the globe, up and down the supply the expected, and at lightning speed.
chain — has only really existed for the past 30 years, During the Great Recession from 2008 to
24
CONSUMER SHIFTS
2009, the worst economic downturn in US history 2021, positive growth could return at 1 to 4 percent
since the Great Depression of the 1930s, the compared to the 2019 baseline.44 For companies that
luxury market was disproportionately impacted, do make it through to see a return to growth, what
contracting 8 percent globally compared to the will the new normal look like?
overall apparel market’s 5 percent shrinkage.
Because personal luxury goods are discretionary While it’s never been more
purchases, consumers tend to abandon them first,
especially from brands that have not developed
important to win over China’s
an emotional reason for existing in the eyes of growing middle class of brand-
the consumer. conscious shoppers, the focus will
However, after that downturn, the luxury
industry bounced back more strongly than perhaps increasingly be on meeting them
anyone could have anticipated. At the end of 2019, locally, not abroad.
LVMH, which owns brands including Louis Vuitton,
Christian Dior and Celine, became the second Post-downturn, the luxury industry had two
most-valued company in Europe, following oil and levers of growth that cannot be exactly replicated
gas giant Royal Dutch Shell, with a market capi- this time around. For one, luxury brands started
talisation passing the €200 billion mark ($217.9 charging a lot more for the products they sold at full
billion).43 That same year, the group, which now price. In 2000, the starting price for an Hermès Kelly
includes more than 70 brands across categories such bag was $4,800. By 2013, it was $7,600, reflecting a
as wine and spirits, jewellery and watches, travel 58 percent increase in 13 years, 1.5 times the rate of
and fashion, generated €53.7 billion ($58.5 billion) inflation during that period.
in revenue, up 15 percent year-over-year. Its closest While raising prices helped boost margins,
rival, Kering, generated €15.9 billion ($17.3 billion), the Chinese market, which, for most brands, only
up 16 percent from a year earlier. emerged as a significant source of revenue in the
mid-2000s, became the engine of growth. Chinese
In many ways, the coronavirus consumers were responsible for more than half of
global luxury growth between 2012 and 2018, and
pandemic is the first global crisis total spend by Chinese consumers is expected to
that will deeply impact the sector make up 40 percent by 2025, according to a 2019
report by McKinsey.45
since the industry morphed into
But while both of those levers can still be
a virtual oligopoly. pulled, the circumstances driving them are now
different. “Over the past three or four years, the
More than a decade after the Great Recession consumer’s behaviour was changing regardless,”
ravaged the global economy, the luxury industry is said John Idol, chief executive of Capri, the
now facing an even greater threat: a pandemic that American group that controls Michael Kors, Versace
has halted nearly all trade in a large part of the world. and Jimmy Choo.
The next six months may be far more The coronavirus pandemic will only
damaging to luxury than the previous downturn, accelerate that change.
with several struggling players — mostly debt-ridden For instance, while it’s never been more
multi-brand retailers and cash-poor independent important to win over China’s growing middle class
brands — not making it out the other end. McKinsey of brand-conscious shoppers, the focus will increas-
estimates that the global industry for personal ingly be on meeting them locally, not abroad. There
luxury goods will contract by 35 to 39 percent in was already a movement toward this, as price
2020 compared to the previous year. However, by
25
CONSUMER SHIFTS
harmonisation at brands like Chanel made travel Right now, even retailers specialising in
retail less attractive. discounted luxury goods are struggling. In the US,
In 2019, Chinese consumers took more than American off-price chain Ross, which is similar to
150 million trips abroad, with McKinsey estimating TJ Maxx, told vendors it was cancelling orders for
that purchases outside the mainland accounted for up to three months. But come autumn, the discount
more than half of China’s luxury spend that year.46 channel will inevitably get busy, as excess inventory
Now, with travel retail suspended due to interna- from the first nine months of the year will flood the
tional lockdowns, Chinese consumers have no other market. Whether or not the demand will be there
choice but to shop at home. remains to be seen.
“Travelling shoppers will take significantly
longer to return,” said Pierre Mallevays, founder Many consumers will be looking
and managing partner of Savigny Partners LLP, a
mergers and acquisitions advisory firm focusing on
for so-called “investment” pieces —
luxury brands and retail. “This means travel retail minimalist, last-forever items, that
and tourist-dependent stores will continue to suffer feel more responsible given the
into 2021.”
Brands have never been more incentivised to state of the world.
The State of Fashion 2020 — Coronavirus Update
26
IN-DEPTH
Food delivery courier passes a closed Louis Vuitton store. Simon Dawson /Getty Images
wealthy demographic may choose to spend like crazy more amenable to such overtures. The same goes for
on decadent, fun, outrageous and exuberant things. the likes of Salvatore Ferragamo, Brunello Cucinelli
With either scenario in mind, expect an and even Ralph Lauren, while mid-sized companies
uptick in bespoke shopping experiences both online — those with annual revenues in the $100 to $500
and off, with customer relationship management million range — will struggle to compete against the
tools that allow brands to keep up an ongoing groups, which control everything from the supply
dialogue with each client. “Consumers want their chain down to the retail real estate.
shopping experience to be a bit more tailored to
them,” Idol said. “As a part of that, they want their “Consumers want their shopping
sales associates to really talk to them, think about
the way they dress.”
experience to be a bit more
Of course, this new reality will only affect tailored to them. As a part of that,
the companies that make it through the next six
they want their sales associates
months. Some companies will go private in order to
manage the situation without the pressure of public to really talk to them, think about
markets, as may be the case for supply chain giant the way they dress.”
Li & Fung. But the fallout signals an opportunity
for strategic groups like LVMH and Kering, which In the post-pandemic era, consolidation of
will have the capital to make further acquisitions of the luxury market will only intensify. Likening the
targets that may well be more affordable than they future rush of M&A activity to a possible “tsunami,”
once were when this is all over. Ortelli was quick to point out that the fallout from
Independently run companies including the coronavirus won’t be a crisis for everyone. For
Moncler and Prada, which have already been subject some luxury players it will definitely be “a unique
to takeover rumours for months, may suddenly be opportunity,” he said.
27
FASHION
SYSTEM
The State of Fashion 2020 — Coronavirus Update
28
04. DARWINIAN SHAKEOUT
The crisis will shake out the weak, embolden the strong
and accelerate the decline of companies that were already
struggling before the pandemic, leading to massive waves
of consolidation, M&A activity and insolvencies. To secure
their future, companies must adapt to the new market
environment by evaluating divestment and acquisition
opportunities to strengthen their core and capture
whitespaces that emerge from the reshuffle.
Before Covid-19, fashion was already a coronavirus first broke out,48 we predict that after
“winner-takes-all” industry. Now, even though two to three months of store closures that figure
we are only at the beginning of the pandemic, it will more than double to over 80 percent.49 In fact,
is almost certain that the crisis will intensify the the financial market — which could face its biggest
industry’s polarising nature. The shutdown of economic contraction since the second World War50
physical retail and the slump in both consumer and — is still faring better overall than apparel players,
investor confidence will irrevocably alter the fashion whose valuations and stock prices have plummeted
business landscape by accelerating the decline of to dramatic lows, with year-to-date losses of more
struggling companies and buoying stronger empires. than 40 percent in mid-March.51
Companies in all categories will be forced to These headwinds will widen the gap between
review their positioning in this stark new landscape fashion’s winners and losers, with the latter likely
and, for once, the much-maligned phrase “adapt to file for bankruptcy, seek government aid, close, or
or die” will not be an overstatement. It will be become targets for stronger players or private equity
remembered as a Darwinian moment for the global firms. Early indicators of things to come are already
fashion industry. playing out on the global stage, with heavily indebted
US department store Neiman Marcus reportedly
34 percent of listed fashion commencing bankruptcy talks,52 Hong Kong-based
businesses in North America and supply chain giant Li & Fung receiving a $930
million privatisation offer53 and UK retailer Laura
Europe were displaying signs Ashley declaring insolvency.
of financial distress before the Even before the outbreak began, more than
coronavirus first broke out. half of the fashion companies in the McKinsey
Global Fashion Index (MGFI) were classified as
The stakes are indeed very high. While “value destroyers” in The State of Fashion 2020
McKinsey analysis revealed that 34 percent of listed report — meaning their profit does not exceed their
fashion businesses in North America and Europe estimated cost of capital — and that number has
were displaying signs of financial distress before the been growing each year. The pandemic spells more
29
FASHION SYSTEM
trouble for this group, which includes department (which is the average for all apparel players) for six
store giants, high street brands and venture-backed out of 20 super winners cited in The State of Fashion
start-ups. 2020 report.
Many department stores failed to
adequately reinvent their value for consumers However, in the aftermath of a crisis,
following the 2008 financial crisis.54 Struggling
high street players have been unable to catch up
resilient players can outperform
with consumer demand. And venture-backed rivals. Power can be consolidated
companies that prioritised growth over profits are as previously held market share is
now struggling with liquidity as venture funds
scale back investments. Digitally inept discount
freed up once competitors fall away.
players operating their businesses at low margins, in
addition to brands targeting consumer groups other However, in the aftermath of a crisis,
than core online shoppers, are likely to struggle resilient players can outperform rivals. Power can
The State of Fashion 2020 — Coronavirus Update
more than others. Multi-brand boutiques will also be consolidated as previously held market share is
suffer, grappling with demanding rent obligations freed up once competitors fall away. With better
and dwindling cash reserves resulting from already access to resources and government aid, powerful
poor margins and excess stock. fashion conglomerates are at an advantage and
Asian and Middle Eastern investors will push on
The ensuing financial distress with cross-border acquisitions while the markets
are down. Some outperforming players will be
will spur industry consolidation to emboldened by opportunities that arise during the
an extent significantly greater than consolidation reshuffle.
that caused by the 2008 global Maintaining a future-orientated outlook is
key to enabling stronger players to thrive beyond the
financial crisis. crisis. Fashion businesses need to steel themselves
for a turbocharged “survival of the fittest” climate.
The ensuing financial distress will spur To start, a re-evaluation of their core will foster
industry consolidation to an extent significantly growth by improving liquidity and bringing
greater than that caused by the 2008 global financial potential acquisition targets into focus. Thereafter,
crisis, which led to approximately 300 US fashion a cautious re-appraisal of business models and
companies declaring bankruptcy.55 Though M&A future market positioning will allow agile players to
activity will slow down at first56 as companies thrive. Companies must strategically think about
struggle with liquidity and stock devaluations, it their future now. This includes identifying financial
will pick up once the dust settles as strong, strategic leverage, divestitures, acquisition opportunities
investors and private equity companies take the and strategic partners, increasing earnings, and
opportunity to acquire distressed assets for a steal. creating operational and financial stability early in
This is especially true for fragmented categories the recession.
like footwear and stock-laden, wholesale-focused In previous global crises, some players
brands. Even the industry’s top 20 “super winners” identified opportunities in future-proofing brands,
are not fully immune from the crisis and have seen such as GAP’s acquisition of Athleta in 2008, which
valuations plummet. Between January 1 and March it used to enter the rising sportswear category and is
24, stock prices declined more than 40 percent now driving the company’s growth.57 Others may opt
30
04. DARWINIAN SHAKEOUT
1
1 MONTH STORE CLOSURE AND 1 MONTH LOST SALES IN RAMP-DOWN,
RAMP-UP - EQUIVALENT TO 17% FY REVENUE DECLINE, US INCL. COGS
DECLINE
2
2 MONTH STORE CLOSURE AND 2 MONTH LOST SALES IN RAMP-DOWN,
RAMP-UP - EQUIVALENT TO 33% FY REVENUE DECLINE, US INCL. COGS
DECLINE
3
MONTH STORE CLOSURE AND 3 MONTH LOST SALES IN RAMP-DOWN,
3
RAMP-UP — EQUIVALENT TO 42% FY REVENUE DECLINE, US INCL. COGS
DECLINE
NOTE: DISTRESS MEANING NEGATIVE EBITDA (FOR EUROPE ONLY) OR NET
DEBT/EBITDA > 4. INCLUDES 71 LISTED EMEA AND 77 LISTED NA APPAREL &
FASHION COMPANIES, >250MN NET SALES
SOURCE: MCKINSEY & COMPANY STRATEGY AND CORPORATE
PERFORMANCE ANALYTICS
31
05. INNOVATION IMPERATIVE
Necessity is the mother of invention. causing them to stick. Asia will play a starring role in
The coronavirus has sent shockwaves through informing key investors of new opportunities.
the fashion industry, forcing companies to rapidly “Don’t let innovation stop, because this could
dispense with age-old industry practices and be the window of opportunity,” retail futurist Doug
create new ones just to stay afloat. In doing so, it Stephens cautioned in March 2020. “Use this time to
has exposed long-overdue upgrades required by a reinvent how you do what you do, bring consumers
fashion system that is ripe for disruption. new alternatives, new value, and in the process even
Quick moves to halt production, close stores, reinvent your own brand.”
find alternative revenue streams and identify new
ways of working became necessary to navigate a “Don’t let innovation stop,
shifting landscape of strictly enforced quarantines
because this could be the window
and social distancing, compelling fashion players
to accelerate strategies that were at trial-stage just of opportunity, use this time to
months ago into new operational realities. Some reinvent how you do what you do,
technologies that had been slow to take hold — think
bring consumers new alternatives,
virtual fashion shows and digital show rooms,
sample sign-offs in sourcing offices, livestream new value, and in the process
commerce and the latest 3D design tools — are now even reinvent your own brand.”
being relied upon to get business done.
As soon as the immediate firefighting Successful players will embrace new technolo-
subsides, brands should identify where to focus gies and behaviours for the long haul, beginning with
their attention and make longer term innovation operating models and hiring strategies. Companies
investments. Technologies and processes success- previously bound by physical borders are discovering
fully implemented during the crisis will have a the efficiency of cross-functional emergency teams
profound effect on the industry’s future. With and, as a result, will continue to break down silos
time, shoppers and business leaders will become between product teams and will rethink the necessity
acquainted with the benefits of new practices, of in-person meetings and travel. They will also
32
05. INNOVATION IMPERATIVE
hire more across geographical borders, sourcing top Digitisation of wholesale has been much
talent internationally and setting up cells outside of slower than its consumer-facing counterpart, but the
headquarters to attract talent — much like Adidas’s rise of digital showrooms and new B2B practices will
design lab, Brooklyn Creator Farm, which offers a persuade more players that there are viable alter-
global model.58 New habits are already being put to the natives to the millions of physical samples that are
test across the fashion industry, from an 84 percent produced for showrooms, and high intensity travel to
rise in remote working to a 79 percent uptick in video traditional trade shows and fashion weeks.
conferencing and a 58 percent increase in flexible
working hours.59 Investing in technology that enables New habits are already being
efficient employee interaction will serve teams in the
put to the test across the fashion
long term.
Specialist tech platforms catering to industry, from an 84 percent rise
fashion — from digital wholesale showroom in remote working to a 79 percent
Joor to livestream start-up Hero — have already
uptick in video conferencing and
experienced a spike in demand, with the latter
enjoying a 20 percent uptick in average orders a 58 percent increase in flexible
placed during the first two weeks of March 2020 in working hours.
the US when the coronavirus outbreak was gaining
speed.60 This is not to mention the rising success of Asics used technology to launch its new
broader-use digital enabling services such as Zoom, sneaker models. Unable to invite the internation-
which has seen its stock price spike more than 100 al media to its Japanese headquarters during the
percent,61 and Slack, which has doubled its daily lockdown, the company recreated its presentation in
users since the outbreak began.62 VR and shipped Oculus Quest headsets to journalists
Fashion brands will also need to operate to watch the hologram.64 Elsewhere, Chinese
more flexibly across the value chain, cutting down showroom agency DFO utilised livestreaming during
go-to-market times and adapting more respon- Paris Fashion Week to reach buyers in China and
sively to consumer trends and needs. For instance, engaged double the number of people who would
designers and merchandisers will be empowered to normally travel to Europe. Resulting orders, 95
make faster decisions and steer brands towards a percent of which were placed digitally, hit 80 percent
demand-driven model with 3D technology, virtual of the agency’s sales targets.65
sampling and AI-supported planning. With fashion shows and seasons completely
Production-wise, successful contingency wiped from the first half of the 2020 calendar and
plans executed during the pandemic — such as the September shows still hanging in the balance,
relocating production to Turkey while mainland the fashion cycle may also experience a long-overdue
China was on lockdown63 — will encourage brands cadence shift. Fashion Week has been a growing
to think laterally about normal production runs. pain point for the industry from a sustainability and
Nearshoring will be accelerated in response to a investment standpoint with many viewing it as an
heightened desire for products made closer to home. antiquated resource vacuum. Resource-intensive
One outcome could be to leverage new manufactur- destination cruise and resort shows need to be
ing hubs for capsule collections, while backward re-evaluated, as well as the idea of multiple fashion
integration and semi-automation could provide weeks in multiple cities throughout the year. The
further support to increase flexibility of the supply necessity for fashion to “skip a season” also offers
chain and better prepare for future shocks. an opportunity to sell products in-season, instead
33
FASHION SYSTEM
of bringing in deliveries earlier and earlier, so that slump, as messages based on values are welcomed by
winter clothes are selling in July. It will be up to more receptive ears. At the same time, alternative
bigger players to rethink the fashion cycle and business models not based on generating virgin
catalyse real change by adopting new digital formats products, such as resale, upcycling and recycling,
and setting an example for the rest of the industry. may see a boost from high levels of overstock in the
system. However, consumers hit hard by a global
Sustainability credentials will be recession will be more cost-conscious than ever
and may consider sustainability in their purchasing
employed as one method to regain
decisions even less than before. Whatever the
consumers’ trust and wallets as they outcome, sustainability messaging will need to
emerge from the discounting slump. be grounded in authentic behaviour and rigorous
internal practices.
Brands will also innovate their products by For innovations to stick, brands need to
integrating emerging consumer trends. For example, strategically anchor them in their roadmap and
The State of Fashion 2020 — Coronavirus Update
Chinese brand Cosmo Lady developed an antibacte- operating methods, with substantial business model
rial intimate wear line which capitalises on a niche and process changes necessary to harmonise pre-
product concept that now appeals to mainstream and post-pandemic era approaches. Fashion players
concerns for health and safety — a move that boosted need to identify, prioritise and scale up innovations
its stock price by 21 percent.66 that worked and benefited them the most during the
Meanwhile, sustainability credentials will be crisis, implementing a test-and-learn approach in a
employed as one method to regain consumers’ trust new world where speed is of the essence.
and wallets as they emerge from the discounting
Shopping Mall Starts Online And Offline Sales In Hangzhou. Wang Weichen/China News Service via Getty Images
Exhibit 5:
34
35
IN-DEPTH
by Casey Hall
Chinese couple wear protective masks as they walk in a shopping area. Kevin Frayer/Getty Images
The State of Fashion 2020 — Coronavirus Update
As the first country to be hit by the “We are seeing the other side of
coronavirus and the first to return to work after a
months-long shutdown, all eyes are on now on China the crisis in China. We now have a
for a glimpse into the future. playbook we can use elsewhere.”
The hope is that Chinese businesses — which
were impacted earlier than the rest of the world — China’s colossal consumer market and the
will serve as a crystal ball for executives elsewhere critical role the country plays in supply chains means
looking to intervene with strategies adapted or its own recovery will be a determining factor in the
borrowed from China. But that’s not the only reason recovery of the global fashion industry. China is not
industry leaders are looking east. only the world’s largest fashion market,67 it is also the
36
FASHION SYSTEM
growth engine for the luxury sector, accounting for in Wuhan by parent company LVMH with a short
nearly a third of luxury purchases worldwide.68 With message published on social media channels reading
so much riding on this one market, the first question (in Chinese): “Every paused journey will eventually
facing fashion players worldwide is: how soon will restart. Louis Vuitton hopes you and your loved ones
Chinese spending return to pre-pandemic levels? stay safe and healthy.”
While stores were closed, the brand
Bruised but Open for Business concentrated efforts on customer outreach and a
Valentine’s Day pop-up store on WeChat, featuring
Official retail data for January and February store assistants on live chat ready to communicate
2020 painted a grim picture, with a more than 20 in real-time with shoppers — a strategy which saw
percent year-on-year drop in sales.69 Hardest hit are online sales double compared to the previous year’s
companies with broad brick-and-mortar footprints efforts.73
that have yet to transition to an omnichannel model.
Belle International, China’s largest shoe
retailer, has more than 20,000 stores across China,
The coronavirus crisis will
none of which have seen much foot traffic for months. further increase the pace of retail
H&M closed two-thirds of its China stores and lost consolidation, with lower valuations
90 percent of its sales at the peak of the outbreak,
although its store network had almost entirely creating more “opportunities for
reopened by the first week of April 2020.70 Burberry those that have some cash flow to
— which has dozens of stores on the mainland and
is highly exposed to Chinese travel retail demand —
make acquisitions.”
warned of a dramatic hit to sales in March 2020.71
Retailers with strong digital and Companies, including Swatch Group and
omnichannel strategies are in a better position to Salvatore Ferragamo have noted some improve-
minimise foregone revenues. Nike, for example, saw ments in their China sales already, but it is unclear
a jump in e-commerce sales cushion losses from to what extent. In any case, positive momentum
China’s retail closures this quarter. “We are seeing is likely to be unevenly spread among brands by
the other side of the crisis in China. We now have consumer and product segments. Jason Yu, general
a playbook we can use elsewhere,” said Nike Chief manager of Kantar Worldpanel for Greater China,
Executive John Donahoe.72 predicts cutbacks in discretionary spending on
Though most shops are open for business in travel and hard luxury, with “opportunities in
almost all major Chinese cities outside of Wuhan, affordable luxuries…especially beauty” remaining.
where lockdown conditions were set to be lifted Beijing is desperate to restart China’s
in early April, people are still feeling raw from the economy as quickly as possible, with fears growing
recent crisis and wary of its potential re-emergence. of the first economic contraction since the Mao era
Striking the right note in such a climate is in the first quarter and the World Bank downgrading
not easy and, in China, many brands went quiet, China’s full year GDP growth estimate to 2.3
preferring to say nothing to consumers rather than percent. While green shoots are an increasingly
risk a mistake. The downside to this approach is of common sight across China’s fashion value chain —
course that, during a crisis, people crave connection from manufacturing to retail — they are sporadic.
and brands who are completely absent will lose A report released in March 2020 by Fung
mindshare. One example of a positive and caring Business Intelligence Group predicts that the
message during the worst of China’s coronavirus lingering effects of the outbreak in China will
outbreak came from Louis Vuitton, which followed remain throughout April and into May. “We believe
the announcement of a donation to relief efforts the disease outbreak will linger for another two to
37
FASHION SYSTEM
three months in China. By then, consumption will reshoring of spending, particularly apparent at the
gradually return to pre-outbreak levels,” the report high-end of the fashion market, has been a trend
reads in part. Savills China Retail, meanwhile, since 2016, bolstered by government edicts lowering
predicts a full recovery for the country’s retail import levies on luxury goods, and bringing prices
sector in the second half of the year. However, it in China more in line with those elsewhere in the
is important to note that there is little consensus world. Further lowering taxes on consumer goods is
among market observers; others weighing in on one relatively straightforward measure the central
future recovery scenarios predict a significantly government might use to stimulate consumption if
longer time horizon. the rebound in consumer appetite seems unsuitably
One thing preventing a speedier recovery robust moving into the second quarter of the year.
is that some restrictions on people remain; they
often vary by city where local municipalities are As much as 60 percent of GDP
responding to local conditions. As a result, there growth in China is attributed to
are still some limits on the number of shoppers
allowed in stores at once, for example, or mandates
consumer spending, making it the
of self-quarantine for those travelling domestically most important factor in how the
to shop between cities, cutting off the potential for
country’s economic recovery fares
The State of Fashion 2020 — Coronavirus Update
38
IN-DEPTH
offerings on e-commerce platforms such as Tmall’s Even luxury brands have jumped on the bandwagon,
Luxury Pavilion, Secoo and JD.com, as well as their with Burberry, Prada and Bottega Veneta all
own WeChat commerce channels. The increased signing on to Tmall’s monthly luxury livestream-
focus on online sales will no doubt be a global ing promotion. In the midst of China’s coronavirus
phenomenon as stores around the world remain shut crisis, Xiaohongshu also more aggressively rolled out
for an indeterminate period, but local players are its livestreaming tool, with Louis Vuitton becoming
bullish about the longer-term prospects for luxury one of the first luxury brands to use the feature on
e-commerce. Secoo Chairman and Chief Executive the popular social commerce platform.
Li Rixue predicts e-commerce sales will make up 30 As stores close in other global markets and
percent of China’s $150 billion in annual luxury sales consumers increasingly turn to e-commerce for
within the next five years, up from 10 percent today. shopping and short video social media sites for
entertainment, the trend to combine the two in
the form of livestreaming commerce seems to be a
Showrooms that hold wholesale
uniquely Chinese one at this point — though there
designer brands during Shanghai is no reason it must stay that way. Brands may not
Fashion Week are now largely be able to reach consumers in the west using Taobao
Live, Yizhibo or Xiaohongshu to capitalise on this
being conducted via livestreaming, intersection of entertainment and commerce, but a
video conference appointments similar opportunity may exist by strategising more
around globally accessible platforms like TikTok and
and online ordering in a test of just Instagram Live.
how much the fashion industry Organisers of Shanghai Fashion Week —
can be digitised. who called off their physical event this season —
have also pivoted to livestreaming, not only for
fashion presentations but also by teaming up with
Consumers have increasingly looked Alibaba to allow brands to sell current season stock
online for their shopping needs as varying degrees through the tech giant’s Tmall platform. Showrooms
of lockdowns and quarantines kept as many as 780 that hold wholesale designer brands during Shanghai
million people in China home over Chinese New Fashion Week are now largely being conducted via
Year and the weeks beyond.77 Even as overall retail livestreaming, video conference appointments and
sales bottomed out, e-commerce was one bright spot online ordering in a test of just how much the fashion
in official economic data, with 3 percent growth for industry can be digitised — a B2B experiment that
January and February 2020. Christy Tan, head of will be watched closely by industry peers around
markets strategy and research for Asia at National the world.
Australia Bank, notes a fundamental shift in China
towards “consumption that is more indoor-based Industry leaders should remain
than outdoor-based.” To date, it has been livestream-
sufficiently sceptical about the
ing that has emerged as the innovation to watch in
this space. accuracy of this “crystal ball”
because it is often misguided to
The “Crystal Ball” Has its Limits
draw global conclusions based on
In the wake of lockdowns, some traditional the Chinese market context.
brick-and-mortar retailers in China have re-trained
sales assistants to be livestream hosts, helping to The verdict on showrooms’ early efforts
claw back some of the shortfall from store closures. seems mostly positive. “This season we did it as
39
FASHION SYSTEM
an emergency contingency, but I found it to be so contain its outbreak relatively quickly (although
exciting [that] I truly regret we haven’t experimented fears of a second wave are constant, with worrying
with this before,” DFO showroom and buying agency signs of new small-scale outbreaks around the
Chief Executive Meimei Ding said in March. country at the time of writing). The type of strong
centralised political power structure found in
Just as brands and retailers must China, allowing the government to impose strict
pandemic restrictions, doesn’t exist in many western
transform themselves to serve the democracies. And it is hard to imagine information
customer where and when they gathering being as straightforward elsewhere as it is
in China, where there is a lack of privacy legislation
are needed, manufacturers in helping tech giants — and the brands that benefit
China are increasingly becoming from their big data operations — to trace and track
“customer first” entities in order people’s movements, activities and interactions.
What’s more, China’s predominantly insular
to survive. tech ecosystem, unique cultural context and its
rapid, comparatively recent economic development
Just as brands and retailers must transform makes it a very different market proposition and one
The State of Fashion 2020 — Coronavirus Update
themselves to serve the customer where and when that can’t easily be compared to other global markets
they are needed, manufacturers in China are or used as a barometer for all scenarios.
increasingly becoming “customer first” entities in
order to survive. Already suffering a long-term trend As the economic fallout unfolds,
of offshoring garment manufacturing to markets
the Chinese market will continue
with lower labour costs, more Chinese manufactur-
ers are considering a pivot from export merchandise to dance to its own rhythm and,
for international brands to local brands catering to while some of the beats will sound
domestic demand.
A global decline in orders from major clothing familiar or indeed universal, others
brands will see even more factories competing won’t be popular beyond its borders.
for this domestic business and many converting
to a “consumer-to-manufacturer” (C2M) model. As the first country to suffer from the
Alibaba-owned Taobao recently unveiled its plans coronavirus outbreak, China’s customer-first, inno-
Beijing daily life amid the Covid-19 pandemic. Artyom Ivanov\TASS via Getty Images
to work with 1,000 manufacturers across China vation-centred recovery mentality may prove to be
on its custom-manufacturing platform, aiming to a model for some global fashion industry leaders to
turn them into “super factories” with annual output emulate during these tough times — but only up to a
exceeding RMB 100 million ($14 million) each. point. As the economic fallout unfolds, the Chinese
While some of the business pivots, trends market will continue to dance to its own rhythm
and innovations that emerged during the outbreak and, while some of the beats will sound familiar
in China will almost certainly foretell what happens or indeed universal, others won’t be popular beyond
elsewhere around the world — particularly the its borders.
spotlight on wellness, livestreaming and patriotic
consumption — there are important caveats to
consider. Industry leaders should remain suffi-
ciently sceptical about the accuracy of this “crystal
ball” because it is often misguided to draw global
conclusions based on the Chinese market context.
For one, China appears to have been able to
40
IN-DEPTH
41
GLOSSARY
3D design Czech Republic, Estonia, Georgia, Hungary, Morocco, Mozambique, Namibia, Niger, Nigeria,
Design enabled through software tool for virtual Kosovo, Latvia, Lithuania, Macedonia, Moldova, Oman, Pakistan, Qatar, Réunion, Rwanda,
rendering and 3D visualisation of products with Montenegro, Poland, Romania, Russia, Serbia, Sao Tomé e Príncipe, Saudi Arabia, Senegal,
the ultimate goal of replacement for physical Slovakia, Slovenia, Turkey, Ukraine. Seychelles, Sierra Leone, Somalia, South Africa,
prototypes. South Sudan, Sudan, Swaziland, Syria, Tajikistan,
Europe (mature) Tanzania, Togo, Tunisia, Turkmenistan, Uganda,
APAC (emerging) Austria, Belgium, Denmark, Finland, France, United Arab Emirates, Uzbekistan, Yemen,
American Samoa, Bangladesh, Bhutan, Brunei, Germany, Gibraltar, Greece, Iceland, Ireland, Zambia, Zimbabwe.
Cambodia, China, Fiji, French Polynesia, Guam, Italy, Liechtenstein, Luxembourg, Malta, Monaco,
Hong Kong, India, Indonesia, Kiribati, Laos, Netherlands, Norway, Portugal, Spain, Sweden, North America
Macau, Malaysia, Mongolia, Myanmar, Nauru, Switzerland, United Kingdom. Canada, Puerto Rico, United States of America.
Nepal, New Caledonia, North Korea, Papua New
Guinea, Philippines, Samoa, Solomon Islands, Financial distress Overstock
Sri Lanka, Thailand, Tonga, Tuvalu, Vanuatu, A definition for negative EBITDA (for Europe An excess in inventory, which has not been
Vietnam. only) and net debt/EBITDA > 4. purchased by consumers.
42
INFOGRAPHICS
The State of Fashion 2020: Coronavirus
Update infographics:
1. Survival Instincts
Source: BoF Community Survey: Impact of
Covid-19, Fashion Industry Employees N=1,454,
March 2020
2. Discount Mindset
Source: McKinsey & Company COVID-19 Apparel
& Fashion survey, N=>6,000, 27/3-29/3 2020
3. Digital Escalation
Source: “淘宝再造的“直播节”,能引来
疫后消费爆发吗?”, https://www.sohu.
com/a/382744170_120296297
4. Darwinian Shakeout
Source: McKinsey & Company strategy and
corporate performance analytics
5. Innovation Imperative
Source: The Business of Fashion & Mckinsey &
Company
Exhibits:
43
ENDNOTES
1 “UN chief says coronavirus worst global crisis 17 “Safeguarding our lives and our livelihoods”, 32 “The BoF Podcast: Li Edelkoort Says
since World War II”, France 24, 1 April 2020, March 2020, McKinsey & Company, https:// the Coronavirus Is a Representation of our
https://www.france24.com/en/20200401-un- www.mckinsey.com/business-functions/ Conscience”, The Business of Fashion, 27 March
chief-says-coronavirus-worst-global-crisis-since- strategy-and-corporate-finance/our-insights/ 2020, https://www.businessoffashion.com/
world-war-ii safeguarding-our-lives-and-our-livelihoods-the- articles/podcasts/the-bof-podcast-li-edelkoort-
imperative-of-our-time on-how-covid-19-is-ushering-in-the-age-of-the-
2 McKinsey analysis based on data from Capital amateur
IQ 18 McKinsey analysis based on data from MIYA
payment data engine 33 McKinsey & Company COVID-19 Apparel &
3 McKinsey FashionScope analysis 2019 Fashion survey, N=>6000, 27/3-29/3 2020
19 “Chinese County in Lockdown After
4 McKinsey Global Fashion Index estimate. Coronavirus Cases”, The New York Times, 34 “Nike revenue beats as digital growth offsets
Calculated in relation to the 2019 baseline figure 1 April 2020, https://www.nytimes.com/ rare China sales fall on virus hit”, Thompson
reuters/2020/04/01/world/asia/01reu- Reuters, 24 March 2020, https://uk.reuters.com/
5 McKinsey Global Fashion Index estimate. ters-health-coronavirus-china-county.html article/us-nike-results/nike-revenue-beats-as-
Calculated in relation to the 2019 baseline figure digital-growth-offsets-rare-china-sales-fall-on-
20 The State of Fashion 2020, The Business of virus-hit-idUKKBN21B38L
6 “Coronavirus offers ‘a blank page for a new Fashion & McKinsey & Company, http://cdn.
beginning’ says Li Edelkoort”, Dezeen, 9 March businessoffashion.com/reports/The_State_of_ 35 Peacebird, http://www.peacebird.com/en/
2020, https://www.dezeen.com/2020/03/09/ Fashion_2020.pdf pages/media/news.php
li-edelkoort-coronavirus-reset/
21 McKinsey & Company COVID-19 Consumer 36 “A Post-Pandemic Guide to WeChat”, The
7 “Global surveys on consumer sentiment during Pulse, 22 March 2020 Business of Fashion, 26 March 2020, https://
the coronavirus crisis”, McKinsey & Company, www.businessoffashion.com/articles/profession-
https://www.mckinsey.com/business-functions/ 22 McKinsey & Company COVID-19 Apparel & al/a-post-pandemic-guide-to-wechat-coronavi-
marketing-and-sales/our-insights/global-sur- Fashion survey, N=>6000, 27/3 - 29/3 2020 rus-china-prada
The State of Fashion 2020 — Coronavirus Update
veys-of-consumer-sentiment-during-the-coro-
navirus-crisis 23 McKinsey & Company COVID-19 Consumer 37 “Can Taobao’s reconstructed ‘Live Festival’
Pulse US 3/23-3/29/2020 N=1,119 lead to an outbreak of post-epidemic consump-
8 “Safeguarding our lives and our liveli- tion?”, Sohu.com, 24 March 2020,https://www.
hoods”, McKinsey & Company, https://www. 24 “The BoF Podcast: Retail Futurist Doug sohu.com/a/382744170_120296297
mckinsey.com/business-functions/strat- Stephens on How Coronavirus Will Shift
egy-and-corporate-finance/our-insights/ Consumer Behaviour”, The Business of Fashion, 38 “Will E-Commerce Save China’s Luxury
safeguarding-our-lives-and-our-livelihoods-the- 13 March 2020, https://www.businessoffashion. Business?”, The Business of Fashion,
imperative-of-our-time com/articles/podcasts/the-bof-podcast-retail-fu- 12 March 2020, https://www.busines-
turist-doug-stephens-on-how-coronavirus-will- soffashion.com/articles/professional/
9 McKinsey analysis based on data from CapIQ shift-consumer-behaviour will-e-commerce-save-chinas-luxury-business
10 “A perspective for the luxury industry 25 “To reduce or not? The effect of coronavirus on 39 McKinsey COVID 19 Consumer Pulse Survey
during—and after—coronavirus”, McKinsey & discounting strategies”, Edited, 31 March 2020,
Company, April 2020, https://www.mckinsey. https://edited.com/resources/the-effect-of-coro- 40 McKinsey COVID-19 Apparel & Fashion
com/industries/retail/our-insights/a-per- navirus-on-discounting-strategy/ survey, N=>6000, 27/3-29/3 2020, Edited.com,
spective-for-the-luxury-goods-industry-dur- access March 27, 2020
ing-and-after-coronavirus 26 “Safeguarding our lives and our liveli-
hoods: The imperative of our time”, McKinsey 41 “East Asia and the Pacific in the Time of
11 “LVMH says revenue has dropped as much as & Company, March 2020, https://www. COVID-19 — Regional Economic Update,
20% due to the coronavirus outbreak”, Bloomberg, mckinsey.com/business-functions/strat- April 2020”, The World Bank, https://www.
27 March 2020, https://www.bloomberg.com/ egy-and-corporate-finance/our-insights/ worldbank.org/en/region/eap/publication/
news/articles/2020-03-27/lvmh-says-revenue- safeguarding-our-lives-and-our-livelihoods-the- east-asia-pacific-economic-update
has-dropped-as-much-as-20-due-to-coronavirus imperative-of-our-time
42 McKinsey COVID 19 Consumer Pulse Survey,
12 “The BoF Podcast: Luca Solca on ‘The Worst 27 McKinsey analysis based on consumer 22 March 2020
Year in the History of Modern Luxury”, The interviews
Business of Fashion, 19 March 2020, https:// 43 “LVMH Is Now the Second-Most Valuable
www.businessoffashion.com/articles/podcasts/ 28 McKinsey analysis based on data from MIYA Company in Europe: How Did That Happen?”, The
the-bof-podcast-luca-solca-on-the-worst-year- payment data engine Business of Fashion, 5 November 2019, https://
in-the-history-of-modern-luxury www.businessoffashion.com/articles/profes-
29 “ A perspective for the luxury-goods industry sional/lvmh-e200-billion-second-largest-com-
13 McKinsey & Company COVID-19 US Consumer during—and after—coronavirus”, McKinsey & pany-europe
Pulse Survey 3/20-3/22/2020 N = 1,073 Sampled Company, April 2020, https://www.mckinsey.
and weighted to match US gen pop 18+ years com/industries/retail/our-insights/a-per- 44 McKinsey Global Fashion Index estimate.
spective-for-the-luxury-goods-industry-dur- Calculated in relation to the 2019 baseline
14 Labor dept of US, official data, https://edition. ing-and-after-coronavirus figure
cnn.com/2020/04/02/investing/premar-
ket-stocks-trading/index.html 30 “To reduce or not? The effect of coronavirus on 45 “Coronavirus Live News Update”, The New
discounting strategies”, Edited, 31 March 2020, York Times, April 2020, https://www.nytimes.
15 “The BoF Podcast: Luca Solca on ‘The Worst https://edited.com/resources/the-effect-of-coro- com/2020/04/01/world/coronavirus-news.html
Year in the History of Modern Luxury”, The navirus-on-discounting-strategy/
Business of Fashion, 19 March 2020, https:// 46 “A perspective for the luxury-goods industry
www.businessoffashion.com/articles/podcasts/ 31 “Retailers, Pressured to Shutter Stores, Face during—and after—coronavirus”, McKinsey &
the-bof-podcast-luca-solca-on-the-worst-year- a Moral Dilemma”, The Business of Fashion, 17 Company, April 2020, https://www.mckinsey.
in-the-history-of-modern-luxury March 2020, https://www.businessoffashion. com/industries/retail/our-insights/a-per-
16 Organisation for Economic Co-operation and com/articles/professional/retailers-pressured- spective-for-the-luxury-goods-indus-
Development to-shutter-stores-face-a-moral-dilemma try-during-and-after-coronavirus?cid=oth-
44
er-eml-alt-mip-mck&hlkid=c48ca3bd4e2340d- com/articles/professional/the-fashion-tech-com- 73 Brand spokesperson.
780d493c0e2655ab1&hctky=10076794&hd- panies-getting-a-boost-as-covid-19-takes-hold
pid=649460ac-0c5c-4d9e-b0d7-84451468d33c 74 China consumer report 2020: The many faces
61 “The Fashion-Tech Tools Getting a Boost As of the Chinese consumer, McKinsey & Company,
47 https://www.worldbank.org/en/region/eap/ Covid-19 Takes Hold”, The Business of Fashion, December 2019, https://www.mckinsey.com/
publication/east-asia-pacific-economic-update 19 march 2020, https://markets.businessinsider. featured-insights/china/china-consumer-report-
com/news/stocks/zoom-stock-price-surged- 2020-the-many-faces-of-the-chinese-consumer
48 “East Asia and the Pacific in the Time of coronavirus-pandemic-video-work-from-
COVID-19 — Regional Economic Update, home-2020-3-1029023594 75 China: Exports, percent of GDP, The Global
April 2020”, The World Bank, https://www. Economy.com, https://www.theglobaleconomy.
worldbank.org/en/region/eap/publication/ 62 “COVID-19: Remote work puts millions com/China/exports/
east-asia-pacific-economic-update more on Microsoft Teams, Slack”, Channel
News Asia, 20 March 2020, https://www. 76 “Consumer sentiment drops in China, but not
49 McKinsey analysis based on data from Capital channelnewsasia.com/news/business/corona- in other major economies”, Ipsos, 18 February
IQ virus-covid-19-remote-work-millions-micro- 2020, https://www.ipsos.com/en-hk/consum-
soft-teams-slack-12558570 er-sentiment-drops-china-not-other-ma-
50 The New York Times, “Coronavirus Live News jor-economies
Update”, https://www.nytimes.com/2020/04/01/ 63 “Turkish clothes makers see orders shifting
world/coronavirus-news.html from coronavirus-hit China”, Thompson Reuters, 77 “780 million people in China are living under
7 February 2020, travel restrictions due to the coronavirus out-
51 McKinsey analysis based on data from https://www.reuters.com/article/ break”, CNN, 17 February, 2020 https://edition.
Capital IQ us-china-health-turkey-clothing/ cnn.com/2020/02/16/asia/coronavirus-covid-19-
turkish-clothes-makers-see-or- death-toll-update-intl-hnk/index.html
52 “Neiman Marcus in bankruptcy talks ders-shifting-from-coronavirus-hit-chi-
with lendors”, Thompson Reuters, 24 March na-idUSKBN2011QA
2020, https://www.reuters.com/article/
us-neiman-marcus-bankruptcy/neiman-mar- 64 “I went to a sneaker launch in VR because
cus-in-bankruptcy-talks-with-lenders-bloomb- of the coronavirus”, Engadget, 31 March 2020,
erg-law-idUSKBN21B01F https://www.engadget.com/2020-03-31-asics-
meta-sneakers-vr-launch.html?
53 “Li & Fung gets 930 million privatization offer
from consortium”, Bloomberg, 20 March 2020 65 “Now Is the Time for Virtual Showrooms to
https://www.bloomberg.com/news/arti- Shine. Will They?”, The Business of Fashion, 19
cles/2020-03-20/li-fung-gets-930-million-pri- March 2020, https://www.businessoffashion.
vatization-offer-from-consortium com/articles/professional/now-is-the-time-for-
virtual-showrooms-to-shine-will-they
54 “The BoF Podcast: Retail Futurist Doug
Stephens on How Coronavirus Will Shift 66 “For the domestic clothing brand? The average
Consumer Behaviour”, The Business of Fashion, daily retail sales during the epidemic exceeded
13 March 2020, https://www.businessoffashion. 8 million”, Ladymax, 11 February 2020, http://
com/articles/podcasts/the-bof-podcast-retail-fu- news.ladymax.cn/202002/11-35157.html
turist-doug-stephens-on-how-coronavirus-will-
shift-consumer-behaviour 67 The Business of Fashion, February
2020, https://mp.weixin.qq.com/s/
55 McKinsey analysis based on Capital IQ data sAb8LL88g7YCTxjvDvw_Yg
56 “Resilience through a downturn”, McKinsey 68 China Luxury Report 2019, McKinsey &
& Company, 11 July 2019, https://www.mckinsey. Company, April 2019, https://www.mck-
com/industries/financial-services/our-insights/ insey.com/~/media/mckinsey/featured%20
banking-matters/resilience-through-a-downturn insights/china/how%20young%20chinese%20
consumers%20are%20reshaping%20
57 “Gap Acquires Athleta for $150 Million”, The global%20luxury/mckinsey-china-luxu-
New York Times, 22 Sep 2008, https://www. ry-report-2019-how-young-chinese-consum-
nytimes.com/2008/09/23/business/23gap.html ers-are-reshaping-global-luxury.ashx
and Gap stores are closing but Athleta may be the
company‘s best bet; “The Gap Isn’t the Future. Its 69 National Bureau of Statistics China
Lululemon Challenger Is.”, Bloomberg, 2 March
2009, https://www.bloomberg.com/news/arti- 70 “H&M points to faster online shift as corona-
cles/2019-03-02/gap-stores-are-closing-but-ath- virus shuts stores”, The Financial Times, 3 April
leta-may-be-the-company-s-best-bet 2020, https://www.ft.com/content/33a86903-
53dc-4ef6-b456-bd3324c734f6
58 “Inside adidas’ Secret Brooklyn Creator Farm
Where They Design the Future”, Highsnobiety, 71 “Burberry Warns of Dire Sales Slump as
19 July 2017, Coronavirus Spreads”, The Business of Fashion,
https://www.highsnobiety.com/2017/07/19/ 19 March 2020, https://www.businessoffashion.
inside-adidas-brooklyn-creator-farm/ com/articles/news-analysis/burberry-warns-of-
dire-sales-slump-as-coronavirus-spreads
59 BoF Community Survey: Impact of
COVID-19, Fashion Industry Employees 72 “Nike revenue beats as digital growth offsets
N=1,454, March 2020 rare China sales fall on virus hit”, Thompson
Reuters, 24 March 2020, https://uk.reuters.com/
60 “The Fashion-Tech Tools Getting a Boost As article/us-nike-results/nike-revenue-beats-as-
Covid-19 Takes Hold”, The Business of Fashion, digital-growth-offsets-rare-china-sales-fall-on-
19 March 2020, https://www.businessoffashion. virus-hit-idUKKBN21B38L
45
FOR COMMERCIAL ENQUIRIES PLEASE CONTACT:
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For questions on the report or further discussions, please contact a member of McKinsey’s Apparel,
Fashion & Luxury global leadership team:
achim_berg@mckinsey.com
linkedin.com/in/achim-berg Naoyuki Iwatani Althea Peng
Senior Partner, Japan Partner, North America
Anita Balchandani naoyuki_iwatani@mckinsey.com althea_peng@mckinsey.com
Partner, United Kingdom
anita_balchandani@mckinsey.com Fernanda Hoefel Jennifer Schmidt
linkedin.com/in/anita-balchandani Partner, Latin America Senior Partner, North America
fernanda_hoefel@mckinsey.com jennifer_schmidt@mckinsey.com
47