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The State of Fashion 2021 VF
The State of Fashion 2021 VF
of Fashion
2021
3
The State
of Fashion
2021
CONTENTS
ECONOMY
GLOBAL
GLOBAL ECONOMY 16—33
01: Living with the Virus 17
Jumia: Balancing Speed with Discipline in a Crisis 20
02: Diminished Demand 23
Covid-19 and the New Era of Luxury 29
CONSUMER
CONSUMER SHIFTS 34—57
SHIFTS
03: Digital Sprint 35
Kering: Fast-Tracking a Digital Upgrade 38
Alibaba: Innovating for China’s Advanced Ecosystem 41
04: Seeking Justice 45
Louis Vuitton: Hardwiring Accountability in a State of Flux 48
05: Travel Interrupted 52
Selfridges Group: Managing the Pivot to Local Shopping 55
FASHION
SYSTEM
FASHION SYSTEM 58—99
06: Less is More 59
A More Circular Fashion Industry Will Require a Collective Effort 63
07: Opportunistic Investment 67
08: Deeper Partnerships 70
Shahi Exports: Reforming the Fashion Supply Chain 74
BEAUTY
2021
Risk, Resilience and Rebalancing in the Apparel Value Chain 77
09: Retail ROI 81
H&M Group: Making Retail More Resilient 85
Mapping the Retail Portfolio of the Future 89
10: Work Revolution 96
Glossary 116
End Notes and Infographics 118
7
CONTRIBUTORS
As founder, editor-in-chief Based in Frankfurt, Achim Anita Balchandani is a As global senior expert in
and chief executive of The Berg leads McKinsey’s Global Partner in McKinsey’s London McKinsey’s Apparel, Fashion
Business of Fashion, Imran Apparel, Fashion & Luxury office, and leads the Apparel, & Luxury group, Saskia
Amed is one of the fashion group and is active in all Fashion & Luxury group in Hedrich works with fashion
industry’s leading writers, relevant sectors including EMEA. Her expertise extends companies around the
thinkers and commentators. clothing, textiles, footwear, across fashion, health and world on strategy, sourcing
Fascinated by the industry’s athletic wear, beauty, beauty, specialty retail and optimisation, merchandis-
potent blend of creativity and accessories and retailers e-commerce. She focuses ing transformation, and
business, he began BoF as a spanning from the value end on supporting clients in sustainability topics — all
blog in 2007, which has since to luxury. As a global fashion developing their strategic topics she is also publishing
The State of Fashion 2021
grown into the pre-eminent industry and retail expert, responses to the disruptions about regularly. Additionally,
global fashion industry he supports clients on a broad shaping the retail industry she is involved in developing
resource serving a five- range of strategic and top and in delivering customer strategies for national
million-strong community management topics, as well as and brand-led growth garment industries across
from over 200 countries and on operations and sourcing- transformations. Africa, Asia and Latin
territories. Previously, he was related issues. America.
a consultant at McKinsey
in London.
Felix Rölkens is part of the As global markets editor of Jakob Ekeløf Jensen is a Althea Peng is a Partner in
leadership of McKinsey’s The Business of Fashion, consultant in McKinsey’s McKinsey’s San Francisco
Apparel, Fashion & Luxury Robb Young oversees content London office, specialising office, and leads the Apparel,
group and works with from Asia-Pacific, the Middle in Apparel, Fashion & Luxury. Fashion & Luxury group for
apparel, sportswear and pure East, Latin America, Africa, He works with fashion and the Americas. In this dynamic
play fashion e-commerce the CIS and Eastern Europe. luxury companies as well industry, she partners with
companies in Europe and He is an expert on emerging as investors in the industry global apparel and retail
North America, on a wide and frontier markets, whose across Europe, on topics such companies to drive large-
range of topics including career as a fashion editor, as e-commerce, strategy, scale transformations for
strategy, operating model business journalist, author value creation, operating profitability and to build new
and merchandising and strategic consultant model and M&A. capabilities for growth.
transformations. has seen him lead industry
projects around the world.
8
ACKNOWLEDGEMENTS
The authors would like to thank all members of The Business of Fashion and the McKinsey community for their contribution to the
research and participation in the BoF-McKinsey State of Fashion Survey, and the many industry experts who generously shared their
perspectives during interviews. In particular, we would like to thank: Adam Freede, Albert Chan, Alexander Pavlov, Anant Ahuja, Anne
Line Hansen, Anne Pitcher, Charlotte Elstob, Dickson Szeto, Doug Stephens, Elsa Berry, Grégory Boutté, Helena Helmersson, Josh
Gardner, Juan Carlos Escribano, Juliet Anammah, Michael Burke, Mike Hu, Nelli Kim, Philip Guarino, Rania Masri, Robert Burke,
Sharifa Murdock and Thiago Alonso de Oliveira.
The wider BoF team has also played an instrumental role in creating this report — in particular Amanda Dargan, Anna Rawling,
Anouk Vlahovic, Casey Hall, Chelsea Carpenter, Hannah Crump, Kate Vartan, Lauren Sherman, Niamh Coombes, Nick Blunden,
Rachel Deeley, Sarah Brown, Sarah Kent, Tamison O’Connor, Venetia van Hoorn Alkema, Victoria Berezhna, Vikram Alexei Kansara
and Zoe Suen.
The authors would in particular like to thank Sonja Penttilä and Sarah André from McKinsey’s Helsinki and London offices respectively
for their critical roles in delivering this report. We also acknowledge the following McKinsey colleagues for their special contributions
to the report creation and in-depth articles: Adhiraj Chand, Aimee Kim, Alex Sukharevsky, Andres Avila, Anita Liao, Antonio Gonzalo,
Cherry Chen, Claire Gu, Clarisse Magnin, Colin Henry, Colleen Baum, Daniel Zipser, Danielle Bozarth, Ellie Baker, Emanuele Pedrotti,
Emily Gerstell, Ekaterina Abramicheva, Ewa Sikora, Fernanda Hoefel, Franck Laizet, Gillian Wright, Hanna Grabenhofer, Hannah
Yankelevich, Jihye Lee, John Hooks, Julia Dageförde, Karl-Hendrik Magnus, Karthikeyan Swaminathan, Libbi Lee, Lisa Renaud, Marie
Strawczynski, Mekala Krishnan, Miriam Lobis, Nakul Verma, Neha Onteeru, Nicola Montenegri, Patricio Ibanez, Peter Stumpner,
Raphael Buck, Rebeca Vega, Rebecca Zhang, Ryan Shultz, Sajal Kohli, Sakina Mehenni, Sophie Marchessou, Susan Lund, Thomas
Tochtermann, Tom Skiles, Ulric Jerome, Valerie Van der Voort, Vorah Shin. We’d also like to thank David Wigan and Jonathan Turton
for their editorial support, and Adriana Clemens for external relations and communications.
In addition, the authors would like to thank Joanna Zawadzka and Lucinda Scholey for their creative input and direction into this State
of Fashion report, Martin Nicolausson for the cover illustration and Getty Images for supplying imagery to bring the findings to life.
9
EXECUTIVE SUMMARY
In Search of
Promise in
Perilous Times
The State of Fashion 2021
For the fashion industry, 2020 was the year geographies and a relatively rapid transition to
in which everything changed. As the coronavirus economic recovery. In this scenario, the industry
pandemic sent shockwaves around the world, the would return to 2019 levels of activity by the third
industry suffered its worst year on record with quarter of 2022.
almost three quarters of listed companies losing Our second, “Later Recovery” scenario
money. Consumer behaviour shifted, supply chains would see sales growth decline by 10 to 15 percent
were disrupted and the year approached its end over the coming year compared with 2019. In this
with many regions in the grip of a second wave of case, the virus would continue to wreak havoc
infections. A turbulent and worrying year has left despite widespread containment measures and
us all looking for silver linings — both in life and in fashion sales would only revert to 2019 levels in the
business — knowing full well that we will need to fourth quarter of 2023.
make the most of them in the year ahead. In either scenario, we expect tough trading
Indeed, according to McKinsey Global conditions to persist next year, in some geographies
Fashion Index analysis, fashion companies will post at least, and for high levels of bankruptcies, store
approximately a 90 percent decline in economic closures and job cuts to continue. At the same time,
profit in 2020, after a 4 percent rise in 2019. Given the pandemic will accelerate trends that were
the ongoing uncertainty, our predictions for in motion prior to the crisis, as shopping shifts
industry performance next year are focused on to digital and consumers continue to champion
two scenarios. fairness and social justice.
The first, more optimistic “Earlier Given the extreme jeopardy facing the
Recovery” scenario envisages that global fashion industry, there is no simple, standardised playbook
sales will decline by between 0 and 5 percent in for the coming year. Instead, fashion companies
2021 compared to 2019. This would be predicated must tailor their strategies to fit their individual
on successful virus containment in multiple priorities, market exposure and capabilities.
10
In other words, deploy your “silver linings In a disrupted environment, decision-makers must
strategy” that takes advantage of bright spots in the be bold. They must develop novel strategies for their
proverbial storm. The key principles for managing assortments or product offering, focused on profit-
change will be flexibility and agility, alongside ability, value, simplicity and downsized collections,
operational resilience — a critical capability in rather than discounting and volumes. They also
an uncertain environment. To inform decision- should create a more nuanced assessment of store
making, we expect data and analytics to play an ROI to manage the crisis in physical retail while
increasingly important role, helping companies implementing a truly omnichannel perspective
to track shifts in demand across geographies, on store operations.
categories, channels and value segments. The pandemic will continue to put supply
chains under pressure and executives should
The pandemic will accelerate be prepared for further shocks in 2021. Brands
should secure high-quality and reliable production
trends that were in motion prior capacity and make the long-overdue shift to a
to the crisis, as shopping shifts demand-focused model to operate in this fluid
to digital and consumers continue environment. Leveraging volume commitments
and strategic alignment with key suppliers will
to champion fairness and help some suppliers’ financial stability and,
social justice. in the process, improve the credibility of brands’
ethical commitments.
Consumer behaviour has undoubtedly While there is little doubt that the year
shifted over the past year, as people sheltered from ahead will be an arduous one for some fashion
the virus in their homes, travel was restricted and industry players, it will also be a year
stores were closed around the world. However, as of opportunity for others. Market valuations,
digital consumption continues its dominance and a forward-looking measure of expected company
growth in 2021, companies must develop more success, show that a brighter future lies ahead
engaging and social experiences to encourage for companies that are heavily indexed in digital
consumers to connect. At the same time, we channels and the Asia-Pacific region.
anticipate executive teams to increasingly focus We believe 2021 will bring continuing
on ensuring that digital channels add measurable opportunities in both the value and luxury
value to the bottom line, given tight budgets and the segments, where the former benefits from
need for productivity and efficiency. With tourism consumers trading down in uncertain times,
in the doldrums for some time to come, brands and the latter benefits from a strong recovery in
need to unlock new pockets of demand and tailor markets like China. Whatever their positioning,
assortments to attract more local customers. As stronger players will have an opportunity to seize
they become more conscious of worker welfare market share from their peers and, in some cases,
issues and the human impact of factory closures, acquire their rivals at a bargain price. In this highly
company leaders must uphold the highest ethical tempestuous and increasingly competitive market
business practices and overhaul business models environment, players across the board will need to
that are exploitative of people and the planet. reflect carefully (but swiftly) on their next moves.
Looking forward, the industry should set Not every silver lining that emerged from the crisis
its sights higher, aiming for a “better normal” will lead to a business opportunity and those that
across stores, partnerships and assortments. do will certainly not last forever.
11
INDUSTRY OUTLOOK
Navigating Fashion’s
Rocky Road to
Recovery
The past year will go down in history as one Although more than half of business leaders
of the most challenging for the fashion industry in our BoF-McKinsey State of Fashion 2021 Survey
The State of Fashion 2021
on record, marked by declining sales, shifting also expressed concerns about things other than
customer behaviour and disrupted supply chains. the Covid-19 health and economic crisis for the year
On top of a humanitarian crisis affecting the lives ahead, the pandemic recovery timeline did weigh
of billions of people, Covid-19 is the catalyst for heavily on their minds. We should acknowledge
a deepening economic crisis. Like many other that the mood of fashion business leaders may
sectors, the fashion industry finds itself in the midst have evolved in the weeks that transpired since the
of unprecedented adversity, with revenues and survey, especially as the pandemic worsens again
margins under pressure. Yet the shifting landscape in the fourth quarter of 2020 — with government
is also creating pockets of momentum and, despite responses including more severe social distancing
the ongoing, widespread impact of the pandemic, measures in Europe, the threat of new lockdowns
some fashion companies are developing new ways across numerous regions and mass-testing in some
to compete. Chinese provinces. Nevertheless,
The pandemic has compounded the demand the collective sentiment of fashion executives
for all things digital, which in turn has enabled gleaned from our survey does constitute a
innovation, efficiency and new ways for businesses compelling yardstick against which to measure
to scale up. The shift is permanent, and will business leaders’ predictions and expectations for
continue to create opportunities to build slicker, the year ahead.
smarter operating models and differentiated Naturally, business leaders across the board
customer propositions that are more person- hope for the effects of Covid-19 to dissipate and
alised to each customer. Equally, the crisis has for the global economy to recover as quickly as
emphasised the need to move to more sustainable possible. McKinsey Fashion Scenarios analysis for
and responsible ways of working in all areas of the industry over the next year anticipates that,
the value chain. As the number of fashion players in an Earlier Recovery scenario, the virus will be
responding to this need continues to grow, it will effectively controlled, thanks to a strong public
prove to be a long-term boon to companies, workers, health response (based on information available
customers and the planet. September 2020).1 In this scenario, government
12
Exhibit 1:
Fashion executives are divided on the outlook for the industry in 2021
% OF FASHION EXECUTIVE RESPONDENTS, EXPECTATIONS FOR THE CONDITION OF THE FASHION INDUSTRY IN 2021
RELATIVE TO 2020
Worse Same Better
BY SEGMENT
Luxury 39 30 31
Mid-market 55 23 22
41 23 36
Value
BY GEOGRAPHY
Europe 47 23 30
North America 41 35 24
36 20 44
Asia
Exhibit 2:
Fashion executives expect Covid-19 and the economic crisis to be the biggest
challenge in 2021 and digital to be the biggest opportunity
TOP THREE ANSWERS, % OF RESPONDENTS WHO MENTIONED THE WORD
Covid-19 and
the economic
crisis
45
Digital
Changing
consumer 30
demand and
behaviour
Biggest challenge for the fashion industry Biggest opportunity for the fashion industry
13
INDUSTRY OUTLOOK
interventions will partially offset economic scenario were to materialise, a deeper dip in sales
impact and global travel will pick up along with the in 2021 and slower global economic recovery would
possibility of larger social gatherings. The global be anticipated. In this case, the US would see sales
growth outlook for fashion sales in this scenario decline by 22 to 27 percent in 2021 compared to
determines that recovery would be achieved by the 2019, and pre-Covid performance in the country
third quarter of 2022, with China leading the way would not return until after 2025. Although
with 5 to 10 percent sales growth in 2021 compared significantly impacted, Europe would fare slightly
to 2019. Europe, on the other hand, would expect to better than the US overall in this scenario, with
continue to see lower sales in 2021 as international sales down 14 to 19 percent compared to 2019.
tourists stay at home, with sales down 2 to 7 percent However, the European luxury segment would
compared to 2019. With footfall remaining low, suffer a considerable hit. If new lockdowns were
pre-Covid levels of activity in Europe are unlikely to be implemented and travel restrictions persist,
to return before the third quarter of 2022. This luxury sales in Europe could drop up to 40 percent
scenario includes a similar trajectory for the US, and only recover to their pre-crisis level by the third
with sales down 7 to 12 percent in 2021 compared to quarter of 2023.
2019, and recovery to pre-Covid sales only expected There are, of course, a multitude of inter-
by the first quarter of 2023. mediate scenarios in between the two ends of
The primary driver of growth in the coming the spectrum, each containing a combination
The State of Fashion 2021
year will continue to be digital channels, reflecting of positive and negative effects set against the
the fact that people in many countries remain backdrop of an industry striving to recover its
reluctant to gather in crowded environments. The equilibrium. However, in all cases, we anticipate
Earlier Recovery scenario anticipates dynamic significant variation between geographies, with as
digital growth across geographies in 2021 compared much as a two- to four-year lag between fast- and
to 2019, with more than 30 percent online growth slow-recovering markets.
in Europe and the US and over 20 percent growth in On top of subdued sales, we expect industry
the already highly digitised Chinese market.2 players will see deep and long-lasting changes
to both consumer demand and ways of working.
The primary driver of growth in Among potential short-term challenges, brands will
the coming year will continue to need to manage a category shift towards casualwear
and the continuing pressure on luxury, as well as
be digital channels, reflecting the
shorter production cycles and cash constraints that
fact that people in many countries lead to a slowdown in investments.
remain reluctant to gather in Set against this backdrop, the strategic
outlook among business leaders is uneven,
crowded environments.
reflecting the diverse trends the industry faced
However, less favourable recovery scenarios even before the pandemic. Across all value
must also be considered if there is a delay to a segments, a larger proportion of executives in the
widely available vaccine. In this case, the virus BoF-McKinsey State of Fashion 2021 Survey are
would persist in some regions and new waves of pessimistic rather than optimistic about the year
lockdowns could take hold, accompanied by only ahead, but 32 percent of respondents still expect
partially effective government responses and the industry to evolve positively next year.3 In line
ongoing travel restrictions, further embedding with pre-crisis attitudes, 31 percent of executives
the consumer behaviour developed during the in the luxury segment and 36 percent in the value
pandemic. If this more pessimistic Later Recovery segment have a positive outlook for 2021, while only
14
22 percent of executives in the mid-market believe mindset shift towards sustainability that has begun
things will get better. In the luxury segment specif- to take place over the last few years. Optimism
ically, fashion executives express more confidence about digital and sustainability chimes with the
than McKinsey’s Earlier Recovery scenario, which widely held view that, despite the disruption of the
forecasts a decline of global luxury sales by 12 to 17 pandemic, these trends will accelerate and, in turn,
percent in 2021 compared to 2019, and up to a lead to a reset of the fashion industry.
28 percent decline in Europe. The highest
confidence is around the value segment, with 36 Digital is seen by a third of
percent of executives projecting an improvement
executives as a silver lining that
and another 23 percent predicting little change.
This reflects the impact of the pandemic on presents the biggest opportunity
consumers across different income brackets, as in 2021.
well as the more established appetite for cheaper
fashion, now partially offset by rising demand for With the benefit of hindsight, we also asked
quality and durability. survey respondents to reflect on the relevance of
In line with regional recovery rates so forward-looking sentiments gathered last year.
far, executives from Asia are the most confident Of the themes we highlighted in last year’s State
about the upcoming year, with almost half sharing of Fashion report, executives state that those
a positive outlook. The vision for 2021 is less impacting their business the most in 2020 were
optimistic in the west, with only around a third of “Next Gen Social,” “Sustainability First” and,
European executives and a quarter of US executives in third place, “On High Alert” of recession risk.
expecting the state of the fashion industry next These choices reveal how the Covid-19 crisis has
year to improve. The sentiment of European accentuated trends that were forecasted in last
executives is the bleakest, with almost half saying year’s report and catalysed them in a way and at a
conditions will get worse, compared to 41 percent of pace no one could have predicted.
executives in the US. The 10 themes that will come to define
The extent to which these concerns are 2021 suggest the beginning of a new chapter
weighing on executives is shown in their choice for the global fashion industry. 2020 has been a
of the top three words to describe the conditions year of colossal change. What is clear is that the
we can expect for the fashion industry in 2021: fashion industry, like many other sectors, will
“uncertain,” “challenging” and “disruptive.”4 certainly exit this crisis in a very different form
Given the clouds that shroud the economic outlook than that in which it entered. Depending on their
this year, digital is seen by a third of executives as a sizes, geographies and the segments in which they
silver lining that presents the biggest opportunity operate, some players can anticipate a brighter
in 2021. Indeed, almost all businesses anticipate outlook in the year ahead. Others will not.
their online revenues to rise next year, with 26 In any event, there is no likely scenario
percent of executives projecting a gain of 50 which predicts a strong recovery in 2021.
percent or more and nearly half of executives The upcoming year acts as a bridge between two
projecting growth of 30 percent or more. The different states of the industry. As such, the 10
digital opportunity in e-commerce as well as in the themes for The State of Fashion 2021 each highlight
digitisation of business processes and operations a major disruption sparked by the pandemic.
is the most cited opportunity by far. Sustainability In order to cross the bridge into fashion’s new
follows in second place, with 1 out of 10 executives world, executives should pay heed, as each theme
citing it as an area of growth, underscoring the offers an urgent imperative for the year ahead.
15
The State of
GLOBAL ECONOMY CONSUMER SHIFTS
The Covid-19 crisis has Following the deepest Digital adoption With garment workers, The travel retail
impacted the lives and recession in decades, has soared during sales assistants and sector remains
livelihoods of millions the global economy is the pandemic, with other lower-paid severely disrupted
of people, while expected to partially many brands finally workers operating at and destination
disrupting international recover next year but going online and the sharp end of the shopping suffered
trade, travel, the economic growth enthusiasts embracing crisis, consumers have throughout 2020. With
economy and will remain diminished digital innovations become more aware of international tourism
consumer behaviour. relative to pre- like livestreaming, the plight of vulnerable expected to remain
To continue to manage pandemic levels. customer service employees in the subdued next year and
unprecedented levels Since demand for video chat and fashion value chain. As shoppers experiencing
of uncertainty in the fashion is also unlikely social shopping. As momentum for change further interruptions to
year ahead, companies to bounce back online penetration builds alongside travel, companies will
should rewire their due to restrained accelerates and campaigns to end need to engage better
operating models to spending power shoppers demand exploitation, consumers with local consumers,
enable flexibility and amid unemployment ever-more will expect companies make strategic
faster decision-making, and rising inequality, sophisticated digital to offer more dignity, investments in markets
and balance speed companies interactions, fashion security and justice to witnessing a stronger
against discipline in the should seize new players must optimise workers throughout the recovery and unlock
pursuit of innovation. opportunities and the online experience global industry. new opportunities
double down on and channel mix while to keep customers
outperforming finding persuasive shopping.
categories, channels ways to integrate the
and territories. human touch.
45 20%
0% to -5%
%
55%
-10% to -15%
EARLIER LATER
RECOVERY RECOVERY
Covid-19 and the Global fashion sales in 71% of fashion executives 55% of consumers expect 66% of fashion executives
economic crisis is 2021 could be below expect their online fashion brands to care for expect travel retail sales
the top challenge 2019 levels by as much business to grow by 20% the health of employees to recover their former
for 2021 for 45% of as 15 percent or more in 2021 in times of crisis growth levels only within
fashion executives and 2 or 3 years
stakeholders surveyed
Fashion 2021
FASHION SYSTEM
58% ~1/2
89%
45%
58% of fashion 45% of fashion executives 35% of fashion executives Approximately half of 89% of fashion
executives consider expect market share expect resilience and European consumers executives expect a
assortment planning redistribution to be a top partnerships in the have shopped less in hybrid model of
to be a key area for data theme in 2021 supply chain to be a top physical stores since working to be part of
and analytics in 2021 theme in 2021 lockdowns started the new normal
GLOBAL
ECONOMY
01. LIVING WITH THE VIRUS
The State of Fashion 2021
18
01. LIVING WITH THE VIRUS
The pandemic has had a destructive impact future scenario, the global economy could return
on the global economy. It is now certain that there to 2019 levels of activity by the third or last quarter
will be an exceptional slowdown in economic growth of 2021, with differentiated growth trajectories
in 2020, with the International Monetary Fund across regions. In more pessimistic future scenarios,
predicting that global GDP will be 6.5 percent lower recovery will take longer and businesses will face
than its pre-pandemic projection, with variability continued volatility in supply and demand for
across regions. At the same time, governments multiple years.
are accumulating huge debts. In just one year, One segment hit particularly hard by the
global public debt stocks are projected to jump by crisis has been international travel, which has almost
an astonishing 13 percent to 96 percent of gross ground to a halt in some geographies. The severity
world product, with longer-term effects likely to be of the impact was summed up by Procter & Gamble
tax rises, restricted spending and slower growth.5 (P&G) Vice Chairman Jon Moeller, when he told
Furthermore, few economists predict a recovery to investors on an earnings call in April 2020 that the
pre-crisis levels before the third quarter of 2022, and travel retail business in Asia — which underpins P&G
even that prediction is riddled with uncertainty. brands like SK-II — was simply “gone.”6 For fashion
and beauty players that are reliant on the travelling
International tourist arrivals are consumer, there will continue to be concern next
expected to contract by 60 to 80 year. International tourist arrivals are expected to
contract by 60 to 80 percent in 2020 and McKinsey
percent in 2020 and international forecasts that international tourism will remain
tourism is forecast to remain subdued until 2023 or 2024.7 8
subdued until 2023 or 2024. Cross-border trade also continued to slow
significantly in 2020, with port and airport closures
Recovery will likely fall somewhere between disrupting flows, which adds to challenges caused by
bullish and bearish scenarios for 2021, based on ongoing trade tensions and tariff disputes, including
McKinsey Global Institute analysis in partnership the deteriorating relationship between China and
with Oxford Economics (based on information the US and the unknown impact of Brexit on
available September 2020). In a more optimistic UK-EU flows.
19
GLOBAL ECONOMY
In the wake of these crosscurrents, the strains on existing centres due to social distancing
fashion industry will continue to face a period of measures.11 British retailer John Lewis announced
unprecedented challenges. With that in mind, in the summer it would open concessions with
resilience should be at the top of executives’ agendas. fast-growing indoor spinning brand Peloton, rapidly
History reveals just how important it is during responding to the at-home fitness trend that boomed
times of crisis. during the pandemic.12
In the aftermath of the 2008 financial crisis, As the crisis continues to unfold, brands
companies that were able to foster resilience through must shape their strategies by quickly grasping
operational and financial flexibility generated higher which trends will remain after recovery and which
total returns to shareholders (Exhibit 3). According will dissipate. In any event, investment in data
to McKinsey analysis, this manifested across four key and analytics is likely to reap benefits. Armed
levers.9 The first was investment in top-line growth with customer insights, companies can reset their
as early as possible, which accelerated the rebound long-term strategies and redirect investment into
and led to revenue increases of up to 30 percent opportunities that will outlast the pandemic.
compared with those of non-resilient players. Second, According to our BoF-McKinsey State of
companies that addressed key structural costs were Fashion 2021 Survey, the most fertile ground for
able to achieve higher productivity — resilient players these opportunities will be in the areas of digital
The State of Fashion 2021
reduced operating costs by as much as threefold. and sustainability, which were chosen by 30 percent
Third, a methodical approach to acquisitions and and 10 percent of executives respectively (see Digital
disposals led to better performance: specifically, Sprint on page 35).
divesting and investing early in the recovery paid The emphasis on sustainability is also reflec-
dividends. Finally, deleveraging was a consistently ted in consumer sentiment. More than three in five
productive strategy, with less indebted companies consumers in a McKinsey survey ran in May 2020
faring better than their peers. said brands’ promotion of sustainability was an
important factor in their purchasing decisions.13 14
More than 80 percent of leaders In response, numerous companies are stepping up
at consumer and retail companies their sustainability efforts. Timberland is aiming to
source all of its natural materials from regenerative
report they are now making and agriculture by 2030,15 while British department
implementing major decisions store Selfridges has unveiled bold new sustainability
faster than before. goals, promising to stop stocking products that are
not compliant with its new sourcing standards by
The four levers can also be seen through 2025,16 and Allbirds has started labelling the carbon
the twin rubrics of agility and discipline. Fashion footprint of each of its products.17
companies that adopt these overarching principles In 2021, we expect winning brands to be
and turn them into concrete strategies are likely to those that can define clear, long-term ambitions,
emerge from the crisis in better shape. Indeed, many while demonstrating enough flexibility, speed and
are already doing so. More than 80 percent of leaders agility to navigate an uncertain short-term future.
at consumer and retail companies report they are Brands should reshape their operating models to
now making and implementing major decisions adapt to the faster pace of change and sustain those
faster than before.10 In March 2020, US jewellery effective new working practices that have emerged
brand Kendra Scott rapidly transformed its 108 from the crisis. Since adaptability will be key to
US stores into fulfilment centres — a response to all of this, brands should identify the threats to
20
01. LIVING WITH THE VIRUS
their businesses and prepare strategic responses will have to reimagine budgeting from a zero-base
across multiple scenarios in order to counter approach, with pre-defined funds allocated to
uncertainty and facilitate fast decision-making. different possible scenarios. While brands should
Building cross-functional teams that are informed cut down on secondary spending where possible,
by strategic priorities will give brands the necessary leaders should be careful not to trim key growth
agility to respond quickly and capture market investments, notably digital ones, in order to remain
opportunities. relevant both during and after the downturn.
Fashion executives need to set aside their We expect in the coming year that leading
traditional approaches to budgeting and strategic fashion executives will step up their execution
planning to maximise their organisation’s respon- excellence and delegate decision-making more
siveness in the months ahead. Leaders should efficiently to ensure better accountability. The
systematically assess the impact of strategic pandemic has already prompted some players to
initiatives launched since the start of the pandemic recalibrate chains of command, simplifying deci-
and re-evaluate their initial assumptions about sion-making and enabling greater autonomy down
factors like sales and volumes based on real-time the hierarchy and to regional centres. And in an
results. Learnings from 2020 should be used to increasingly uncertain world, fashion executives
stress-test plans for 2021 and identify key priorities should also ensure continuous dialogue and infor-
for all potential future scenarios. To support this mation-sharing with employees and shareholders,
fresh perspective on planning, fashion leaders fostering communication across the organisation.
Exhibit 3:
296
Resilient companies2 Non-resilient companies S&P 500
166
153 153
96
89
67 63
48
1 Calculated as market capitalisation weighted TSR index of Resilient and Non-Resilient companies in the Textiles, Apparel and Luxury Goods
industry, includes 862 global Textiles, Apparel and Luxury Goods companies that were trading between 2007-2017
2 Resilient companies defined as having excess TSR CAGR (vs S&P 500 index) between 2007-2017; companies in the remaining 4 quintiles
are classified as non-resilient companies
SOURCE: MCKINSEY CORPORATE FINANCE PRACTICE
21
EXECUTIVE INTERVIEW
Juliet Anammah
Chairwoman, Jumia Nigeria;
Head of Institutional Affairs, Jumia Group
Dubbed Africa’s answer to Amazon, Jumia Less than a year after ringing the
ceremonial bell at the New York
has seized the e-commerce opportunity in Stock Exchange to celebrate the
dynamic markets like Nigeria, Kenya, Senegal, IPO of the first African start-up
listed there, Juliet Anammah
Morocco and Egypt, though it didn’t achieve and her colleagues were devising
the growth levels analysts expected during the an emergency action plan to
liaise with health ministries
pandemic. Next year, the e-tailer will be even in the eleven countries where
Jumia operates. The recently
more disciplined about its path to profitability, promoted executive was used to
suggests Juliet Anammah, a veteran executive representing the e-commerce
heavyweight at the highest levels
at the group. of negotiations with governments
and global business leaders, but
— by Robb Young nothing could have prepared her
for the agility and diplomatic
resolve that she and leaders like
her needed during the pandemic.
In more ways than one, 2020
has been a rollercoaster year
for “the Amazon of Africa.” But
as an e-commerce platform
22
01. LIVING WITH THE VIRUS
selling everything from luggage go and start rewriting the rule part of the country who were also
to laptops and food to footwear, book on how e-commerce works. willing to take cash on delivery,
Jumia remains an attractive Consumers [around the world] so we had to create a network of
channel for brands to access are already used to a certain way third-party logistics providers.
consumers on the continent, and of interacting with e-commerce We just built the systems that
Anammah remains bullish about platforms. It’s important that you would allow us to then leverage
the firm’s prospects in 2021. give them something that they’re that and the data systems for it.
familiar with — but adapt it.
How much more room is there That’s impressive. But how
So we said, “How will consumers
for Jumia to grow in the year do you localise Jumia’s
trust that the item will be
ahead and what role do you assortment across African
delivered to them?” because
now play in the continent’s nations with so many different
logistics is a big challenge in
online acceleration? Is it wardrobe preferences — not
Africa. We had to solve the trust
different from the role you only between the different
question by creating a cash
played in the first eight years markets but also within
on delivery option with three
of growth? each market?
attempts to make a delivery, a
We still have decades of growth payment solution and all kinds of Assortment differs [by market]
ahead of us. If you look at the special [service infrastructure]. because we operate across 11
penetration of e-commerce on I call it adapting the e-com- countries [but] there are certain
the continent, at best, it’s still merce model for the African brands that we have partner-
about two percent, three percent. environment and customising ships with on a global level… But
There is still a whole lot of upside it to the African consumer. We if you take Nigeria, for example,
in terms of more transactions couldn’t just take a model from there are small local designer
that we can bring online, and we another region, and then implant outlets producing affordably
are addressing this in multiple it in Africa. That wouldn’t have priced clothing for work [and]
dimensions. We’re increasing worked. But for people to now some creating African native
the variety of products that say, “Oh, this is the Amazon of fashion for special occasions. We
can be found on Jumia. Today, Africa,” it means they recognise also customise our marketing.
a consumer can buy virtually that what we’re doing for Africa is In certain markets, YouTube
anything on Jumia [not just] what Amazon did in the US. So, to is important and others it is
fashion products and beauty the extent that [the “Amazon of different social media.
products. They can buy airtime Africa” nickname] makes me feel To what extent do you feel that
[for mobile phones] and pay bills anything, it makes me feel happy. Jumia’s path to profitability
on Jumia. And within each of the
Jumia provides a sales has been impacted by
categories where we operate, the
platform for consumers Covid-19? How do things look
assortment is growing every year.
in Nigeria, South Africa, now in the run-up to 2021?
All of these are things that are
relevant [in terms of our growth Kenya, Côte d’Ivoire, Ghana, During the Covid pandemic we
trajectory in the context of Senegal, Uganda, Morocco, didn’t need to spend as much on
Africa’s ever-] increasing Algeria, Tunisia and Egypt. sales and advertising as we would
[e-commerce] penetration rate. How do you manage to have done in normal times [so]
optimise the customer overall, you’ll find that net losses
Some people credit Jumia experience for such a hugely were reduced between 2019 to
with “revolutionising” diverse group of markets 2020. Of course, we had taken
e-commerce in Africa. Others with different regulatory some decisions earlier on about
accuse it of being a clone of environments and different staff costs and other operational
Amazon, citing the successive consumer behaviours across expenditures that matured by the
roll-out of services like Jumia that colossal expanse of second quarter of 2020, which
Prime, Jumia Express and so the continent? held our gross merchandise value
on. What do you say? (GMV) expenses down further.
We didn’t have the luxury of
I’d say: one, you don’t reinvent having big, established logistics In terms of the top line, it wasn’t
the wheel. It makes no sense to players that could reach every phenomenal growth.
23
EXECUTIVE INTERVIEW
Some people expected us to see assortment and product designs I think it’s more than that. It’s
triple-digit growth over 2020 that recognise the specific really taking a proper look at the
versus 2019. Their perception price needs of our consumers entire value chain and asking,
was that the whole of Africa was at this point in time, then those okay, where do we source? Where
ordering online, which is not the products will be successful on do we produce these items and
case. You need to understand that our platform. using fabrics at what price? Who
it’s a long-term play for e-com- are the middlemen and key
You’ve said that luxury brands
merce. It’s not a two-year stint channel partners before it gets to
are definitely not a priority
and you march on to profitability. Jumia? Fashion brands [that are
for Jumia, but to what
It takes a pretty long time. interested in partnering with us]
extent is Jumia interested in
Where we are right now, we’re have to look at it very critically
negotiating more deals with
very much focused on our to see where the opportunities
global fashion brands from
account profitability. are to really drive the price down.
the US or Europe, assuming of
Brand executives would need to
You were the CEO of Jumia course that their assortment
be assertive about saying, “We
Nigeria for four years before is right and their price point
are focusing on Africa and Africa
being appointed chairwoman hits your sweet spot?
is an opportunity for us.” If this
in 2020. How have you led The commercial team are con- is the mindset and objective at
your team to source the stantly looking at new partner- corporate level, then you have the
right products for the mass ships. Fashion is one of the top corporate backing which means
market? five or six categories where we’re you also have the motivation
We are a platform for everyone. definitely very hungry for new and incentive to really look at
We’re agnostic. So you have top partnerships. Having said that, the entire value chain and route
The State of Fashion 2021
brands from Procter & Gamble, the sweet spot, if I remember to market and figure out how
and then you also have the dis- rightly, it used to be between to make sure that products can
tributors, the small-size wholesal- $10 to $20. Of course, you also ultimately be sold on Jumia at
ers that bring a lot more variety have consumers who would want $20 and $25. At the end of the
of brands in their portfolio. Then higher price points and product day, it’s about the different [and
of course, we have local sellers designs. But what you may sometimes competing emerging
who bring rich diversity even consider a lower price point from market] priorities that are on the
CEO’s table. Apart from Asia, they
“It’s a long-term play for e-commerce. also have the Latin American
market opportunity. So if there is
It’s not a two-year stint and you march no hunger at corporate headquar-
ters saying, “We want to grow in
on to profitability.” Africa,” then it’s not going to work.
though they may only have 10 to a US or a UK perspective, is still Going forward, how much
50 SKUs in total. You also have relatively pricy on the continent. heat will Jumia feel from
to remember, these are countries It’s looking at how brands rework online competitors like Konga
going through a very difficult their route to market in such a in Nigeria or Takealot in
period now. [African] consumer way that they can make products South Africa?
purchasing power is increasingly available within a $20, $25, $30 There’s so much to be done on
going to be squeezed so we need price point reach. What I think the continent that, if anything,
to bring an assortment that’s would be difficult is if those competition is welcome because
relevant to the consumer, in brands use their existing route to everybody understands there is
terms of the price-performance market, they may not be able to huge, huge potential ahead of us.
ratio. Whether it’s a fast-fashion deliver those price points. This interview has been edited and condensed.
brand from China, a big brand Additional reporting by Zoe Suen.
Are you referring to the added
from Turkey, or an established
margins incurred due to
brand from [Europe or the US],
distributors?
to the extent that they have
24
02. DIMINISHED DEMAND
Few fashion companies were spared from The challenging environment born out of
a fall in consumer spending as demand for discre- the unprecedented events of 2020 will linger into
tionary goods plummeted during global lockdowns. 2021, with global fashion sales projected to be
As a result, the entire fashion industry revenue below 2019 levels by as much as 15 percent in the
pool in 2020 will shrink by 15 to 20 percent in an Later Recovery scenario. A full recovery of global
Earlier Recovery scenario, or by 25 to 30 percent fashion sales to pre-crisis levels will not come until
in a Later Recovery scenario, according to the third quarter of 2022 at the earliest, according
McKinsey Fashion Scenarios analysis (based on to McKinsey’s Fashion Scenarios.23 Indeed, fashion
information available September 2020).18 This is expected to be among the slowest-recovering
reflects the extreme severity of the global recession, discretionary spend categories.
which has been described by the International
Monetary Fund (IMF) as the worst since the 1930s A full recovery of global fashion
Great Depression.19 sales to pre-crisis levels will not
However, the impact on the fashion
industry will be uneven. Europe is expected to be
come until the third quarter of
the worst-hit region in 2020, witnessing a 22 to 35 2022 at the earliest.
percent decline in sales, followed by the US with
a 17 to 32 percent decline. China will likely be less “Undoubtedly the apparel market has
impacted, seeing sales drop by 7 to 20 percent.20 shrunk in 2020. People aren’t shopping in stores
Results from McKinsey’s consumer — they’re sitting at home questioning why they
sentiment surveys support this prognosis. have so many items in their closets,” said Elizabeth
Consumer intent to shop for apparel, footwear, Spaulding,24 president of US-based online personal
accessories and jewellery in September 2020 styling service Stitch Fix, which laid off 1,400
was still down by 27 to 35 percent in the US.21 stylists in California and is hiring or relocating
Meanwhile, consumer intent in China, which is 2,000 stylists across other US states throughout
further ahead in its recovery, turned to positive 2020.25 “We’ve just seen extraordinarily accelerated
4 percent in June.22 demand [since June and] some of the highest
25
GLOBAL ECONOMY
retention rates that we’ve seen in many years, by revenues and 21 percentage points by margin.28
which we think is a signal of people saying, ‘this is Indeed, appetite for expensive discretionary
the way I want to shop in the future.’” items is still high among some wealthy consumers
There are other shards of light among the and is expected to remain so in 2021. Kering has
gloom, with spending in some regions expected to reported a steady recovery in mainland China,
pick up faster than others. Fashion sales in China with some brands returning to growth already,29
are predicted to return to pre-crisis levels by as while store re-openings there suggest there has
early as the fourth quarter of 2020 or, at the latest, also been a release of pent-up demand for luxury.
by the first quarter of 2021. In the Earlier Recovery Indeed, China is driving recovery in the luxury
scenario, European fashion spend will partially segment as Chinese luxury sales already recovered
recover in 2021 (down by only 2 percent to 7 percent to 2019 levels in the second quarter of 2020 and
compared with 2019), with Germany as a bright are estimated to be up 10 to 30 percent in 2021, in
spot that could reach pre-crisis spending levels by comparison to 2019. This reflects a shift of luxury
the third quarter of 2021. However, the US appears spend into China, while the other major economies
set for a slow recovery in 2021, with fashion sales 7 will take longer to recover.30
percent to 12 percent down from 2019, even in the
Earlier Recovery scenario.26 Lockdowns and restrictions
The State of Fashion 2021
The pace of recovery will also vary across on movement have strongly
fashion categories and value segments, with some
pockets of growth despite the continuing economic
influenced consumer choices
challenges. Looking at market valuations, the around what to wear.
value and discount segments are the healthiest.
By October 2020, value and discount players had At the other end of the scale, growing
a market capitalisation of 5 percent more than inequality and financial uncertainty are prompting
in December 2019, while the same figure was -12 consumers to seek out value. The IMF is among
percent for luxury companies and -16 percent the organisations to note that Covid-19 is likely to
for the value segment. This reflects longer-term increase income inequality, with poorer people
industry trends towards polarisation across more vulnerable to furloughs and layoffs and
value segments. 27 less able to work from home.31 Overall unem-
ployment is estimated to be 50 to 83 percent
Appetite for expensive higher in OECD countries in 2021 than in 2019,
discretionary items remains depending on scenario.32 Some 20 percent of US
consumers expect the crisis to affect their personal
high among some wealthy or household finances for more than a year, and
consumers and is expected 27 percent say they will trade down to more
to remain so in 2021. inexpensive items to save money.33
Lockdowns and restrictions on movement
Earnings reports suggest the luxury have strongly influenced consumer choices around
segment in fashion suffered less than others in early what to wear, too. The formalwear category, which
2020. Luxury revenues and margins were down 26 was slowing down prior to the crisis, has been on
percent and 15 percentage points respectively in the a steeper downward slope since the pandemic
reporting quarters falling between February and started. Many players have been suffering, with
June, while the overall market was down 34 percent Brooks Brothers filing for bankruptcy, Hugo Boss
26
02. DIMINISHED DEMAND
reporting a year-on-year sales decline of 59 percent likely to emerge as a dominant force across many
in the second quarter,34 and T. M. Lewin and Moss fashion categories in 2021. Indeed, companies that
Bros closing stores, citing customers working from were able to ride the surge in demand for casual
home and cancellations of major events as the cause or athletic clothing fared better than analyst
of the decline in suit shopping.35 According to the expectations in the second quarter of 2020, such
BoF-McKinsey State of Fashion 2021 Survey, as American Eagle Outfitters-owned Aerie which
68 percent of fashion executives expect shopping launched new athleisure brand Offline in July.41
for occasion wear to recover earliest by the end of With more flexible working arrangements on the
2021, while in formalwear, as many as 38 percent horizon for the year ahead, casualwear is only set to
say it will never return to pre-Covid-19 growth grow in importance for many fashion players.
levels.36 Stefano Canali, president and chief Some companies have been quick to pivot to
executive of the luxury menswear brand Canali, these new consumer dynamics. Dolce & Gabbana’s
said in June 2020 that he believes the classic, Alta Moda (haute couture) collection normally sells
traditional suit is “definitely in a deep crisis” that lavish, custom-made occasion wear. In the season
will outlast the pandemic.37 that fell during lockdown, elaborate gowns and
We expect increased consumer interest in eveningwear were replaced by a capsule collection
health and wellness to persist beyond the pandemic, of kimonos, kaftans and other easier-to-wear items.42
meaning demand for athleisure and activewear Meanwhile, formalwear brand Reiss took a hint from
will likely continue to be strong in 2021. Athleisure the success of its more leisurewear-focused pieces
and activewear brands have not been immune to and launched a new “luxe leisure” collection.43
declining sales, but US sales were down just 2 to
3 percent year-on-year in August, compared with The casualisation trend that was
double-digit declines in other apparel categories,
already in motion before the
according to Earnest Research.38 Investors
appear to be more optimistic about the outlook pandemic and that accelerated
for sportswear than other apparel categories: by throughout 2020 is likely to
October 2020, sportswear company stocks had
emerge as a dominant force across
exceeded their pre-crisis-levels by 7 percent, while
the non-sportswear clothing category was down many fashion categories in 2021.
18 percent.39
One driver for the category is an uptick in Looking forward, as demand remains
cycling as an alternative mode of transport. Sales subdued in 2021, fashion companies should aim
of bicycles doubled in the US and grew in many to mirror shifts in consumer behaviour across
other countries during the spring lockdown, and the their product offering and double down on growth
growing number of cities implementing more bicy- hotspots. Strategic plans should reflect “heat maps”
cle-friendly mobility concepts points in the direction of better-performing geographies, categories
of sustained demand for bikewear and waterproof and value segments, with ideas road-mapped so
clothes. 40 In early 2020, luxury brand Moncler even that companies can respond quickly to opportu-
partnered with the eBike start-up Mate for one of its nities when and where they arise. Investment in
Genius collaboration collections. marketing, new stores and staffing will be best
More broadly speaking, the casualis- directed at geographies in which demand is picking
ation trend that was already in motion before the up fastest. Product marketing campaigns should
pandemic and that accelerated throughout 2020 is focus on in-demand categories such as athleisure
27
GLOBAL ECONOMY
and loungewear and be given a spotlight in prime players to consider whether they have enough
locations like online landing pages. brand equity to position themselves at higher price
Brands in formalwear categories, points. Across categories, however, the underlying
meanwhile, can opt to rebalance assortments principle remains the same in the challenging
towards a higher proportion of easier-to-wear environment of diminished demand: winning
items without compromising on quality. Given brands will need to act quickly on changes in
the ongoing polarisation of demand across value consumer behaviour while staying true to their
segments, it will also make sense for premium brand identity.
Exhibit 4:
Europe US China
50
Berlin’s Pedal Power as Coronavirus Boosts Bicycle Culture. Maja Hitij/Getty Images
-50
-100
J F M A M J J A S O N D J F M A M J J A S O N D
2020 2021
Note: Scenarios intended to provide insight based on currently available information for consideration and not specific advice
28
02. DIMINISHED DEMAND
29
The State of Fashion 2021
30
IN-DEPTH
by Lauren Sherman
Key Insights
• The pandemic has forced a shift away from buying experiences
to buying things, but brands should prepare for the return of the
experience economy.
• High-end watches and hard luxury are a strong category in the crisis
market environment, thanks to their appeal as investment pieces.
• The luxury sector is poised for consolidation led by the biggest players,
but the pandemic has shown that there is still room for smart young
independent brands.
At the beginning of 2020, the luxury McKinsey Global Fashion Index. Economic profit,
industry was at the precipice of a seismic shift. which factors in both explicit and implicit costs,
Consumers were increasingly choosing experiences was up by 4 percent. Companies big and small,
over things, facilitating the rise of the resale and successful and struggling, streamlined operations
rental markets, and inspiring luxury brands in order to account for the sudden dip in sales.
Daily Life In Los Angeles Amid the Coronavirus Outbreak. Michael Tullberg/Getty Images.
to move further into hospitality. China, which But it’s not as if shopping halted altogether.
accounted for the lion’s share of growth in the Consumers, stuck at home worrying about their
market for personal luxury goods in 2019, had never finances, were making buying decisions that would
been more important to the survival of old brands, have been almost impossible to predict a year
and the development of new ones. E-commerce earlier. Years of online innovation and change
was steadily gaining market share and, while happened in a matter of months, as brands focused
tourism remained a significant revenue-driver for on generating revenue from the only channel
luxury brands, growing government regulation was available in many markets: e-commerce.
already making local customers more important. Brands were motivated to do whatever they
Then the pandemic hit, and “seismic” took could to recapture lost revenue online. Still, even
on a whole new meaning. The global Covid-19 the biggest companies in the most profitable market
crisis limited the mobility of even the wealthiest segments have been hit hard. The luxury and
consumers because of lockdowns and other travel affordable luxury segments have proven marginally
restrictions. In the 2019 fiscal year, EBITA (or more resilient, with sales shrinking an average 30
earnings before interest, tax and amortisation) percent and EBITA an average 20 percentage points
was down an average 3.2 percent, according to the during the quarters falling between February and
31
GLOBAL ECONOMY
June 2020, compared to the same period in 2019, become more important to win the local customer
according to McKinsey. Sales of mid-priced fashion by offering site-specific exclusives and entry-price
brands were down 35 percent, with EBITA down products that appeal to the country’s still-rapidly
21 percentage points in the same period, while growing middle class. Even as consumers begin
discount players experienced a 36 percent decline travelling again when the pandemic is behind us,
in sales, struggling under mountains of unsold the local customer will remain front of mind.
inventory. “Recovery is going to happen where
businesses and retailers are not heavily tourist-de-
Years of online innovation and pendent,” said Robert Burke, a New York-based
change happened in a matter retail consultant who works with clients across
the globe, from China to South America to Europe.
of months, as brands focused “That’s where we are seeing some of the best
on generating revenue from the recoveries: where it’s a local shopper.”
Looking ahead, that means cultivating local
only channel available in many shoppers in other regions too, like Europe, which
markets: e-commerce. is over-stored and heavily reliant on out-of-the-
country visitors to drive sales. While local China
As executives look ahead to 2021 and customers will keep that market humming, brands
beyond, it is important to consider the longer-term must also look to cultivate local relationships in
ramifications for everything that has already regions that have recently been more reliant on
The State of Fashion 2021
happened — and the further changes to come. tourism to drive growth. “China is best placed,
but one region can’t carry an entire industry,” said
The Enduring, All-Important China Factor Philip Guarino, a Paris-based luxury advisor.
32
IN-DEPTH
From Experiences to Things, and Back Again up 7 percent overall, with leather goods, apparel,
watches, jewellery and home goods all returning
For decades, a luxury handbag was the to growth. At Kering, overall sales fell just over 1
ultimate status symbol, especially for the newly percent, beating analysts’ estimates by nearly 8
wealthy. But pre-pandemic, it was already percentage points. While sales at Gucci fell almost
becoming clear that customers were looking for 9 percent, hot label Bottega Veneta jumped
something more experiential. That’s why luxury 21 percent.
companies were hyper-focused on creating Has the culture regressed back to 2008,
experiences, from Louis Vuitton’s pop-up in when “it bags” were en vogue? Probably not. It’s
Chicago’s West Loop to coincide with Virgil Abloh’s unlikely consumers will continue to prioritise
exhibit at the city’s Museum of Contemporary Art, “things” longer-term after the pandemic. Business
to the influx of hotel residences emblazoned with travel may not bounce back as quickly, but tourism
names including Versace, Armani and Bulgari. and experiences are poised to rise in popularity
once there’s a proven vaccine. Brands must be
“The industry has an opportunity prepared for another sudden shift back to pre-pan-
demic consumer trends. Resale has continued to
to reset its ‘rest of the world’ flourish during the pandemic, rental will likely
strategy. So many people rely on experience a comeback too.
China as the growth engine, but
there are other emerging markets
that also need attention.”
A Bottega Veneta bag and shoes, Hamburg, Germany. Jeremy Moeller /Getty Images
In 2019, market research firm Greenlight
Insights projected that the global market for
location-based entertainment would grow to $12
billion by 2023, at a compound annual growth rate
of 32.2 percent. As consumers made it clear that
they were prioritising experiences over things,
new business models emerged to ensure they
would keep buying clothes in one way or another
— from rental to online. But when the pandemic
hit, travelling, visiting stores and even going out
to eat became impossible for almost everyone.
So, curiously, people started buying things again.
Luxury handbags, shoes and jewellery fared
better than expected in many cases, even if overall
consumption was down on pre-pandemic levels.
By the third quarter of the 2020 fiscal year,
certain areas of luxury were bouncing back. At Balancing Casual Luxury and Investment Pieces
LVMH, the fashion division — which includes the
crucial leather goods category — was up 12 percent Sales of activewear and loungewear —
year-on-year, even as overall sales decreased 7 anything with an elastic waist — have soared
percent (attributed to challenges in its duty-free through the pandemic, as consumers prioritise
business), as well as at Sephora, its global beauty comfort, work from home, and adopt new exercise
store. At independent brand Hermès, sales were routines in the hopes of remaining active, even in
33
GLOBAL ECONOMY
lockdown. While clothing and footwear brands Chinese market. “The Chinese consumer used to
suffered the biggest decline in value — their average buy jewellery for the weight of gold; now they’re
market cap was down 18 percent and 19 percent buying it because it’s beautiful. It’s a wonderful way
respectively in October 2020 from December 2019 to show their personality, their taste level and to
— the sportswear segment saw a strong recovery discreetly stand out.”
and increased by 7 percent. Chinese group Fosun acquired a majority
But while the global casualisation of the stake in French jewellery brand Djula in late
wardrobe continues — even in China and other March 2020 through its Yuyan subsidiary in the
parts of the APAC region, where suiting has midst of the pandemic, which she said is evidence
remained a typical work uniform for both men and that there is market confidence in the category’s
women — it won’t be the end-all. “Men have felt the growth potential.
need to change up their wardrobes,” Burke said.
“It’s about casual, not athleisure.” Personalising Retail Everywhere
In fact, most experts believe that the men’s
high end ready-to-wear market will continue to In 2019, e-commerce made up between 10
expand, whatever the future business-casual and 15 percent of global luxury sales, with Europe
wardrobe looks like. “There is more innovation and China at the lower end of the range and the US
there,” Kim said, noting the launch of the Air at the higher end. By 2020, the figure had risen by at
Jordan Dior collaboration as an exciting fashion least 50 percent across all three regions, according
moment that was also genderless in its appeal. to McKinsey. At online luxury marketplace
The State of Fashion 2021
34
IN-DEPTH
Madaluxe, a third-party distributor for fashion have actually thrived. Some because they operate
brands. “Customer acquisition costs per order have on such a lean budget — using the pre-order drop
come down.” model to drive sales — and weren’t weighed down
Whatever happens, the physical retail store by excess from the spring season. Others managed
will be as important as ever — even if there are to gain mindshare because they have been nimble
fewer of them overall. “Stores are really going to enough to react rapidly to changing customer
have a heyday,” Berry said. “[Changed consumer sentiments — either by creating relevant products
behaviour] is going to put pressure on the stores or responding to cultural movements in a sensitive,
that do exist to be super interesting.” authentic way.
Big Guns and Creative Independents “If you don’t have your supply
The luxury industry was already busy chain, e-commerce, etc. up and
consolidating long before the pandemic, as giants running in all markets, then
squeezed out mid-sized brands unable to compete
with the scale of strategic conglomerates. While
you’re a weakened player. Without
each brand in a conglomerate’s portfolio commonly the infrastructure, mid-sized
pursues independent strategies, synergies at the brands are better off being
group level mean brands still benefit in just about
every area across talent acquisition, marketing consumed by a group.”
spend, retail footprint and supply chain. Those best
positioned to prosper in the next phase of industry While the conglomerates are certainly safer
growth are conglomerates like LVMH and Kering than most, a crop of independent brands in the
and vertically integrated independents like Chanel accessible luxury space, including Brooklyn-based
and Hermès, companies that have the ability to Telfar, Los Angeles fashion collective Brain Dead
directly manage inventory and can easily stop and and sweatpants connoisseur Entireworld, made
start production. waves and sold out product, proving that there
“If you don’t have your supply chain, is still room for smart, original ideas that appeal
e-commerce, etc. up and running in all markets, to the next generation of luxury consumers, who
then you’re a weakened player,” said Anne Line are more attuned to false marketing. The luxury
Hansen, founder of AH Advisory, a boutique customer of 2020 is well-educated about the
European consulting firm. “Without the infra- product and has high expectations, and they’re only
structure, mid-sized brands are better off being going to become more knowledgeable in the years
consumed by a group.” to come.
However, Berry believes there may be an “Niche brands are willing to test and listen
opportunity now for mid-sized brands to come to what their consumers want,” Hansen said. “It has
together and form new entities that are better forced everyone to be more creative.”
positioned to go up against the giants. “The world
has become very complicated… but [conglomer-
ates] are going to get too big,” she said. “There is
going to be some consolidation between mid-sized
companies that are more family- and culture-driv-
en and less corporate.”
And yet, industry consolidation does not
mean upstarts will be edged out completely. During
the pandemic, many young, independent brands
35
CONSUMER
SHIFTS
03. DIGITAL SPRINT
The State of Fashion 2021
36
03. DIGITAL SPRINT
37
CONSUMER SHIFTS
1,200 stores worldwide and focus on digital growth.55 deliver exactly that, especially at a time where some
Diane von Furstenberg said it would close all of its customers are not able to join us in stores,” Josie
stores and move to a digital-only model.56 Zhang, president of Burberry China, explained in her
“Retail isn’t dead, but boring retail is dead,” introduction to Burberry’s Tmall livestream session
said Rania Masri, chief transformation officer of in March 2020, which garnered 1.4 million views and
Chalhoub Group, a Dubai-based retail and distribu- resulted in many of the featured products selling out
tion company that partners with global luxury brands within an hour.63
across the Middle East.57 “It’s always multi-layered, With so much buzz around the channel in
it’s not just about tech, it’s also about the people and China, it is little wonder that global brands, including
how they work together in order to change and develop Ralph Lauren, Levi’s and Burberry, have begun
the experience we want to offer.” to experiment with it.64 However, luxury players
To maximise impact amid a rapidly changing are discovering that it is challenging to maintain a
channel mix, fashion players must find new ways gilded and distinguished brand positioning while
to excite customers and encourage them to engage creating the kind of natural, chummy atmosphere
online. History shows us that, in a disrupted macro that the medium requires. Nonetheless, we expect
environment characterised by shifts in consumer many fashion brands to continue to trial and refine
behaviour, excellent customer experience yields livestream strategies for China in the year ahead.
financial results as well as opportunities for Despite its early hiccups, Livestream is
companies to recalibrate their propositions. Following starting to gain traction outside of China, with US
the 2008 global financial crisis, customer experience livestreaming revenues expected to hit $25 billion
The State of Fashion 2021
leaders posted three times higher shareholder returns by 2023.65 Livestream commerce is also likely
than laggards.58 This is an important point for brand to accelerate in 2021 as big tech firms and social
executives to appreciate because there is a new media innovations enable direct online checkouts.
picture emerging around brand loyalty. During the Instagram introduced in-app checkout for Instagram
coronavirus pandemic, consumers across countries Live in August 202066 and TikTok hosted its first
have indicated they are willing to move away from shoppable livestream in the same month.67
their favourite brands and to experiment more. In Other new digital opportunities are leading
fact, over 60 percent said they switched brands or to creative solutions for marketing, design and new
retailers in the early part of the year.59 revenue streams across the fashion industry.
In China, innovations such as livestream A partnership between Ralph Lauren and Snap Inc.,
commerce have captured the imagination and helped for example, will create virtual branded apparel for
to bridge the gap between physical and digital by avatars,68 while other collaborations exist between
bringing human interaction to the digital shopping fashion companies and video games. A deal between
experience. The trend started as early as 2016 with Louis Vuitton and the League of Legends introduced
the launch of Alibaba’s Taobao Live. Three years later, in-game skins designed by Creative Director Nicolas
Chinese livestream revenues amounted to $63 billion. Ghesquière to accompany a real-world capsule
They are set to rise to $138 billion in 2020, according collection, and Net-a-Porter in China launched
to Coresight and iResearch,60 having been boosted Animal Crossing skins showcasing Spring/Summer
significantly by lockdowns. The number of sellers collections of local brands, connected by QR codes
on Taobao Live grew by 719 percent in February linking to products on the e-tailer’s Tmall store.69
alone.61 Influencers have also proven their value in the With no end in sight for the trend towards increased
livestreaming environment, in some cases generating screen time and digital interaction, virtual fashion is
more sales in a few hours than department stores do likely to emerge as a not insignificant opportunity for
in a day.62 brands both as a revenue stream and as a channel for
“Customers are craving newness, and product discovery.
livestreaming is a safe and exciting way for us to
38
03. DIGITAL SPRINT
In other emerging digital trends, messaging omnichannel ecosystems across platforms. As retailer
apps leveraging remote clienteling are proving app downloads surge, brands are building next-
their value in supporting consumer purchasing generation apps featuring storytelling and elements
decisions. From Japan’s Line to Russia’s Telegram, that connect digital experiences to physical stores,
the apps provide marketing, customer service and such as in-store self-checkout. At Burberry’s “social
social commerce opportunities, tapping hundreds retail store” in Shenzhen, China, omnichannel has
of millions of users. At the height of the pandemic, been woven into the shopping experience; customers
Chinese retailers capitalised on people’s desire for are rewarded with social currency for online and
human interaction by publishing QR codes to link offline engagement on the brand’s WeChat’s mini-
consumers with sales reps in hundreds of brand-based program — exchangeable for free menu items at the
WeChat groups.70 In Brazil and other Latin American in-store café.73
markets where WhatsApp is popular, offline retailers In the coming year, we expect brands to
leveraged the app for remote shopping. elevate the online customer experience even further,
Where it is not possible to integrate human as digital is augmented with physical, and vice versa,
interaction into the digital experience, artificial intell- in increasingly sophisticated ways. To power up
ligence (AI) is likely to play an increasingly prominent e-commerce growth, the digital customer experience
role in boosting conversion, giving customers the and behavioural insights will be the top two priorities
chance to experiment with virtual try-ons powered for data and analytics in 2021, according to fashion
by augmented reality. Several brands are now using executives.74 In addition, brands will leverage
these formats, including some formerly digital-resist- innovations including integration of social shopping,
ant luxury watch players such as Grand Seiko.71 The reviews, gamification and personalisation, aiming to
growing appetite for AI makes a lot of sense. Shopify create a richer digital experience. One departure from
found that conversion rates increased 250 percent for the past, however, is that fashion players will need to
products that were supported by try-on technology.72 be much shrewder with their investments to focus on
To support the digital customer journey, those innovations that deliver on the bottom line.
many fashion companies are now investing to elevate
Exhibit 5:
16
22 26 22
37 34 33 37
40
84
78 74 78
66 67 60 63
63
Note: Scenarios intended to provide insight based on currently available information for consideration and not specific advice
SOURCE: MCKINSEY ANALYSIS; EXPERT INTERVIEWS; EUROMONITOR INTERNATIONAL LIMITED, APPAREL 2020 EDITION AND LUXURY GOODS 2019 EDITION,
SHARE OF E-COMMERCE SALES (FOR 2019)
39
EXECUTIVE INTERVIEW
Kering: Fast-Tracking a
Digital Upgrade
The State of Fashion 2021
40
03. DIGITAL SPRINT
You’re Kering’s chief client and actually interact with sales associ- between those two populations is
digital officer. Can you tell us a ates in the store. So, if a customer that they’re ultra-connected. Of
bit more about the connection says yes to using the feature, a course, in terms of the share of
there? sales associate in the store could e-commerce it will normalise a
I think François-Henri [Pinault]’s chat with the customer, or even do bit, since a lot of [what] we saw in
vision in creating this role was a video and have them show some the first half of the year has been
that digital is the means to an end. particular products and even close driven by our retail network being
My job is about starting from the a sale. We’ve piloted that in some closed. But I think it will be at a
clients, leveraging digital to create regions with a programme called much higher level than expected
the best experience for them. Gucci Live and we’re getting an prior to the pandemic.
amazing response from our clients,
For all Kering brands except One trend we’ve been seeing in
both in terms of qualitative
Gucci — including Saint the digital space in recent years
feedback and conversion.
Laurent, Balenciaga, Bottega has been faster growth for big
Veneta and Alexander McQueen Before the pandemic, McKinsey brands while smaller brands
— Yoox Net-a-Porter had been had forecast that e-commerce underperform. What’s driving
operating their e-commerce would account for around 20 that polarisation online?
businesses via a joint venture percent of overall luxury sales Do you think that gap will
until this year, when you were by 2025. Kering exceeded continue to widen next year?
set to move those functions in- that forecast in some regions That’s not just online; it’s a gen-
house. Why? this year, five years earlier eralised phenomenon that digital
than expected. After such a is a part of. Building a luxurious
If a quarter of our business and
rapid surge, will online sales experience online and building a
so many of our interactions with
channels still grow next year? digital footprint is very hard to do
clients are going to happen online,
we want to control that experience.
We think our clients want to move “If I had one [piece of] advice for a small brand
seamlessly between the different
channels: making it so if you buy that’s not part of a group like ours, it would be
online you can pick up in store, you
can book an appointment in-store
to really pick their battles. My advice would
online, you can reserve a product be do a few things extremely well, and delight
to try on, you can buy online then
return it in-store. The only way to
a niche of customers.”
build those bridges is if you control
both sides of the equation. Our e-commerce revenue during and requires significant invest-
the first half of 2020 went from ment. To have an e-commerce
Those sort of click-and- 6 percent to 13 percent of overall platform that is global, that is
collect services and in-store retail revenues year-over-year. In also omnichannel, is incredibly
appointments are no doubt North America we were as high hard. And if you want to have an
more important since the as 26 percent e-commerce — so impactful social media strategy,
pandemic, even if we’d already already ahead of the 20 percent that’s also very hard because it’s
been hearing a lot about this McKinsey expected for 2025. I not just one platform: you have to
“omnichannel” approach in expect e-commerce to continue adapt your content for Instagram,
recent years. Are there any to accelerate in the coming years, Facebook, Line in Japan, WeChat
other ways you plan to blend because this is addressing a fun- in China, and KakaoTalk in Korea.
online and offline services for damental trend in our business. Building relevant content for
the next phase? We’re seeing a lot of the luxury each of those requires a lot of
One area where we accelerated growth coming from younger investment. So bigger brands — or
some efforts on omnichannel is generations as well as Chinese brands that are part of a bigger
distance sales, making it so a client customers aspiring to buy our group — can do this better.
visiting our e-commerce site can products, and the common theme
41
CONSUMER SHIFTS
Without that kind of group where we see new platforms and the clients. For clients who accept
investment, how can a small, new usage happening all the time. to be identified, the sales associ-
or a medium-sized brand be ates can also access their purchase
Could this diversity of
the exception, and really win history and recommend products
approaches — being available
some visibility online? and sizes based on past purchases.
to buy on WeChat, Tmall, or
If I had one [piece of ] advice for even livestream channels your You also have clienteling, managing
a small brand that’s not part of brands have experimented contact details in the app so that
a group like ours, it would be to with — open up luxury the sales associates can reach out
really pick their battles. When you brands to a greater risk of at a distance. This has proven
look at a brand like Gucci which is counterfeiting? I would have to be absolutely critical in the
going after every opportunity in thought you’d prefer to train context of the pandemic. During
the digital space, it’s very tempting customers to know there’s the lockdown with the retail stores
to try to go after all of those oppor- only one or two places to buy being closed, sales associates could
tunities too. My advice would be genuine Gucci or Saint Laurent, stay in touch with clients and
do a few things extremely well, for example? do distance sales. Then as stores
and delight a niche of customers. reopened, they could prepare
This allows us to have better
Trying to do everything could appointments and reach out to
control rather than creating more
result in being average, and not customers in a personalised way.
risk. Our clients are incredibly
cutting through the noise.
savvy and they understand where We’ve also been hearing
We’ve heard so much in recent they can find genuine products. more about zero-inventory
years about the importance They understand which channels concepts this year as brands
The State of Fashion 2021
of e-commerce for Chinese are controlled by the brands they are trying hard to not hold
luxury consumers, especially aspire to engage with and it makes stock. Some designers are even
those who buy through very the other channels look not as experimenting with a
advanced digital channels in attractive. When we build our pre-order model. Are those
China’s own distinctive online presence in a way that’s relevant ideas relevant for Kering’s
environment. What are Kering for our brands in those parts of brands in the luxury sector,
brands doing to scale up the ecosystem, I think we’re perhaps as a return to the old
activity in this space? adding trust. model of couture?
E-commerce is huge in Asia, but What sort of tech should we We’ve been rolling out algorithms
when you look at luxury, it’s still expect to see more of in your that use AI to forecast sales for
very nascent. That’s something brick-and-mortar stores? new products. What we’ve built
that not everybody understands. There have been a lot of “store so far is 20 percent more accurate
The ecosystems are incredibly of the future” innovations than what we had been doing
different from what we are used touted in recent years, and I’d [before]. Zero stock is definitely
to here, as “.cn” e-commerce sites be curious to know which ones something we aspire to, but it’s
are less popular in China than you see actually taking off? further down the road since we’re
[their “.com” counterparts] in still in the early days of being
We’ve not made huge investments
Europe and the US, and there are able to predict exactly how our
in IT like connected mirrors,
some very specific players you products are going to sell. We do
but rather focused on tools that
have to work with. [But] Gucci use pre-orders sometimes, but
aren’t visible to our clients, which
has launched its [Chinese] site we’re not going to switch to a
augment the performance of
and we’re seeing tremendous model where we would produce
our sales associates. We want to
traction there, and we are also on-demand for customers. Part of
leverage that human contact as
building our presence in [the the magic of the in-store experi-
opposed to digital for the sake
country’s] very specific ecosystem. ence is being able to try a product
of digital. We have an app we’ve
We’ve opened flagship stores for in the store and then have it imme-
developed in partnership with
some of our brands on [Tmall’s] diately. We want to keep that.
Apple, which allows the store
Luxury Pavilion and we’re also
associates to check stocks in real
opening WeChat stores. This is This interview has been edited and condensed.
time so they don’t have to leave
an extremely fast-moving market
42
03. DIGITAL SPRINT
Mike Hu
Alibaba Group Vice President and General
Manager of Tmall Luxury, Fashion and FMCG
The luxury sector’s reliance on the Chinese China was the first major global
economy to return to substantial
market has been further amplified by a slow growth following a record con-
recovery from Covid-19 in the west. Mike Hu, traction in 2020. Malls have since
reopened in cities from Beijing to
the executive who manages relationships with Wuhan and — with global travel at
a standstill — home-bound luxury
luxury brands like Burberry, Versace and shoppers have been spending
Cartier for Alibaba-owned Tmall, says that more than ever in the mainland.
A lot of this activity is online,
the e-commerce giant will employ a new much to the benefit of major
‘three-dimensional model’ of retail to meet players like Alibaba-owned Tmall,
which unveiled a new outlet
its 2021 targets. channel Luxury Soho to comple-
ment Luxury Pavilion, its core
sub-platform that works with
— by Casey Hall and Zoe Suen
almost 200 luxury and designer
brand partners.
Though the rivalry between
Tmall and JD.com continues to
dominate China’s fashion e-com-
merce market, both face growing
competition from smaller
43
CONSUMER SHIFTS
upstarts. But Mike Hu is not for quite some time. How change. This means that we
worried. The executive in charge significant will this be next see [things through the lens of
of luxury, fashion and FMCG year for online channels in the] customer and we don’t just
at Tmall says the firm’s wealth the post-pandemic market focus on whether he or she buys
of consumer data and suite of environment in categories something. We closely observe
tailored tech innovations like such as luxury, for example? their behaviours, interests, likes,
livestreaming will keep it on track Luxury brands are especially scrolling, attention, interest,
to meet some of its lofty targets interested in discussing with us purchasing and loyalty — we can
next year. about how and whether Tmall can see all sides clearly. In China,
reach fourth- and fifth-tier cities we call this strategy gong zhen
During the widespread
now. We think livestreaming is (strategic resonance); brands and
outbreak in the mainland in
very important in this regard. Tmall move in tandem in order to
January 2020, there must
Currently, around 60 percent of develop a common language and
have been a lot of uncertainty
our livestreaming audience is find the right way forward in the
within Alibaba Group — as
from lower-tier cities. market.
with all Chinese companies
— about business prospects The outlook for global luxury
for 2020. But we’ve since
witnessed China’s strong
“Over the next two consumption remains
uncertain, meaning major
economic rebound from years we hope to high-end brands will be
Covid-19. How do you assess relying on Chinese sales more
Tmall’s recovery since then?
increase the number than ever. What are your
Since the pandemic we’ve seen of luxury brand expectations and plans for
The State of Fashion 2021
44
03. DIGITAL SPRINT
growth: we would also like larity. Given this, we are putting locally as Key Opinion Leaders],
to make offline stores a more emphasis on domestic consump- celebrities and sometimes
interactive, elevated experience. tion scenarios and are paying executives of companies that use
This would involve cooperating attention to categories that have livestreaming to sell products
on many fronts, from content to the potential to sell well. — this mix is likely to broaden
social media to B2C to supply
chains and consumer behaviour. “We are not only focused on digital growth:
What about smaller brands?
we would also like to make offline stores a
We hope to add more niche
brands to our platform — labels more interactive, elevated experience.”
that may be well-known in their
home markets and have a long Brands will continue to
in the future. During this year’s
history but remain unknown to jostle for Chinese customer
6.18 Mid-Year Shopping Festival,
Chinese consumers. Take the engagement in an increasingly
around 40 percent of livestreams
Italian luxury brand GCDS, which crowded market. How can
were hosted by big brands. This
launched its Tmall store in Tmall help brands reach
percentage is expected to grow
August. Also, how should brands Chinese consumers in new
to 70 to 80 percent during the
with 50 years of history but that ways in 2021?
upcoming 11.11 Shopping Festival.
are new to our market engage Every year we develop a joint By next year’s 6.18 Shopping
with Chinese shoppers? We’re business development plan with Festival, we expect that even
trying to find ways to accelerate these groups and develop projects, more brands will host their own
their journey and find success products and solutions for their livestreaming shows. Finally,
here. needs. Estée Lauder [Companies], we also see a new trend among
for example, has been with us luxury brands of using short
Covid-19 has fundamentally
for four or five years exclusively videos to mix with livestreaming
changed the way people
— they don’t want to sell through to further secure the quality of
shop on a global level. Can
too many channels as this makes visual content while connecting
the same be said of Chinese
it hard to control pricing and with their consumers.
shopping habits and the way
promotions. Burberry and Cartier
consumers engage with online This interview has been edited and condensed.
follow the same exclusive part-
marketplaces, such as Tmall?
nership model. We have a whole
How will the pandemic impact
package that helps brands target
future consumption trends
commodity management, mem-
in China?
berships and [related] services.
The pandemic has had a limited Different brands have different
impact on high-net-worth indi- sales models and therefore
viduals as they have a higher risk require different solutions.
tolerance. Younger consumers
and especially those from lower- What will be the next big
tier cities, however, have been technological advance that
affected. In the future, I believe Tmall focuses on? Will the
consumers will be more cautious livestreaming boom of this
in their spending and show more year carry on in 2021?
interest in low-cost products. In We’re really confident about
other words, the wallet share the prospects of livestreaming,
of consumers from lower-tier particularly as an interactive
cities will [eventually] decrease. tool for young consumers. But
Meanwhile, we are also seeing its characteristics will change.
an increase in consumption for There will be a greater diversity
household goods. Short-distance of broadcasters. Today, it’s
travel has also gained in popu- mostly KOLs [influencers known
45
The State of Fashion 2021
46
04. SEEKING JUSTICE
Fashion’s impact on the environment has understand that all the… cancellations [and] not
been in the crosshairs of public perception for getting money is put on the workers’ shoulders,”
some years, as environmental activism increased said the founder and executive director of the
in prominence and brands started to become more Bangladesh Centre for Worker Solidarity, in an
transparent about their practices. Now, social interview for The Business of Fashion Podcast.77
Garment workers from the Euro Clothing Company II hold a protest in front of the factory, closed due to brands cancelling
justice and human rights issues are gaining a higher “Why is it always us that has to suffer, even in this
share of voice in the conversation about the fashion pandemic?”
industry’s pressing need to improve its sustaina- There are signs that the fashion-buying
bility credentials. While it is yet to be seen whether public is taking action to demand better treatment
consumer attitudes will translate into tangible of workers in the value chain. Thousands of
changes in purchasing behaviour, it is certain that consumers worldwide have participated in the
their orders amid the Covid-19 coronavirus pandemic. Sophie Deviller, AFP via/Getty Images
the pandemic has amplified public awareness of #PayUp campaign, which calls out brands that
social injustice in the supply chain. have not committed to pay for in-production or
completed orders during the Covid-19 crisis, which
The pandemic has amplified public consequently puts millions of vulnerable workers
awareness of social injustice in the at risk. As public concern and campaigns grow, a
growing number of brands have started to look at
supply chain.
more fundamental changes in their purchasing
Indeed, as factories closed in early 2020, practices (see Deeper Partnerships on page 70).
orders were cancelled and payments were deferred But manufacturing is not the only area
or renegotiated, the plight of the 40 to 60 million under scrutiny. The social justice spotlight has
global garment workers impacted by the crisis turned to all aspects of the fashion value chain,
became even more visible to consumers.75 Suppliers from the fields where textile fibres are grown to
across the world were reported to have lost over the stores that stock final products. When the
$16 billion in revenues between April and June Arcadia Group, whose high street brands include
2020.76 In May, labour rights activist Kalpona Akter Topshop and Dorothy Perkins, attempted to award
painted a stark picture of the plight of garment as little as 50 percent of notice pay to some head
workers. “Everyone in the supply chain needs to office staff facing redundancy, the combination of
47
CONSUMER SHIFTS
negative press, campaigner action and a union’s an hour.82 An independent review commissioned
threat to take legal action compelled the company by the brand and carried out by Alison Levitt QC
to reverse the decision.78 However, at the same found that the allegations of “unacceptable working
time, there are many instances of accusations of conditions… are not only well-founded, but are
poor worker treatment or unfair compensation substantially true.”83 In Boohoo’s response to
at warehouses and logistics centres that persist the review, Group CEO John Lyttle said that the
without intervention. company would need to “go further and faster” to
Consumers are demanding more from improve its governance and compliance.84 However,
brands in their engagement with socio-political the company’s sales still rose nearly 50 percent
values, too. Kantar Monitor research found that quarter-on-quarter and its share price recovered
54 percent of consumers believe brands “have an fairly quickly. 85 86
important role to play in social conversations about
issues like #MeToo and race relations,”79 but when 66 percent of consumers said they
brands fall short, consumers are quick to call them would stop or significantly reduce
out. Brands that jumped on the Black Lives Matter
movement with tokenistic marketing messages
shopping at a brand if they found
have faced accusations of hypocrisy, while many it was not treating its employees or
The State of Fashion 2021
brands have been called out for having all-white suppliers’ employees fairly.
upper management teams.
In the year ahead, the longer-term trend of Clearly, there is often a gap between
citizen activism will continue, boosted by social consumer attitudes on social justice issues and
media and a widening gap between the rich and their purchasing decisions. What is unclear,
poor exacerbated by the pandemic. Gen-Z, which however, is how long the gap will last. In an August
will account for more than 40 percent of global 2020 survey by McKinsey, 66 percent of consumers
consumers in 2020, will lead the charge as the most said they would stop or significantly reduce
politically active age group on social platforms.80 In shopping at a brand if they found it was not treating
the US, research by the Pew Research Center shows its employees or suppliers’ employees fairly.87
younger cohorts are most likely to encourage action Among marginalised communities,
online and to use hashtags relating to political or consumers increasingly expect fashion companies
social issues.81 to put money behind their stated values when it
comes to racial injustice. It is with this in mind
Consumers are demanding more that Aurora James, the founder of sustainable shoe
from brands in their engagement and handbag brand Brother Vellies, launched the
with socio-political values. 15 Percent Pledge, a non-profit that campaigns for
diversity in the fashion industry by challenging
Still, the overall picture remains complex. retailers to dedicate 15 percent of shelf space to
Often, the strongest critics of brands are not their Black-owned businesses.88 “Historically, less than
biggest consumers, and infringements of social 1 percent of venture capital money has gone to
justice or human rights do not always translate to Black individuals,” said James, in an October 2020
declining sales. UK-based Boohoo Group saw its interview with BoF.89 “It’s not that Black people
share price dive in July 2020 amid allegations that aren’t already ideating on amazing products or
its factory forced employees to work when sick, on creating them on their own, it’s that they don’t have
a wage of as little as £3.50 (approximately $4.50) the resources to package them and put them out in a
48
04. SEEKING JUSTICE
way that’s going to work for those resources.” Now it is time for fashion companies to
In many countries, heightened citizen adhere to the highest standards of human rights
awareness is helping to build momentum for new and social justice issues across business operations.
employment legislation, though it is important to The key in these endeavours should be authen-
note that labour laws have historically been poorly ticity and action, which can be achieved through
enforced. The European Commission, for example, meaningful engagement with trade unions,
has committed to setting rules for mandatory direct worker engagement, non-profits and workers’
corporate environmental and human rights due rights watchdogs.
diligence, which is in a discussion phase as of Companies should focus on transparen-
October 2020,90 while in Germany there are plans cy and concrete plans to support commitments
to enforce protection of supply chain workers.91 as a first step. Introducing concrete changes
Meanwhile, Middle Eastern states including Qatar to purchasing practices are crucial, such as
and Lebanon are taking steps toward abolishing ringfencing labour costs in negotiations as a way
the punishing “kafala” (sponsorship) employment to pay workers in the supply chain a living wage.
system for migrant workers.92 However, progress Finally, decision-makers expecting furloughs,
does not always follow an upwards trajectory — layoffs or shifts to temporary contracts should
India cleared new labour codes in September 2020, prepare workers for any changes and resist the
raising concerns that workers could be fired by temptation to cut corners at a time in which
employers more easily,93 and in California, a new employees — and their personal finances — are
bill to protect garment workers was deprioritised increasingly under strain.
from discussion in the 2020 legislative session.94
Exhibit 6:
I would stop
shopping at 34
that brand
I would
significantly
reduce shopping
33
at that brand
I would slightly
reduce shopping 15
at that brand
My shopping
behaviour would 18
not be affected
SOURCE: MCKINSEY FASHION SCENARIOS: CONSUMER SURVEY IN GERMANY, UK AND SPAIN, AUGUST 2020
49
EXECUTIVE INTERVIEW
Michael Burke
Chief Executive, Louis Vuitton
Louis Vuitton — the largest luxury brand in Like all fashion companies
dependent on a mostly physical
the world by revenue before the Covid-19 crisis retail model, Louis Vuitton was
— was hit hard by the pandemic. But Chief hit hard by the crisis. Profits at
parent company LVMH plunged
Executive Michael Burke led the company to by 68 percent in the first half of
2020. But revenues bounced back
a healthy rebound by engaging local clients in Q3 when sales in the fashion
and driving sales online. Now, the seasoned and leather goods group at LVMH
were up 12 percent year-on-year,
executive is calling for a return to the original led by a strong performance
values of luxury, which he says are key to at Vuitton, which succeeded in
engaging local customers and
creating a more sustainable business model. driving sales online.
All the while, Vuitton was also
— by Imran Amed working hard to polish off its
sustainability credentials, comm-
unicating them openly in a
dedicated new section of its
consumer-facing website
launched in September. The
visible shift in strategy under-
scores the growing importance
50
04. SEEKING JUSTICE
of transparency throughout the upcoming houses that change of the type of jobs we’re creating.
luxury supply chain. As he looks and disrupt. If we start losing We create jobs but they have to
ahead to 2021, Chief Executive too many small brands and if we be jobs that people actually want
Michael Burke is more cognizant start losing too many suppliers, to occupy. So that goes to the
than ever of the responsibility it’s going to weaken the entire work environment, that goes to
Louis Vuitton bears to protect ecosystem. the diversity of the job. The little
people and the planet — and that
his customers will increasingly “Our ecosystem is absolutely dependent on
hold him to it.
What have you learned and
suppliers and small, upcoming houses that
taken away thus far from this change and disrupt. If we start losing too
crisis?
Who said this, was it Churchill?
many small brands and if we start losing
“Planning is useless, but having too many suppliers, it’s going to weaken the
a plan is indispensable.” I guess
what that means is when the shit entire ecosystem.”
hits the fan you need to have a plan,
but having a plan before the shit Size also comes with
industrial revolution at Louis
hits the fan is not that useful. It’s responsibility to do right
Vuitton has been that today, a
really a statement to the impor- by the people in your supply
craftsman will typically only
tance of resilience and agility. chain, the employees that
work a couple of days or a couple
That’s what we really stressed in work in your stores and in
of weeks on a different product.
those six months. That’s how we your factories, the planet, the
They will change to make other
got through it in better shape than communities we live in. How
products in the course of a week
when we entered it. Vuitton is a do you balance the priorities
or a month, which makes for a
better company today than six of various stakeholders
much more interesting job, much
months ago. now that it’s not only about
less repetitive. It reduces a lot
optimising profit?
In what ways? of the stresses on joints and
Yes, it’s a responsibility. The whatever problems you have
Well, it killed the last remnants of bigger and the more successful when you’re actually making
the past, of the [late] 20th century. you are, the more you should be products. This is all made by hand.
That was not a good period for held to that responsibility, So there will be consequences
luxury. Financially it was — but because satisfying all these of people working with hands
we had strayed from the real stakeholders is only possible and leathers and brass and nails
values of luxury. It was about with a long-term approach. The and wood, [but] we need to make
rolling out identical strategies; it problem is not compromising. sure that environment is the best
was about replicating what you You have to make compromises if possible environment.
did in Paris; it was about stand- you set realistic, short-term goals.
ardising your windows and being
very proud of it. It was about all
If you have long-term goals you
will satisfy all your stakeholders,
“If you want to satisfy
these un-luxury values. so the responsibility boils down everybody, you can
to long-term thinking. If you want
Some people have called
to satisfy everybody, you can only
only do it by having a
that the “McDonaldisation”
of luxury. do it by having a longer outlook longer outlook than
than the market has.
It’s quite clear, and it’s unfortu- the market has.”
nate that it’s correlated to size. I What does it mean to be
think you wrote about that, and a responsible employer I don’t know the last time you
it’s true, which is dangerous. right now? went to a Vuitton [atelier], but
Our ecosystem is absolutely Well, from an employment every centimetre is thought in
dependent on suppliers and small, perspective, it’s being mindful those terms, down to the rubber
51
CONSUMER SHIFTS
mats they stand on, to the noise been doing around gender the client base. If you go in the
pollution. The noise levels have equality, but what are you studios, it’s extremely diverse.
been divided by a factor of three doing specifically on the White, heterosexual, middle-aged
in the last 10 years. The air quality, side of racial diversity and men are the minority. So it’s
all of the actual physical work representation? happening. Does it still have a way
environment has to be appropri-
ate for this day and age. The jobs “We went into the crisis with 450 stores, we
have to be interesting.
came out of the crisis with 10,000 stores,
The other thing is empowerment.
When the crisis really accelerated, because every single salesperson, when they
the only way to work [was] to fully
empower people. The things that were stuck at home, we empowered them
we’ve done in the last three or through software that we wrote in 10 days to
four months are good examples.
The [Louis Vuitton menswear] not just interact with the clients, but also to
show in Shanghai was cast locally
and produced locally. The local actually close the sale.”
teams were fully empowered to
I find that when you have a to go? Yes. Can we accelerate?
not just do a repeat show, but an
supposedly immovable problem Yes, but it’s happening.
original show. That show would
have never happened before. We one way of solving it is attacking And, in this environment,
got away from this neo-colonial it from both ends, which means how does Louis Vuitton think
The State of Fashion 2021
approach where everything hiring some very, very visible about engaging in politics?
happens in New York, London, senior people and putting them Thinking back to the opening
Paris or Milan and gets trickled in positions of power, not just of the Vuitton factory in
down through the various representative positions, but Texas with Donald Trump and
[markets] and they replicate; actually power positions. In the reaction — not just from
that’s gone, that’s finished. other words, they themselves your consumers and followers
will be able to hire; they them- on social media, but even
I also turned every one of our selves have substantial budgets. Nicolas Ghesquière.
10,000 sales employees into store They themselves will be able to
managers. We went into the crisis [Nicolas] has the right to have his
influence the messages that come
with 450 stores, we came out own opinions, that’s an absolute
out of the company, and you know
of the crisis with 10,000 stores, right at Louis Vuitton. I’m not
I’m talking about Virgil [Abloh].
because every single salesperson, going to muzzle him, but I can
That’s on one end of the spectrum
when they were stuck at home, tell you that there were many
and the other end of the spectrum
we empowered them through people in America that disagreed
is when we hire our junior exec-
software that we wrote in 10 with his comments, just like there
utives, we need to make sure that
days to not just interact with were many people that agreed.
we have the right balance.
the clients, but also to actually At Louis Vuitton, you have the
close the sale. Each client advisor Let’s talk about the right to have your own opinions
became a self-standing store management teams though. and actually to express them.
with access to all the inventories At the very senior levels How much better can I do than
throughout the zone, they could of companies like Vuitton, that? I think that is a very
sell any product to anybody. So you are still just relatively democratic approach.
sales associates became store homogenous as a group,
How does all of this work so
managers, a store managed by one especially when compared to
that you get it communicated
person. This is how we were doing the customer base that you’re
to the ultimate stakeholder,
30 or 40 percent of our business engaging with.
your customers?
with all stores closed. Not if you look in the stores,
Louis Vuitton, seven or eight
look at the store managers, it’s
I saw the work that you’ve years ago, was, I would say, more
very diverse and it represents
52
04. SEEKING JUSTICE
they want that Look out for the full interview with
Michael Burke on The Business of
transparency, they Fashion in January 2021.
want authenticity Disclosure: LVMH is part of a group of investors
who, together, hold a minority interest in The
and they want to be Business of Fashion. All investors have signed
shareholders’ documentation guaranteeing BoF’s
53
05. TRAVEL INTERRUPTED
Global tourism had been growing strongly stayed away from European fashion capitals like
prior to the pandemic, a trend that contributed Paris, Milan and London. French luxury department
The State of Fashion 2021
to the importance of travel retail and destination store Galeries Lafayette said it was facing a €1 billion
shopping for the global fashion industry. In fact, (approximately $1.17 billion) loss in 2020, while its
travel and tourism growth outpaced GDP growth Italian counterpart La Rinascente expected a 20 to
over the past decade, driven by strong growth in the 25 percent drop in annual revenues.100 “There are
Asia-Pacific region.95 Before the pandemic struck, some great [shopping] districts around the world
global airport sales were predicted to grow 6 percent [but] it’s a real problem for districts to reinvent
in 2020.96 Now, of course, all of that has changed, themselves [now],” said British department store
and international arrivals globally are expected to Selfridges Group Managing Director Anne Pitcher.101
drop by 60 to 80 percent in 2020.97
Disruptions have profoundly impacted Retailers in other major shopping
tourism hotspots and the fashion retailers
operating in them. Destinations across the Southern hubs have also seen significant losses,
Mediterranean sub-region of Europe and its as high-spending tourists from China,
periphery saw a 73 percent decline in international Russia and the Middle East stayed
arrivals in the first half of the year, while those in
the Northeast Asia sub-region posted an 83 percent away from European fashion capitals
decline.98 Across the board, popular destinations like Paris, Milan and London.
such as Thailand, Macau, Hong Kong and Singapore,
all of which usually attract millions of tourists, Scenario modelling by McKinsey and Oxford
saw very few arrivals. Hong Kong was particularly Economics suggests the pandemic lifecycle of the
hard-hit, having welcomed 91 percent fewer tourists travel industry will consist of four stages: a crisis
between January and September 2020 compared to period, a recovery from the pandemic, a recovery
the same period the year before.99 from the economic downturn, then eventually a new
Retailers in other major shopping hubs normal, with the recovery’s timing and pace varying
have also seen significant losses, as high-spending across regions (based on information available
tourists from China, Russia and the Middle East September 2020).102
54
CONSUMER SHIFTS
Exhibit 7:
Crisis year
1 Historical Travel restrictions Structural
Peak pandemic accompanied by
changes to
systematic lockdowns, consistent travel
travel
restrictions and reluctance to travel.
Economic downturn
Pandemic recovery
2 Governmental restrictions gradually Emotional reluctance
ease as outbreaks are contained, and to travel
consumers slowly regain trust in safe
travel.
Economic recovery
3
Restrictions on travel have mostly
disappeared and public confidence in
travel is back to normal. The economy
slowly recovers.
New normal
4 Return to normal for the majority
of travelers. Some sectors remain
affected by secular shifts in consumer
behaviour and preference. 1 2 3 4
SOURCE: MCKINSEY TOURISM RECOVERY MODEL, MCKINSEY TRAVEL LOGISTICS AND INFRASTRUCTURE PRACTICE
Uncertainty is expected to continue into travelled during China’s National Day Golden Week
2021 and recovery will likely be focused initially in October,105 106 providing some support to domestic
on domestic and neighbouring-country travel. retail.107 108 109 In North America, more than 90
However, international tourism may not return percent of trips in August were undertaken by car,
to pre-pandemic levels before 2023 or 2024. This revealing the extent to which consumers shifted to
chimes with fashion executives’ sentiment about domestic travel.110
the recovery timeline for the travel retail sector. In However, not all markets will recover at the
our BoF-McKinsey State of Fashion 2021 Survey, 66 same speed or to the same extent, as some are more
percent of executives expect it to take at least two to dependent on global shoppers than others. The
three years for travel retail sales to recover to their slower recovery of luxury sales in Europe compared
former growth levels.103 to other geographies highlights the impact of absent
The faster recovery of domestic and nearby luxury consumers, especially those who normally
-country travel already began to play out in 2020. In travel from China and other Asian countries.
China and Europe, intra-regional travel picked up Even in a positive scenario, Europe is expected
over the northern hemisphere summer, which saw a to see its luxury sales decline by 23 to 28 percent
gradual increase in the number of flights.104 Booking in 2021 compared to 2019 in the Earlier Recovery
of domestic flights in China recovered to pre-Covid scenario.111
levels in August and more than 600 million people
55
CONSUMER SHIFTS
With global travel hubs expected to remain domestic customers. We therefore expect to see
relatively quiet throughout 2021, shopping at changes to assortments, in-store staff profiles and
duty-free and luxury outlets will continue to shift marketing.116 Galeries Lafayette, which previously
towards China as retailers in these sectors double generated 50 percent of revenue from interna-
down on their efforts in the wider region. Swiss tional tourists, said it will focus on Parisians and
duty-free retailer Dufry, which was replaced as the French tourists for the 2020 holiday season.117 US
world’s number one by China Tourism Group DF department store Bergdorf Goodman has similarly
in 2020,112 plans to focus its recovery on Asia. In developed new initiatives targeting affluent New
2020, Hong Kong-based DFS Group acquired a 22 Yorkers, and started offering same-day delivery to
percent stake in Shenzhen Duty Free Ecommerce the Hamptons during the summer.118
Co, signalling the growing importance of mainland Meanwhile, retailers with a high share
hubs. Outlet player Value Retail said in April that of products associated with holidays and travel
China was a priority, after seeing strong growth in will continue to adapt their offerings. Samsonite
2019 and in the period after lockdown in 2020.113 Group, for example, has said it will shift away from
suitcases and towards everyday products like
In North America, more than 90 day-to-day bags.119 Luxury brand Rimowa started
percent of trips in August were its own sunglasses line, extending its product range
The State of Fashion 2021
56
EXECUTIVE INTERVIEW
57
CONSUMER SHIFTS
Pitcher says she also sees exciting Let’s not hide from the truth. of years at least to bed in, and
opportunities. It’s really hard. I always try and somebody will always want to
advocate that a great business get there first. We will have later
Some industry commentators
relationship is one where both spring deliveries, which is going
say that this is an opportunity
do well, where both succeed, [by] to make the whole Black Friday
to reinvent retail. How do you
trying to find a way where both week and Christmas, hopefully,
see the industry evolving in
generate profitability. It doesn’t look very different. We don’t have
the coming years?
always work. Some of our most Black Friday in our group, but
Retail is part of an ecosystem, important partners are in terrible we’ve all been trying to reduce the
isn’t it? Retail depends in part on difficulty. That leaves a big hole in scale of activity that peaks around
office workers being back in the our mix, but there’s lots of oppor- Black Friday week. It’s unsustain-
office, and there’s also a materi- tunity out there as well. I hope able, absolutely unsustainable.
ality attached to international many people would say of our
travel. Most importantly, how the Are people going to buy as
businesses that we pay our bills,
customer wants to shop and what many clothes as they used
and that’s a good start. I would
is important to us as individuals to through the rest of the
like most to say we’re fair. Fair but
is changing the entire business pandemic and afterwards or
tough is a good place to be.
model. What was bad in retail do you think apparel should
before is probably not going to There’s so much talk have a smaller part in the
survive. What was super chal- about “rewiring” the fashion merchandise and service mix
lenged before is definitely not industry. How is that affecting in stores? In other words,
going to survive. What was good business from a buyer’s was the opening of Selfridges’
before probably will, but we will perspective? bike shop in London during
The State of Fashion 2021
have to reimagine the way we Buyers and wholesalers are the pandemic a sign of things
do retail, reimagine the way we having a really tough time right to come?
sell, reimagine our business now. This is where a level of We cannot continue to consume
models completely, if we’re trust is emerging as critical to at the rate we have, so there is a
going to respond to all of these the relationship and will make huge question that we need to
changing behaviours. us stronger in the longer term. answer. We will probably end
The reality is, no retailer has up selling less, won’t we? At the
moment, we are still selling very
“We cannot continue to consume at the rate beautiful things, so I think it’s a
question of choice, not always,
we have, so there is a huge question that we “Can I afford it?” The throwaway
[purchase] is definitely, for
need to answer. We will probably end up us, slowing down but [buying
selling less, won’t we?” something] that will last for years,
I think that is definitely going to
emerge. If we are going to sell less,
This year, Selfridges has set
received enough stock quickly what are we going to put in these
targets for brands stocked in
enough, which is forcing much great big spaces that are shops?
its stores to meet minimum
longer sale periods before stock We’ve got loads of things we can
sustainability standards by
is replenished. We’ve probably all do, and the experience sits at the
2025. That’s a big ask.
made more profit out of having a centre of that thinking.
At the same time, you’ve also
longer sale, but only because new
had to make some difficult What kind of experiences,
[product] hasn’t been delivered
decisions over the last few particularly in a socially
as soon as it was [previously].
months about order volumes distanced world?
That’s good, except we haven’t
and product mix. How do Department stores are lucky,
taken in as much money because
you manage that kind of because they are by necessity big,
we haven’t had the new deliver-
relationship in a sustainable open spaces. There’s still so much
ies. I think a new business model
manner and with respect? art, food, culture, conversation,
is emerging. It’ll take a couple
58
05. TRAVEL INTERRUPTED
59
FASHION
SYSTEM
06. LESS IS MORE
The State of Fashion 2021
60
06. LESS IS MORE
Even before Covid-19, the fashion industry dedicated websites like Ganni’s, which sell past
had been edging towards a dangerous threshold. seasons’ collections at a discount,128 or through
Excessive inventories and widespread markdowns pop-up outlets like Harrods — other brands, from
proliferated to the extent that just 60 percent of PVH and Michael Kors to Gap and Versace, are
garments were sold at full price, creating billions of holding onto excess inventories in the hope of an
dollars of lost revenues and margin.121 uptick next year. 129 130
During the pandemic, the situation “In uncharted times such as these you
worsened. Inventory levels increased significantly need to be brave and decisive. Harrods Outlet
despite brands’ and retailers’ scrambles to imple- has provided us with an innovative solution to a
ment damage control.122 Inventory turnover fell by completely unprecedented, and unforeseen, issue,”
33 percent in the first three months of 2020,123 124 and said Michael Ward, Managing Director of Harrods.131
orders were down nearly a third year-on-year by the The overstock issue will only get worse
end of April.125 in the future if companies fail to adapt to the
consumer’s new mindset. Consumer attitudes are
Few fashion players were immune changing in the wake of the pandemic, as many
embrace a “less is more” approach that coincides
as markdowns proliferated across
with industry changes in the fashion cycle. Some
all value segments and product 65 percent of consumers in a McKinsey survey
categories. conducted during the Covid-19 crisis said they plan
to purchase more long-lasting, high-quality items,
Few fashion players were immune as and overall, consumers considered “newness” one
markdowns proliferated across all value segments of the least important factors in making purchases.
and product categories. Gap, LVMH and Brunello The pandemic has not only accelerated a pre-exist-
Cucinelli are among those to have announced ing critique of consumerism, but also the increased
substantial inventory impairments as a result of importance of sustainability in purchasing
the pandemic.126 127 While some businesses found decisions, and the rise of circular business models
creative ways to clear unwanted stock — such as (especially resale).132
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FASHION SYSTEM
As Farfetch Founder and Chief Executive Telfar, have leveraged pre-orders and just-in-time
José Neves said in July 2020 on The Business of production models, in which consumers purchase
Fashion Podcast, “the industry has an oversupply items before they are produced and receive them
problem, which is an environmental problem several weeks or even months later.138
as well.”133 Analytics and artificial intelligence will also
Due to these and other factors, brands will gain traction in the product development process as
need to focus on three key priorities in the year data becomes more available to brands and designers
ahead: accelerate their shift toward a demand-led become more skilled at using data. Footwear
model, reduce assortment complexity and address and apparel brand Wolverine plans to optimise
the recalibration of the price-volume equation. assortments with digital consumer testing based
on First Insight’s predictive analytics, where voice
Brands will need to focus on three of the customer (VoC) feedback is combined with
artificial intelligence.139
key priorities in the year ahead:
With 60 percent of fashion executives in
accelerate their shift toward a our BoF-McKinsey State of Fashion 2021 Survey
demand-led model, reduce planning to implement improved analytics for
consumer insights and 43 percent planning to
assortment complexity and
The State of Fashion 2021
62
06. LESS IS MORE
and Coach, which plans to cut 50 percent of its problem brands need to capture more value, and this
holiday season collection.143 In July, the SMCP group means striking a new balance between pricing and
announced it would cut its inventory purchases by volume. There are two levers at their disposal: the
30 percent for the FW20 season.144 reduction of discounts and the optimisation of prices
(price increases for brands that have not yet reached
In 2021, we will see brands the limit of fair value).
After the discount drive of the early phase
applying smarter approaches of Covid-19, the next phase saw a revision of price
to assortment, aiming to reduce points and the implementation of “no sale” strategies
complexity and realign collection to safeguard margins. Some direct-to-consumer
brands, including US-based Dôen and French label
drops with clear consumer Sézane, have built their success on the absence
opportunities. of end-of-season markdowns, relying only on
occasional “archive” and sample sales.150 Some
Another way brands are streamlining luxury brands, meanwhile, have room to leverage
their assortment is by breaking the shackles of the their desirability to lift prices. Although these
traditional fashion calendar. Indeed, the current strategies overlap with brands’ broader price harmo-
number of collections across the seasonal calendar nisation plans, the willingness to capture more value
is increasingly seen as an impediment to a demand- from key products appears to be the main rationale
focused approach. Echoing the sentiment of 30 of recent price increases.
percent of executives responding to our survey, “Our pricing policy of staying at the
Off-White, Tory Burch and Mugler are among the European level remains unchanged. Russian
brands that have announced departures from the customers should not be penalised for shopping
seasonal schedule, enabling them to regain control in Moscow [rather than] in Paris or Milan,”
of in-store delivery.145 146 said Alexander Pavlov, chief executive of Tsum
As luxury players focus their energies on department stores in Russia, which are managed
fewer yearly collections, some are shifting away from by Mercury Group.151 “We believe that practice of
cruise and resort collections. As the trend continues markdowns and price reductions in the full-price
into next year, brands heavily reliant on these stores has [a] negative effect on long-term business;
inter-seasonal collections will face the challenge of we constantly discuss it with our partners.”
having to adapt to a reduced fashion calendar. Gucci Value and mid-market brands have been
announced it would be scaling back the rhythm of its more reluctant to ditch markdowns. However, they
collections from five to just two per year, reflecting are adopting more sophisticated, tailored pricing
a growing movement toward seasonless fashion strategies with levels and duration of discounts
among retailers;147 this is underlined by results from informed by market and consumer data harvested
our BoF-McKinsey State of Fashion 2021 Survey, by analytics and artificial intelligence. Levi’s has
which reveals that two fifths of executives plan to reported significant benefits from its optimised,
make the move. This adds to a growing chorus of data-driven approach to markdowns, with some
brands and designers calling for the fashion calendar promotion events generating four times the profit
to be rewired, such as the Dries Van Noten-led of similar initiatives from the previous year.152
Forum Letter to the fashion industry and the Meanwhile, some smaller labels have taken more
#RewiringFashion initiative facilitated by BoF.148 149 control of pricing with concession models on online
However, to solve the underlying overstock marketplaces.
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FASHION SYSTEM
The events of 2020 have highlighted that more products with consumers ahead of production.
more is not always better. Indeed, they have shown Brands will focus on accelerating speed to market
that brands that reduce complexity and rely less and on aligning launches and product drops with
on discounting as a way to prop up sales often their customers’ needs rather than the traditional
outperform those that do not. When combined fashion calendar. This will lead to a permanent
with a demand-focused approach and intelligent change in mindset among consumers.
assortment management, the overall impact is a Moreover, brands will need to become
more streamlined business model that is better nimbler to pursue price optimisation and manage
suited to the global market. markdowns in a smarter way as they adopt a more
In 2021, we expect brands to sharpen their measured and sensible approach to production in the
assortment using high-quality analytics, and to test wake of the industry’s new mantra: “less is more.”
The State of Fashion 2021
Exhibit 8:
Other 6
64
IN-DEPTH
Key Insights
• With garment production volumes growing by 2.7 percent annually and less
than 1 percent of products recycled into new garments, action on circularity is
an imperative.
• Despite challenges with garment durability and logistics, pioneering brands
are driving circularity from the drawing table to e-commerce search filters.
• All fashion value chain stakeholders have a role in driving the circularity
revolution — we expect it to be the next disruption, and it’s for individual
brands, manufacturers, aggregators and marketplaces to capture the
opportunity before others.
When it comes to protecting the the destruction of luxury goods, as can be seen
environment, the fashion industry knows that “less in France. More generally, measures such as the
is more,” meaning the less impact we have on our EU’s carbon border tax will promote circularity
planet, the more benefits will accrue for businesses, by making the economics of onshore recycling and
people and natural life. One promising way for other circular models more attractive.
fashion to reduce its environmental impact is by
scaling circular business models, through which More than three in five
companies employ a range of strategies to reduce consumers said environmental
waste and make more efficient use of resources,
as well as help their customers to do so, too. In 2021, impact is an important factor in
we see circularity moving from the fashion fringes making purchasing decisions.
towards centre stage.
The impetus to act on the environment An industry-wide circular business model
is emphasised by shifting consumer attitudes. is a lofty ambition — and is a long way from being
More than three in five consumers in a recent realised. Despite efforts by some players, as much as
McKinsey survey said environmental impact is an 12 percent of fibres are still discarded on the factory
important factor in making purchasing decisions.153 floor, 25 percent of garments remain unsold, and
Regulators and policy-makers are also on board, less than 1 percent of products are recycled into
amid a raft of upcoming initiatives to promote new garments.154 Given these metrics, action is an
circular practices (such as in the EU) and prohibit imperative and an inevitability. Indeed, circularity
65
FASHION SYSTEM
may become the biggest disruptor to the fashion Similarly, with most garments composed of a mix of
industry over the next decade. materials, recycling is not easy.
As the industry makes progress with the
“Rs” — reducing, recycling, refurbishing, reselling, Enabling circularity involves a complex web of
renting and repairing — few decision-makers are logistics. Resale transactions are currently mostly
under any illusion about the scale of the challenge. peer-to-peer, with individuals deciding whether
Despite good intentions on the part of some players, the resale value is worth the time and energy
garment production volumes are predicted to grow required to wash, photograph, describe, package
by 2.7 percent annually between now and 2030.155 and send. In “Fashion on Climate,” our analysis
The priority, therefore, must be to set circular showed that, to align with the 1.5-degree pathway
strategies, tackle scalability challenges and take in 2030, 20 percent of garments need to be traded
concerted action to scale solutions. through circular business models, so greater scale
is required.157 The subscription rental model, for
The Challenges in Scaling Circularity example, requires many users for the economics
to make sense — and again, the key challenges are
The way in which value is created in circular logistical, including laundry and delivery.
systems is radically different to the way it is created
The State of Fashion 2021
Capturing value requires durability or recy- What Will It Take to Scale Circularity?
clability. Without durability or recyclability, there
is likely to be significant erosion of product value. The apparel ecosystem is fragmented,
Refurbished products can command relatively high with no single player accounting for more than
prices if the refurbishment is carried out reliably, 1 percent of the market. Standardised solutions,
which is not always easy when clothes are stretched therefore, are unlikely to emerge anytime soon.
or stained and accessories scratched or marked. More probably, we will see a variety of strategies led
66
IN-DEPTH
by a diverse cast of actors and predicated on three • Reskill designers and stimulate circular design
foundational capabilities: innovation;
• Create momentum by collaborating and
Embracing Sustainable Design. Circularity developing tools.
starts on the drawing board, and with the textiles
and materials that designers use for their creations. Ramping-Up Reverse Logistics. Through reverse
One company that has embraced the sustainable logistics, companies can recover items from
design ethic is London-based Dai Wear, which disposal or secondary resale and thereby continue
employs recycled and recyclable fabrics to produce to derive value. Brands often partner with inter-
performancewear. The company uses biodegrada- mediaries to operationalise the process. Patagonia
ble yarns for seams and air-dried fabrics to reduce works with start-up Trove to buy-back items and
washing needs. sell them at a reduced price. Trove can purchase,
“Sustainability is obviously more important process, price and photograph second-hand goods
than ever, but it is also becoming the baseline before putting them up for sale on clients’ websites.
requirement for all apparel companies,” Dai Wear Used-clothing platform ThredUp has partnered
Chief Executive Joanna Dai said. “We find increased with companies including Reformation and Amour
organic engagement and followers slightly outside of Vert to enable customers to send clothes (from
our core target niche who align with our values and any label) in exchange for shopping credits. In the
buy into our brand.” rental space, US-based logistics company CaaStle
Designing for zero waste requires material manages the entire process for companies, from
and product innovation. Scotland-based Johnstons warehousing and cleaning garments to gathering
of Elgin recently introduced EveryYarn, a material customer feedback.
made from used yarns. “Our objective is that every Some companies are leveraging their own
yarn that we make is made into a finished product,” store networks for circularity, although very
says Chief Executive Simon Cotton. “Demand for few also rent, repair or resell in store. UK-based
the range has certainly passed our expectations, Mulberry has maintained a leather library since it
but it requires channels where the limited-edition launched in 1971, offering repair and refurbishment
nature of the product is accepted and the availability for all its products. In 2020, the company launched
of colours drives a certain idiosyncratic design. That Mulberry Exchange, a buy-back initiative under
said, we do get some brilliant designs working this which customers can return bags to be repaired and
way but it’s not suitable for conventional merchan- resold alongside the current collection.
dising or stock-supported wholesale models.”
Companies should:
Companies should: • Design reverse logistics to optimise value
• Invest in, incubate, pilot and test alternative retention, either by partnering with a trusted
materials and processes for a circular system; intermediary or — more likely in the luxury
• Radically reduce production waste and space — taking direct control;
support, train and incentivise suppliers • Leverage store networks to create in-store
to reduce and reuse fibre, chemicals and circularity hubs;
packaging; • Build out non-store collection points and home
pick-ups to improve accessibility;
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FASHION SYSTEM
• Optimise sorting facilities and recycling filter, sort and group assortments, or leverage
technology, either in-house or with partners; retailer-curated collections;
• Eliminate single-use packaging. • Enable peer-to-peer business, including resale
and rental, and sweeten the deal with logistics
and digital solutions;
Circularity is likely to be one of • Create timeless collections, reflecting the
the key business trends of the declining prominence of seasonality;
• Offer tips for care and repair;
next decade. However, it is not
• Enable returns and recycling;
the kind of revolution that can be • Develop data strategies to inform
led by a few leaders, while others business decisions.
wait and see.
Driving the Future of Circularity
Supporting Customer Adoption. For younger Circularity is likely to be one of the key
consumers born into the sharing economy, adopting business trends of the next decade. However, it
circularity is a natural step. However, older is not the kind of revolution that can be led by a
The State of Fashion 2021
consumers may require education and encourage- few leaders, while others wait and see. Rather,
ment. Some consumers believe there is a hygiene a collective effort is required, in which fashion
issue with second-hand clothes, and others struggle companies, customers and all participants in the
to translate their sustainable values into actions for value chain collaborate.
a wide range To date, players that feature sustainability
of reasons. in the centre of their branding have been at the
Some brands are responding by marketing forefront of circular practices, as well as some
circular items alongside conventional ranges, established luxury brands owing more so, perhaps,
for example Patagonia. Zalando and Selfridges, to the resale value of their stock rather than their
meanwhile, are scaling a range of circular offerings eco aspirations. However, looking forward, we
in their core businesses, helping to normalise expect mass-market brands to scale their efforts.
circularity in the minds of shoppers. In addition, aggregators are well-placed to launch
As circularity grows, digital enablement will resale and repair programmes, combined with an
be critical. As the traditional linear fashion value enhanced in-store experience. Marketplaces can
chain transitions into a circular system, consumers build on their size and logistical capabilities. As
will be incentivised to engage beyond an initial consumers become more engaged with sustainabil
purchase in order to engage in circular business -ity issues, circularity will be the key that unlocks
models, which in turn will support data collection the door to a more sustainable future.
that can shape a brand’s business going forward.
The authors of this article focus on Sustainability in Apparel,
Fashion and Luxury, including McKinsey’s research partnership
Companies should: with the Global Fashion Agenda on ‘Redesigning Growth’.
• Offer rental options such as subscription
services and the option to buy rented products
at a discount;
• Borrow online marketplace techniques to
68
07. OPPORTUNISTIC INVESTMENT
Even before Covid-19, fashion was a winner- have been squeezed as profits concentrated around
takes-all industry. In 2019, the top quintile accoun- the luxury and value segments. Similarly, brick-
ted for 200 percent of the industry’s economic profit, and-mortar retail has been on a long downward
while the remainder made a negative contribution, trajectory, with department stores on the front line,
meaning they lost money (see the MGFI on page leading to many relatively small but healthy brands
108).158 Some 34 percent of listed fashion companies coming under pressure from declining wholesale
were already showing signs of distress pre-crisis.159 demand.163 Some of these are building direct-to-con-
During the early phase of the crisis, from March sumer offerings, but that takes time and investment.
to September 2020, we witnessed a “Darwinian With governments around the world
Shakeout,” with at least 20 major companies considering winding down official support schemes
entering bankruptcy restructurings at a wide range and with the development of vaccines and drugs still
of fashion companies including US retailers Century ongoing, the future looks uncertain. We estimate
21 and Ascena Retail, British department store that under a partial-support scenario, around 50
Debenhams,160 Dubai-based e-tailer The Modist and percent of companies would show signs of distress.
Japanese apparel maker Renown.161 162 Without any subsidy at all, the situation would
almost certainly be worse. Europe could see
Some 34 percent of listed fashion as many as three in four companies facing
existential challenges.164
companies were already showing
While many distressed companies face
signs of distress pre-crisis. bankruptcy and liquidation, some may emerge from
restructuring with a relatively clean balance sheet,
The industry’s mid-pandemic economics without huge debt burdens and with an opportunity
could be set to get a lot worse. Listed fashion to rebalance the business. Both Neiman Marcus
companies representing around $50 billion of and J.Crew have filed for bankruptcy and emerged
revenue are loss-making or incurring unhealthy cleaner as a result, the former having shed $4 billion
levels of debt, according to McKinsey Fashion of debt and the latter with a new majority owner
Scenarios (based on information available and $1.6 billion of debt converted to equity.165 166
September 2020). For years, mid-market brands Neiman Marcus Group Chief Executive Geoffroy van
69
FASHION SYSTEM
Raemdonck described it as a “defining moment” for make integration easier. Previous crises have led to
the American department store on The Business of some smart consolidation deals. Nike, for example,
Fashion Podcast amid the company’s bankruptcy purchased Converse in 2003, following the dotcom
proceedings.167 crash, and grew the brand’s sales tenfold, while Gap
A market landscape with fewer players will Inc. bought athleisure line Athleta in 2008, in the
lead to share gains for those who remain, a trend that wake of the global financial crisis. Similarly, India’s
stronger companies like to highlight to investors to largest retailer, Reliance Retail, was reportedly “in
soften pandemic sales results. Strategies to capture talks” with bankrupt UK department store chain
market share from competitors hit by Covid-19 have Debenhams in September 2020 about a potential
been announced by department store chains Kohl’s takeover.171 Historically, this type of deal has been
and Bloomingdale’s,168 with the latter believing that the most prevalent motivation for takeovers.172
$10 billion in market share is waiting to be taken.169 Opportunistic acquirers will strengthen
If we assume more bankruptcies are inevitable, their positions in booming e-commerce and
a likely accompanying trend will be consolida- direct-to-consumer markets, as was seen in
tion, with cash-rich players able to pick up assets June 2020 when Boohoo Group snapped up the
at relatively low prices. This would echo the direct-to-consumer businesses and intellectual
pattern seen after the 2008 financial crisis, but the property of fellow UK brands Oasis and Warehouse,
The State of Fashion 2021
magnitude is likely to be greater this time around, while leaving their costly store network out of the
with potential targets counted in their thousands.170 deal.173 In September, Boohoo was reportedly eyeing
New Look with the same strategy in mind. Among
vertical deals this year, French label Naf Naf was
When it comes to M&A strategy,
sold to its Turkish supplier SY International, and US
there is likely to be a focus on mall operator Simon Property Group bought parts of
deals that offer upside in the “new Brooks Brothers and denim retailer Lucky Brand.
In a small but significant proportion of cases,
normal” market environment that
the motivation for M&A is to acquire capabilities,
emerges out of the pandemic crisis. for example in technology, payments, supply chain
functions and craftsmanship. The latter may emerge
When it comes to M&A strategy, there is as a dominant M&A theme among luxury companies.
likely to be a focus on deals that offer upside in the French Legacy Group bought shoe brand Clergerie in
“new normal” market environment that emerges July, citing interest in not just the brand, but also the
out of the pandemic crisis. While there will be many factory of 112 artisans in Romans-sur-Isère.174
motivating factors for the selection of acquisition If the potential to undertake M&A was
targets, we see three primary drivers: consolida- based on financial resources alone, companies in
tion for market share through new categories or the running for deal-making would include LVMH,
geographies, gaining or strengthening new routes to Fast Retailing, Richemont and Inditex. Together,
market, and acquiring new capabilities. the top 10 companies by cash holdings have close to
Stronger companies will focus on category $80 billion set aside, which is more than 40 percent
and geographic expansion, targeting players of the total cash held by all listed fashion companies
with robust brand equity and with a diversified globally.175 Additionally, internet retailers, which
footprint from the acquirers’ home markets. Often, have seen rising demand during the Covid-19
acquirers target companies that have a similar outbreak, may leverage recent robust trading
business model or channel focus, which is likely to conditions to raise additional cash for acquisitions.
70
07. OPPORTUNISTIC INVESTMENT
Apart from fashion players, private equity funds carefully about how they plan to integrate and
represent a category of potential buyers with deep embed new assets into their existing structure
pockets: they were holding a record $1.5 trillion in because this often is the determining factor of
cash reserves at the beginning of 2020.176 value creation from a transaction. However, buyers
Looking ahead, we expect stronger should also beware — distressed companies without
fashion companies to expand into new categories, a clear strategy or brand value are unlikely to be
geographies and channels, both by capturing market salvageable, even with new ownership and restruc-
share organically and by picking up distressed turing. Either way, we expect competition to heat up
brands. We are also likely to see strategic hedging as the crisis begins to abate, so companies will need
plays, in which brands try to insure themselves to act fast to seize the best M&A and growth oppor-
against potential shifts in consumer demand. tunities out there.
With these plays in mind, companies should think
Exhibit 9:
88 87
84
75
69
51
2010 2011 2012 2013 2014 2015 2016 2017 2018 20191 2020E 2
1 “Normalised” industry EP growth of 4% is based on the assumption that 58 companies with Covid-effects in their 2019 result (FY19 reported in March, April or May 2020),
would have had similar growth to the rest of industry if their financial year aligned with calendar year 2019. The first half 2019 results support this assumption, as 58 Covid-
affected companies had EBITA growth of 10% vs. 14% in rest of industry
2 Long-term Economic Profit implied by 2020 market valuations, while assuming constant debt and WACC
71
08. DEEPER PARTNERSHIPS
For years, there have been calls for cooperate on the components of finished goods in
The State of Fashion 2021
closer partnerships between brands and suppliers. order to create flexibility, which in turn creates
However, progress has been frustratingly slow, value that can be shared among the partners.”
evidenced by the fact that before Covid-19
the prevailing relationship between fashion “Brands must break down and break
companies and suppliers was transactional in
through the adversarial bargaining
nature and short-term in scope.177 178 Now, change
is finally afoot. that is focused on the price of
As underlying tensions in the supplier rela- finished goods out of the factory.”
tionships painfully rose to the surface during the
pandemic, brands were jolted into the realisation Amid store closures, plunging fashion sales
that their supply chains need to be more resilient. and bankruptcies, 2020 was the year in which the
A growing number of executives recognised that fragile nature of buyer and supplier relationships
nurturing closer relationships is one way to do was laid bare. It all began in the first few months of
this while helping to meet their sustainability the year, as lockdowns in China, the world’s largest
obligations and support the fashion industry’s producer of apparel and raw materials, caused
transformation to a more flexible demand- deliveries to be delayed. This sent ripples across the
focused supply chain. In a McKinsey survey, some globe.181 As a result, brands focused on China-based
73 percent of the sourcing community expected the manufacturing scrambled to accelerate diversifica-
trend towards deeper partnerships to accelerate tion strategies and then still faced capacity issues
over the coming year.179 due to the dependence of many Asian sourcing
“Brands must break down and break markets on raw materials and textile inputs
through the adversarial bargaining that is focused from China. As the pandemic spread around the
on the price of finished goods out of the factory,” globe, temporary lockdowns followed in other
John Thorbeck, chairman of supply chain analytics regions. Supply chains became stretched, leading
firm Chainge Capital told The Business of Fashion larger-scale suppliers and sourcing agents with
in September 2020.180 “You need to collaborate and multi-country footprints to gain an advantage.
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FASHION SYSTEM
Going forward, we expect fashion brands Bangladeshi suppliers, impacting the livelihoods of
will seek to more permanently diversify their 1.2 million workers.186 Reports in August suggested
geographic sourcing footprint, as well as support some 9 percent of Bangladeshi garment factories
priority suppliers with longer-term volume had closed permanently because of the pandemic,
commitments and work more closely with them to and nearly a third of the remainder doubted
align on strategy. whether they would be able to resume normal
operations.187 Still, despite many factories shutting
“The buying community is taking permanently, just 17 percent of fashion companies
the supply chain for granted and said they will co-invest in suppliers to secure
future capacity.188
creating long-term collateral Many brands initially reacted slowly to the
damage. It’s very reckless impact on suppliers and workers of cancellations
behaviour.” and payment delays, with many claiming contracts
were invalidated by force majeure.189 The industry
Later in the year, cancellations, delayed or response became more nuanced as the year
reduced payments and contract renegotiations put progressed.
a spotlight on the continuing power imbalance in However, as more factories closed and public
the value chain. Sanjeev Bahl, founder of Vietnam- pressure mounted (supported by campaigning
based denim manufacturer Saitex, characterised organisation blacklists) more brands during the
the period as a “bloodbath.” 182 “The buying northern hemisphere summer said they would
community is taking the supply chain for granted indeed honour their contracts. As time progressed
and creating long-term collateral damage,” he said. fashion sourcing executives put more focus on
“It’s very reckless behaviour.” coming out of the crisis together and on strengthen-
In a McKinsey survey from April 2020, ing the resilience of their supply chain.
around three quarters of sourcing executives
reported cancelling orders during the first wave of
the pandemic, while just one in five paid for more
By March, western fashion brands
than 75 percent of orders as agreed, and 41 percent had reportedly cancelled $2.8
renegotiated supplier contract terms. Not surpris- billion of orders from Bangladeshi
ingly, nearly half of sourcing executives expected
many of their suppliers to face financial distress
suppliers, impacting the livelihoods
this year.183 of 1.2 million workers.
Examples of supply chain pressure have
proliferated around the world. Italy’s artisanal “We have to [help build better] social
luxury suppliers saw orders drop by around protection systems… in countries where there’s
40 percent early in 2020, with many avoiding a lot of production,” said Helena Helmersson,190
furloughs only by switching to production of chief executive of the H&M Group, referring
personal protective equipment.184 In Honduras and to the need for “more collective, industry-wide
El Salvador in Central America, apparel exports to agreements between employers, workers, unions
the US tumbled by over 90 percent year-on-year and governments, as there are in some parts of the
in April, and in Mexico they fell by more than 65 world. [Though] you might argue that it takes a
percent.185 By March, western fashion brands had longer time, what you’re building is a system change
reportedly cancelled $2.8 billion of orders from that will [last].”
73
FASHION SYSTEM
Though the power imbalance in the fashion As brands reinvent their supply chain
supply chain is unlikely to be resolved any time relationships, they are also likely to take the
soon, the voice of suppliers is getting louder, opportunity to make positive moves on sustainabil-
reaching consumers globally. Many suppliers ity and human rights. Under the Paris Agreement
are demanding a relationship based on mutual on climate change, countries around the world are
respect, fairer treatment, a reasonable share of committed to trying to limit the planet’s warming
value and better adherence to contracts. Suppliers pathway to 1.5°C. Analysis by the Global Fashion
in all industry segments are speaking up, from Agenda and McKinsey shows that fashion can
mass-market suppliers in Bangladesh to Indian only play its role with a reduction in excess stock
artisans working for the international luxury by infusing flexibility in the supply chain in close
houses.191 192 Some are threatening embargoes collaboration with workers. They are also increas-
when brands do not pay their bills, applying rating ingly partnering with suppliers across tiers, as the
systems and leveraging tools such as HSBC’s Serai production and raw material stages are often the
to conduct financial health checks on brands.193 biggest emissions-savings levers.195
Looking forward, we expect to see more suppliers
— especially the stronger ones — put their buyers’
Brands need to cater to a less
financials, payment histories and purchasing
The State of Fashion 2021
74
08. DEEPER PARTNERSHIPS
execution, in which suppliers have more transpar- volume commitments and strategic alignment
ency on brands’ strategies, sales data and forecasts, with suppliers. Empowered suppliers will likely
and in which binding commitments are made to help brands boost margins and improve consumer
secure open-to-buy capacity. perceptions of the industry through increased
In addition, strategic partnerships or efficiency and improved sustainability. Rather
co-investments can help suppliers invest in new than focusing on order management, traditional
machinery, semi-automation, technology and R&D. negotiations and compliance, the sourcing function
These will help companies increase productivity will play a key role in sustaining relationships
and optimise inventory management in a more and communicating with preferred partners. For
volatile market, as well as reduce their environ- digitised, agile product development, brands will
mental impact. We also see more players moving also need to forge closer relationships between their
from broad-based sustainability visions to concrete design and merchandising functions and suppliers.
targets and timelines to operationalise their At the margins, we will see investment in the
strategies.197 upstream value chain. This will drive sustainability
In summary, we expect fashion brands and support implementation of new technologies
to reduce transactional or non-committal rela- to boost productivity and enable on-demand
tionships in favour of medium- to longer-term manufacturing.
Exhibit 10:
Note: Survey respondents who answered “unsure” are not represented here
SOURCE: MCKINSEY “TIME FOR CHANGE” REPORT, APRIL 2020, FASHION SOURCING SURVEY, N=348, SOURCING STAKEHOLDERS AND FASHION SOURCING EXECUTIVES
75
EXECUTIVE INTERVIEW
76
08. DEEPER PARTNERSHIPS
Gap, Nike and Uniqlo. While the to suggestions of improving that a lot of brands are looking
relationship between buyers and payment terms or changing for. Overall, everyone seems to be
suppliers remains delicate, there contract terms? pretty risk-averse right now. Price
are also openings to drive positive These conversations are tough is still at the top of the agenda.
change next year. to have and I don’t think most It supersedes everything else.
There’s been a huge amount of suppliers are in that mentality yet. On top of the big changes
attention on the fact that a lot They’re just kind of conditioned you’re seeing in the way the
of buyers cancelled or delayed to think that this is how it is and industry operates overall,
orders when the pandemic we can work with it, work around what changes have you had to
first hit. Were you surprised it, whatever. Right now, the make internally? How do you
at how the industry reacted, priority for a company like Shahi make sure your operations
and do you see a need to is to secure orders to the extent are Covid-safe going forward?
rewrite the relationship where taking orders even at really
The idea of social distancing in
between suppliers and buyers low margins was better than not
the factory is a bit foreign, but it
going forward? having orders [at all]. I guess
was a lot of common, basic stuff:
going forward maybe our confi-
I can’t really wrap my head temperature checks, everyone’s
dence will build up, as we know
around how some companies wearing masks. Most workers
that we’re a reliable supplier and
think that it’s okay to not honour are young [and among] the
we should have these better kinds
these commitments and make lowest-risk category when it
of arrangements.
these payments, because the comes to Covid in some sense.
effects of that are real. People
will lose their jobs, people will “Overall, everyone seems to be pretty risk-
starve. There’s going to be a lot of
real suffering, not just company averse right now. Price is still at the top of the
stocks going down. People use the agenda. It supersedes everything else.”
word “partnership,” but it’s still
[fundamentally] a buyer-supplier
relationship, and the payment More broadly speaking, But for the sampling tailors, who
terms are what they are. [On the what changes are you seeing in tend to be older... we created
other hand,] if there can actually the supply chain as a result of special provisions. [For instance,
be clarity and commitment to say, the crisis? we give] them a separate space
“We’ll give you this many orders, [Our business heads] told me that in the factory [and] limit their
we’ll forecast it this far ahead, buying patterns are returning to interaction, just because of them
and these are the things that will normal, but the turbulent times potentially being at risk. It was an
determine if we continue giving are still causing issues. [There’s] emphasis on protecting workers’
you orders or growing them,” and 20 to 30 percent lower buying health while still being able to
[buyers] stick to that, and it’s not by most brands. Buyers want deliver on production.
just [based on] price or the kind strategic vendors so they’re You are also a co-founder
of factors that they’ve relied on consolidating their vendor base. and CEO of non-profit
in the past, but it’s more holistic, Both on the buyer and supplier Good Business Lab, which
[then] I feel like that is a good side a lot of companies are getting develops and researches the
step in the right direction. That wiped out, so both sides are impact of worker wellbeing
seems realistic also. shrinking a little bit. Demand has programmes. There’s been
Do you see things evolving in dropped, so the tail-end suppliers a lot of concern throughout
that direction at all, though? have been removed from a lot of the pandemic over an erosion
Given the pressure from buyers’ vendor lists. If you have of workers’ rights. In India,
consumers for brands to show vertical integration, the ability some states have rolled back
they are behaving responsibly to make your own fabric, that’s labour laws. How are you
through the crisis, have you highly preferred. I think it also approaching this issue as an
found buyers more receptive supports the speed and agility employer at Shahi?
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FASHION SYSTEM
At Good Business Lab we have a industrial relations. As unfortu- interested strategic suppliers to
slogan that’s “worker wellbeing nate as the situation was, it did set up units in the US. It’s looking
is good business.” We’ve always strengthen us in a lot of ways. at these proposals and investing
believed that, but now I think We used it as an opportunity in them. That’s an interesting
Covid has forced [other] people to grow and learn and shift our approach where I think there’s a
to believe it. If, for example, you approach. Last year I was invited lot more sense of partnership.
don’t take steps to ensure your to Geneva to share the case study
To what extent do you think
factory is a safe working place at the UN Forum on Business and
that being at the forefront
and there’s a spike in cases, you Human Rights.
of these kind of innovations
could risk having your factory
around sustainability and
shut down or people quitting. The “That was probably efficiency are what it’s going
consequences of not investing in
your workers are much higher our biggest crisis… to take to survive, and
also maybe shift the power
now than before, but at the same
time I think a lot of sustainabil-
It taught us a lot balance between buyers
and suppliers?
ity programmes are harder to about the risk of
do. We’re a big implementer of To be honest, Shahi has reached
in-person training, so now we’re this decentralised a size now where we’re actually
forced to rethink how to do that approach.” bigger than some of our
customers. Despite that, the
because not all our factories have
spaces where you could bring a power dynamic is still skewed
There’s clearly a lot of towards brands and retailers
cohort of people together to run a
change and disruption in the because without them we don’t
session like that.
The State of Fashion 2021
78
IN-DEPTH
Key Insights
• Supply-chain shocks are happening more frequently — and are taking a
serious financial toll.
• Because of its geographic footprint, the global apparel industry is particularly
exposed to risks such as natural disasters, heat stress and pandemics.
• Anywhere from one-third to one-half of global apparel exports could shift to
different countries in the next five years as companies alter their sourcing
strategies in an attempt to increase supply chain resilience.
Much has been written about how to make to invest in supply-chain stability and prepare
supply chains more resilient.198 But many companies, themselves to better withstand future disruptions.
wary of eroding efficiency, have spent recent years
putting off the preventive measures that could Disruptions Are Growing More Frequent
minimise the impact of future disruptions. and Severe
Today, the pandemic has once again driven
home the urgency of managing operational and It’s not just a figment of our collective
supply-chain risk. While every goods-producing anxiety: the world really has become riskier.
sector is confronting this challenge, the apparel Changes in the environment and in the global
industry stands out as one of the most heavily economy are increasing the frequency and
exposed. Factories are not only coping with magnitude of supply-chain shocks. Dozens of
workplace health and safety issues. They also weather disasters each year cause damages
face financial distress from orders drying up as exceeding a billion dollars each — and the economic
falling consumer demand hits fashion brands and toll caused by the most extreme events has been
retailers worldwide. escalating.199 A world of shifting geopolitics
The current crisis underscores the fact is producing more trade disputes, tariffs and
that the unexpected now has to be considered uncertainty. Interconnected supply chains and
probable. To cope with eventualities, companies global flows of data, finance and people offer more
need to embed at least a baseline level of losses “surface area” for risk to penetrate. Ripple effects
from disruption into their financial planning. can travel rapidly across these network structures
This information can help global apparel brands — and across national borders.
and retailers make better decisions about how McKinsey surveyed dozens of supply chain
79
FASHION SYSTEM
experts in mid-2020 to gauge just how frequently drops in consumer demand. Furthermore, a large
things go wrong. Their responses were surprising: share of apparel exports come from Bangladesh
Manufacturers can expect disruptions lasting one and Vietnam, which are subject to heat stress and
to two months to occur every 3.7 years on average, flooding. The industry as a whole is also exposed to
and those dragging on for two months or longer workplace risks — a painful reality brought home
happen roughly every five years. Lean global supply by the 2013 Rana Plaza collapse in Bangladesh,
chains deliver real margin improvements, but which killed more than 1,100 garment factory
frequent disruptions have to be fully accounted workers and injured thousands more. This tragic
for as a real cost of doing business with this kind of disaster spurred the industry toward more active
structure. supply chain management and transparency about
Companies are attuned to some types of working conditions. But more can be done.
risk simply because they encounter them more
often. Data breaches, theft and industrial accidents Over the Course of a Decade, Companies
happen. Trade disputes dominate the headlines. Can Expect Disruptions to Erase Half a Year’s
Most multinationals have systems and functions in Worth of Profits at a Minimum
place to try to prevent these types of incidents or to
respond to them quickly. Supply-chain shocks can have significant
But some types of shocks are not on financial consequences. We built representative
the typical company’s radar. They may be rare income statements and balance sheets for hypo-
occurrences, but they can inflict much bigger losses. thetical companies in 13 different industries, using
The State of Fashion 2021
These include extreme weather, earthquakes, actual data from the 25 largest public companies in
financial crises, major terrorist attacks and, yes, each. We then put them through a stress-test to see
pandemics. If 2020 has taught us anything, it’s the what kind of financial losses a 100-day shutdown
folly of assuming that extreme scenarios will never would produce.
come to pass. Our scenarios show that, over the course of a
decade, companies in most industries can expect a
single production shock lasting 100 days to wipe out
Lean global supply chains
between 30 and 50 percent of one year’s EBITDA.200
deliver real margin improvements, For the average textiles and apparel company,
but frequent disruptions have to that number is about 40 percent. An event that
also disrupts distribution channels would push
be fully accounted for as a real
the losses sharply higher in some industries. The
cost of doing business with this magnitude of financial loss depends on whether a
kind of structure. company holds enough inventory to get it through
the period of interrupted production, as well as
We analysed a wide range of industries to whether it has the ability to ramp costs up and
assess their exposure to specific types of shocks. down. Most inventory of finished goods in the
Out of the 23 value chains analysed, apparel apparel industry is held by retailers, which means
emerged with the second-highest level of exposure that production shutdowns could significantly
(topped only by communication equipment; see impact manufacturers’ profits.
Exhibit 11). The labour-intensive nature of the These are the hidden and recurring costs
apparel value chain, as well as its geographic of doing business with complex supply chains in
footprint, makes it particularly exposed. In the a riskier world — and they are only the baseline.
current pandemic (as well as any that might occur Estimating these costs allows companies to better
in the future), apparel manufacturing is susceptible understand how much they can expect to invest in
to shutdowns because of this and unpredictable resilience and still see a long-term pay-off.
80
IN-DEPTH
Will Value Chains Shift Across Countries? export has moved to places such as Bangladesh and
Vietnam. Turkey has become a major producer of
Today, much of the discussion about clothing that is exported to Europe. Newer hubs
resilience involves questioning where things such as Cambodia, Ethiopia and Honduras are
are made, considering lower-risk locations and also beginning to emerge. But companies that
reducing the geographic breadth of supply chains to begin sourcing from these and other developing
make them easier to manage. But the interconnect- economies will need to understand and safeguard
ed nature of value chains limits the economic case against a wide range of risk, from natural disasters
for making large-scale changes in their physical to future pandemics.
location. We estimated what share of global exports
could move to different countries based on the Will a New-Found Appreciation For Risk Prod
business case and how much might move due to Companies to Act?
policy interventions. To consider whether economic
factors would support a geography shift, we looked The need to make supply chains more
at whether movement is already underway, how transparent and resilient has been widely discussed
knowledge- and capital-intensive the value chain for years. But most strategies for doing so require
is, how tied it is to geology and natural resources, making long-term investments or accepting a
and the degree to which it is already regionalised. slightly higher cost of goods. For that reason, only
We also considered non-economic factors, such as a small group of leading companies have taken
importance to natural security, competitiveness decisive action.
and self-sufficiency. However, this time really might be different.
Companies are considering a range of resilience
As China’s exports have plateaued, measures — and most of them do not involve finding
new suppliers in different locations. They can opt
more apparel manufacturing for
to hold more inventory, build redundancies into
export has moved to places such transportation and logistics, reconfigure factories
as Bangladesh and Vietnam. and warehouses to withstand natural disasters
and develop the ability to flex production across
Apparel stands out as one of the industries multiple sites. For example, Esquel, a supplier to
with the largest share of total exports that could brands such as Hugo Boss and Nike, found itself
potentially move to different countries (36 to 57 unable to export fabric from Mainland China to
percent in apparel, as well as 23 to 45 percent in its factories in Vietnam during the initial Covid-19
textiles). Supply chains are already evolving in outbreak. But the company activated its back-up
these highly traded, labour-intensive industries. plan and pivoted to shipping through Hong Kong to
China has long been the world’s dominant maker, keep production going.201
and it still accounts for some 29 percent of apparel Companies not only have a renewed sense
sold globally. But the country’s wages are rising, of urgency about addressing risk; they also have a
and Chinese producers can now focus on meeting new way forward. The pandemic has occurred at
domestic demand. In 2005, China exported 71 a moment when manufacturing technologies are
percent of the finished apparel goods it produced. leapfrogging forward. Particularly when compared
By 2018, that share was just 29 percent. While to other manufacturing industries, apparel
some apparel production may nearshore to US and production has a great deal of room to digitise and
EU markets, most would likely shift to Southeast reap the benefits.
Asian countries due to their comparative advantage In our experience, creating supply chain
in labour and overhead costs. As China’s exports transparency through digitisation can boost both
have plateaued, more apparel manufacturing for productivity and resilience. It is critical to gain
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FASHION SYSTEM
visibility into who supplies your suppliers and cycle, taking correlations into account. Scenarios
spot any vulnerabilities hidden deep in the lower can also incorporate a range of risk-mitigation
tiers of the network. When the Covid-19 pandemic strategies to test which would be most effective.
broke out, Nike’s digitised supply chain enabled The results can then inform strategic planning and
the company to quickly shift products headed for capital allocation decisions.
brick-and-mortar stores to e-commerce fulfilment Preparing for future hypotheticals has a
centres in China. As a result, it minimised the hit present-day cost. But if those investments focus
to revenue.202 on digitally connecting the entire value chain from
Some companies have made it a point to end to end, they can pay off over time — not only
model prioritised risks, but they have often done so minimising future losses but boosting productivity
by looking at these shocks as discrete rather than and strengthening entire industry ecosystems today.
cascading events. Now, analytics tools enable a more
This article draws on a larger body of research on trade and
sophisticated approach that quantifies broader and global flows from the McKinsey Global Institute, the business and
more integrated scenarios. This makes it possible economics research arm of McKinsey & Company. The latest report
in this series is Risk, Resilience and Rebalancing in Global Value
to look not only at extreme one-off events but also Chains. The authors would like to thank Kyle Hutzler and Dhiraj
at their knock-on effects and the ongoing business Kumar for their contribution to this article.
Exhibit 11:
The State of Fashion 2021
TEXTILES APPAREL
MORE EXPOSURE
23 23
22 22 22
21
17 17
13 13
9
LESS EXPOSURE
4
3
2
Overall shock Pandemic1 Large-scale Geophysical Heat stress 4 Flooding5 Trade dispute 6
exposure cyberattack 2 event3
1 Based on geographic footprint in areas with high incidence of epidemics and high people inflows. Also considers labour intensity and demand impact. Sources: INFORM; UN Comtrade; UN World
Tourism Organization; US BEA; World Input-Output Database (WIOD).
2 Based on knowledge intensity, capital intensity, degree of digitisation, and presence in geographies with high cross-border data flows. Sources: MGI Digitization Index; MGI LaborCube;
Telegeography; US BLS.
3 Based on capital intensity and footprint in geographies prone to natural disasters. Sources: INFORM; UN Comtrade; WIOD.
4 Based on footprint in geographies prone to heat and humidity, labour intensity, and relative share of outdoor work. Sources: MGI Workability Index; O*Net; UN Comtrade; US BLS.
5 Based on footprint in geographies vulnerable to flooding. Sources: UN Comtrade; World Resources Institute.
6 Based on trade intensity (exports as a share of gross output) and product complexity, a proxy for substitutability and national security relevance. Sources: Observatory of Economic Complexity;
UN Comtrade.
NOTE: OVERALL EXPOSURE AVERAGES THE SIX ASSESSED SHOCKS, UNWEIGHTED BY RELATIVE SEVERITY. CHART CONSIDERS EXPOSURE BUT NOT MITIGATION ACTIONS.
DEMAND EFFECTS INCLUDED ONLY FOR PANDEMICS.
SOURCE: “RISK, RESILIENCE AND REBALANCING IN GLOBAL VALUE CHAINS”, MCKINSEY GLOBAL INSTITUTE, AUGUST 2020
82
09. RETAIL ROI
For those who dismissed the “retail these fixed costs quickly become disproportionate
apocalypse” as an exaggeration, 2020 will be to revenues, leaving retailers with limited options
remembered as the year that gave them food for to reduce the cost base in the short term.
thought. In the US alone, some 20,000 to 25,000 Many retailers have embarked on strategic
stores are likely to shut this year, which is more reviews of their store networks and launched
than double the number in 2019.203 Even retailers initiatives to improve the productivity of remaining
that actively addressed the retail disruptions of stores, leveraging digitisation, automation and
recent years have been forced to reduce their store more flexible working practices. With respect to
network significantly. Macy’s, Zara, J.C. Penney, the latter, they are both cutting staff costs to align
John Lewis, Onuma and Isetan Mitsukoshi are with lower turnover and training staff across
among those to have announced closures around diverse skill sets. These kinds of decisions are often
the world. One exception to the rule is China, accompanied by budget and capital reallocations
where, according to McKinsey Fashion Scenarios across channels to better reflect revenue potential.
(based on information available September 2020), Digital is often the beneficiary.
the offline market is expected to grow by up to 5
percent in 2021 versus 2019, in the Earlier Recovery Rent alone can often account for
scenario. However, Europe is likely to see an 8 to 13
percent decline in offline sales and the US will
25 to 40 percent of operational
likely see a drop of 22 to 27 percent compared expenses in the physical space.
to 2019 levels.204
The pandemic is, of course, the predominant According to the BoF-McKinsey State
recent source of stress for physical retail, but there of Fashion 2021 Survey, 37 percent of fashion
are also significant long-term challenges, including executives expect to close more than 10 percent
sometimes punitive operating costs. Rent alone can of their stores by the end of 2021, compared
often account for 25 to 40 percent of operational with pre-Covid plans. Zara’s owner Inditex has
expenses in the physical space.205 In times of crisis, announced it will close up to 1,200 stores over two
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FASHION SYSTEM
years and invest €2.7 billion (approximately $3.2 turnover-based rents for their stores, while some
billion) in digital transformation and online-offline landlords are experimenting with rent models
integration.206 Nike has promised to accelerate its indexed to store performance, alternatives to
digital strategy and invest in high-potential areas, upward-only rent reviews and lease renewals with
which it said would lead to job cuts in stores and shorter terms.211 212
new jobs in digital.207 Similarly, some executives
in Asia-Pacific markets are focusing on increasing “[Currently luxury] e-commerce is
online sales capacity rather than investing more in used as a complement to flagship
physical retail (see Exhibit 12).
The role of in-store employees is evolving, stores, not a substitute. In the
as companies retrain or redeploy people to add future [however], this trend will be
a human touch to digital experiences — and vice reversed and physical stores will
versa. For years, futurists have predicted these
so-called “bionic” retail services across a variety be a complementary experience to
of sectors. Now the conditions are right for the idea e-commerce.”
to become a reality. The ultimate goal is to deliver
a stimulating and rewarding shopping experience To gauge the ROI of their retail networks,
The State of Fashion 2021
that caters to individual needs across channels. some brands are using new key performance
We expect these kinds of hybrid roles to increase indicators that measure the stores’ contribution to
exponentially, with in-store employees requiring omnichannel profitability. Through this lens, the
high levels of skill to help deliver an omnichannel ROI of a flagship store is often considerably higher
offering. Activewear brand Fabletics is among the than it would appear to be. Alongside this trend,
companies that are responding, experimenting a number of companies have invested in hybrid
with “omni-associates” who both guide clients flagship spaces, tapping demand for digitisation,
in-store and interact through online channels.208 209 localisation and personalisation. Burberry, Nike
“The lesson… for all brands is that we and digitally native Arias have recently invested
don’t build our lives around retail. Retail builds in hybrid flagship spaces.213 Nike’s latest House
itself around our lives,” wrote retail industry of Innovation store opened in Paris in July. The
futurist Doug Stephens in a column on The format deploys technologies such as apps and body
Business of Fashion.210 scans to create a richer shopping experience and
leverages data analytics to predict footfall and
“The lesson for all brands is that we sales patterns.214 Burberry’s boutique in Shenzhen,
don’t build our lives around retail. China, offers a customised WeChat programme
Retail builds itself around our lives.” in partnership with Tencent, which delivers
to customers exclusive content, rewards and
With store closures expected to accelerate personalised experiences.215
in 2021, there is a growing sense that landlords have “[Currently, luxury] e-commerce is used
more to lose than tenants, leading to the potential as a complement to flagship stores, not a substitute.
for a relative power shift in the relationship. In the future [however], this trend will be reversed
As a result, while some real estate firms are and physical stores will be a complementary
taking retailers to court, others are considering a experience to e-commerce,” said Li Rixue,
possible transformation of lease models. New Look chairman and chief executive of Chinese luxury
and All Saints are among tenants to have requested e-commerce company Secoo.216
84
09. RETAIL ROI
New store formats will continue to emerge In addition to the repurposing of entire
in 2021, offering a range of omnichannel services, stores, brands will trial new uses for parts of their
such as BOPIS (buy online pick up in store) adapted retail floorspace, moving beyond co-retailing to
for in-store returns, in-store ordering and custom- alternative models such as space sharing.
isation. Among recent examples of innovative French sports retailer Decathlon, for example,
initiatives, French footwear brand Veja has opened has opened boutiques in stores of grocery chain
a “services” concept store in Bordeaux that features Franprix.224 The move reflects the growth of retail-
a shoe-repair corner, and Brazilian luxury mall as-a-service models, in which businesses lease out
group JHSF Participações allows customers to space to generate revenue and boost footfall.
remotely chat and browse with in-store personal In the US, Neighborhood Goods and Showfield are
shoppers via WhatsApp and receive their purchases prime examples.225
at home.217 “We are increasingly reinforcing the
idea that the shopping centre can also go to the Some brands and retailers are
customer, wherever they are,” said Thiago Alonso
capitalising on demand for
de Oliveira, JHSF Participações’ chief executive.218
Another way to improve store ROI is to independent workspaces, creating
convert strategically located but underperforming blurred boundaries between work
(or closed) stores into digital fulfilment centres,
and leisure by opening up retail
following examples from other retail segments.
In April, Bed, Bath and Beyond in the US said it floorspace to remote working.
was converting a quarter of its locations into dark
stores.219 At the height of the pandemic, players Some brands and retailers are capitalising
experimented with repurposing closed stores as on demand for independent workspaces, creating
warehouses. US department store Nordstrom, for blurred boundaries between work and leisure by
instance, rapidly increased the share of online opening up retail floorspace to remote working.
orders handled by its full-price stores and its Selfridges and Westfield London are among those
off-price Nordstrom Rack stores, which were both to have announced plans.226 227
closed to the public at the time, in order to reduce As companies aim to boost store ROI in
inventory levels.220 2021, many will focus their store footprint on
For some players, these temporary high-growth markets. Brands including Montblanc,
strategies could become permanent as online order Hublot and MSGM are targeting Asia for new
volumes continue to grow.221 At the same time, as store openings, reflecting the region’s economic
retail localisation trends evolve, we are likely to see growth potential and the fact that China is ahead
increasing numbers of small stores, enhanced with of the global recovery curve (see Mapping the
hand-picked inventories, and neighbourhood stores Retail Portfolio of the Future on page 89).228 Still, a
designed to forge local connections, as seen with precondition of success in the region is likely to be
Macy’s and Harrods’ experiments with smaller, the ability to offer a mature digital–physical hybrid,
out-of-town formats.222 223 The relative importance reflecting Chinese consumers’ high levels of digital
of these new formats compared to large downtown engagement. Uniqlo is among the brands with major
stores will be a factor of how long the health crisis plans, having reaffirmed in March 2020 its pre-pan-
continues to restrict movement and of how long demic announcement that it would open 80 to 100
consumer preferences for local retail endures new stores in the market next year.229
after that.
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FASHION SYSTEM
In 2021, fashion leaders must finally resolve While spearheading the many changes
long-standing structural issues, closing unproduc- to the store footprint and function, fashion
tive stores and renegotiating rent terms across their executives will also need to develop new models to
portfolios. The challenging real estate landscape measure store ROI. Fundamental to these will be
will create opportunities to engage landlords in their alignment with emerging ideas about store
conversations about ways to improve productivity, economics and use of data to make every square
both overall and at individual sites. At the same metre generate as much value for the omnichannel
time, executives should evaluate their presence model as possible.
in fast-growing regions such as China to optimise
retail strategies to capture market growth.
Exhibit 12:
Increase online sales capacity Fewer stores/smaller footprint Not sure More stores/larger footprint No impact
LUXURY 78 11 11
SPORTING GOODS
/ATHLEISURE 73 9 18
FASHION &
APPAREL 37 30 14 14 5
86
EXECUTIVE INTERVIEW
Helena Helmersson
Chief Executive, H&M Group
H&M Group sank to a loss in the second When Helena Helmersson stepped
into the top job at H&M Group in
quarter of 2020 as the pandemic caused sales January 2020, fast fashion was
already under pressure, facing
to plummet 50 percent year-on-year, but it disruption from ultra-fast digital
has since recovered faster than expected. The native competitors and growing
scrutiny for chasing unbridled
fast fashion giant’s chief is focusing on more growth amid a climate crisis.
sustainable business models to drive growth The pandemic forced leaders
like Helmersson to find ways to
in the coming years. adjust to the many disruptions
and constraints that came with
the crisis. Some retailers were
— by Imran Amed and Tamison O’Connor forced into bankruptcy; others
cancelled next season’s orders,
leaving their suppliers in the lurch,
even as pressure to answer for the
social and environmental impact
of business decisions continued
to mount.
H&M was one of a few major
retailers to pay garment suppliers
for orders already produced or
in progress. While Helmersson
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FASHION SYSTEM
managed to return the group to rience, and who we are as a brand we make the transition in a prof-
profitability faster than expected, should be really, really clear. itable and sustainable way so that
H&M’s future success will hinge in the long-term [we] can continue
What’s your thinking now on
on whether the company can growing.
store footprint and how that
finally crack omnichannel retail
will have to adapt to this new So as you consider the
and scale up sustainable business
environment? What will an outlook for 2021, are you
models while still generating
optimised retail footprint for feeling confident that the
growth and profit.
a brand like H&M look like business will return to growth
There are so many things that going forward? vis-à-vis where we were before
have changed because of the We will have different formats the crisis?
coronavirus crisis. As you when it comes to stores, It’s impossible to predict the
think about the future of the depending on whether it’s a big growth. We’re going to continue
H&M Group in the context of city or a small city, and [we] will growing, of course, but how fast
the future of fashion and retail, have to look at what kind of role a will the customer traffic come
which of the current changes particular store contributes. For back? I guess it’s as hard for me
do you think will become example, should it be a source to predict as for you. That’s why
permanent changes? of inspiration? Should it be an we are working on changing our
The most clear [change] is that experience? Should it be part of processes to become faster, to
customers that had not yet started the supply chain, or value chain, or become more flexible… that’s
to do their shopping online have should it be for families? Should it what will make us come out of this
now started to do so. We didn’t be for tourists? It’s about looking even stronger. And from what we
know [if] people [would] go back at the customers and their needs, can see, especially in Europe, the
The State of Fashion 2021
to their old behaviours, but what is like how should we work with local demand for sustainable products
now really clear when we re-open relevance, for example. I’m truly and value-for-money products
the stores [is that people] really excited about pursuing that work. will be there to a greater extent.
want to meet us in both channels, In some countries it will have to
Yes, but the most sceptical
physical stores and online. They mean that we do more closures. In
customers out there will say
want to do both. In the future some countries it will be that we
fast fashion and sustainability
probably there’s even more can keep on expanding because we
are inherently contradictory
channels than our two main ones. don’t have the hubs that we want.
terms. You’re so passionate
E-commerce efforts at H&M Before the pandemic you had about sustainability, but you
haven’t always been successful. around 5,000 stores in over work in a company that creates
What have you learned about 70 countries but now you’re millions and millions
how to make that model work projecting net store closures of of garments every year.
in the future? around 250 stores. Historically, How do you reconcile that?
The key is speed and flexibility. So, fashion brands tended to just I am so sad that we have let
for example, to cope with a crisis open lots of stores because it the word fast fashion become
like this we had to move a lot of was the one sure-fire way of something negative. The fact that
garments between the channels, growing revenue. When you’re the younger generation want to
which sounds pretty basic, but it shrinking the footprint, what dress themselves in a way that
was a lot of work doing that with will be the impact on your shows their personality and
such big volumes. Also, it is about top line? express themselves in different
speed and flexibility when it We are in a transition period now. ways, that used to be something
comes to customer-facing [initia- We come from a place where we really beautiful. Now, because
tives]. For example, if [customers] used to only have our physical of the system behind it, it has
want to meet us online or in stores, and then we introduced become something that people
stores… we need to make sure that online gradually. So, [as we] tran- talk about in a negative way. It’s
there is a customer experience sition towards omni-channel, the system behind it that is broken,
that is integrated, in the sense exactly what that means [for and that’s where I see that we
that whether you choose to go to a the] top line is very, very hard to have such a big responsibility to
store or online, it’s the same expe- predict. We have to make sure that change it. The pace we’ve had the
88
09. RETAIL ROI
last decade cannot be the pace can bring them out of poverty… a longer time, but what you’re
that we have in the coming decade. It’s about building resilient building is a systemic change
We have to speed up changing the systems in these markets. If I look that will sustain. There are a lot
system [in terms of sustainabil- at it in Sweden, you have a whole of things that we do here and now,
ity] so that people can continue social protection network where but in parallel with that it’s really
to express themselves through if you lose your job you still have important to collaborate with
fashion and design. a system there to rely on, at least others to try to move the needle
for a while until you find another when it comes to the systems in
What are the main areas
job. In countries where there’s those countries.
you are focusing on to change
a lot of production, it’s not the
the system? You mentioned some of the
same kind of system, so we have
One, produce what we can sell. new models you’ve been
to work with governments and
That’s where you also need experimenting with such as
the ILO [International Labour
tech as an enabler to get to that rental and resale. What are
Organization]. We have to work
point. Two, it’s about sustainable the early results from these
with unions so that workers
products, and of course, you want and how do you take little
always have a voice, and so that
to make that circular. We really experiments and actually make
they can go to their employer to
have to speed this up so that we get them big enough so that they
negotiate and to really have that
fibres back in the system again and have real impact?
kind of social dialogue that is so
again and again. Three, I think it’s important and that they have It’s challenging. That’s one of the
about new revenue streams that someone to turn to. We have to parts that stresses me a bit with
are circular in themselves, or at [help] build social protection [our] circular vision and how to
least contributing to becoming systems in those countries. speed it up, because it’s quite easy
climate-neutral, and then cli-
mate-positive, going towards the
vision of becoming fully circular. “It’s the system behind it that is broken,
You can look at rentals, remake
and resell. We have to find quickly
and that’s where I see that we have such a big
what can we scale up faster than responsibility to change it. The pace we’ve
others. And of course, you also
need to make sure that it’s prof- had the last decade cannot be the pace that
itable, because otherwise it’s not we have in the coming decade.”
sustainable. So how do you make
sure you can scale it up and that
after a while it can become prof- H&M has made commitments to do smaller tests, but scaling
itable? Here it’s more on the big around living wages in the it is what will actually have an
players to find new start-ups and supply chain for a long time, impact. Our take has been to do a
new technologies, and be part of but this is still not being lot of things in parallel. We need
supporting that, because we have achieved. What is getting in to try rentals, try remake, and try
resources to do so. the way? resale. [But], we don’t have much
The people who have been hit First of all, what we have done time in [this] exploration phase.
hardest by this crisis are garment has definitely made a difference. We need to have courage, we need
workers in low-cost production We see a positive tendency, but I to have more knowledge, and we
countries like Bangladesh. What couldn’t say that salaries are high simply need to find those ways
happens to these workers? You enough. In a dream world, it would going forward. If you look at the
want to protect their jobs, but be fantastic if you could see more number of initiatives we are doing,
some of them are already out of collective agreements, indus- it’s amazing, but to scale those up,
work and they have nothing. try-wide agreements between that’s the nut we have to crack.
employers, between workers,
We have a joint responsibility This interview has been edited and condensed.
unions, governments, as there are
to look at this holistically and
in some parts of the world. It’s all
understand that economic growth
about making industrial relations
helps people, in the sense that it
work in a better way. It takes
89
The State of Fashion 2021
90
IN-DEPTH
by Casey Hall
Key Insights
• Retailers will review each location and consider radical changes based on the
store’s new purpose in the post-pandemic era.
• The year ahead will be one of strong consolidation of retail spaces, particularly
those in overstored markets like the US.
• With the repatriation of Chinese luxury spend, there are opportunities to expand
offline retail in key mainland cities.
There is no doubt that the year ahead will be “We almost do a brand-new market entry
one that is enormously difficult to navigate and plan strategy,” said Charlotte Elstob, Vice President of
for. But for fashion brands that are highly exposed International Retail at JLL, who asks brands to
to physical retail, Covid-19 provides the impetus consider how they would position themselves and
they have long needed to chart a new course for locate stores — and at which size and format — if
Virtual Stage Fashion Show Amid the Coronavirus Pandemic. Jefta Images/Barcroft Media via Getty Images
their store network — one that experts say must be they were to re-enter each market from scratch.
a sprint, not a marathon.
With store inventories and real estate Global store footprints are no
costs weighing heavily on their cost base, fashion
longer the right size, shape or
retailers have been in a race to capture e-commerce
spend as consumers’ uptake of the channel scope for the times in which
skyrocketed during the pandemic. But no matter we live.
how sophisticated and seamlessly integrated their
digital strategies are, omnichannel won’t resolve Nothing is taken for granted in this kind of
a bigger issue that many players face in the run-up approach; no locations are sacred, and no store is
to 2021: Most global store footprints are no longer given a free pass. Indeed, every store is put under
the right size, shape or scope for the times in which the microscope using key performance indicators
we live. More to the point, the tool that companies that go far beyond conventional four-wall analysis.
have traditionally used to fix that problem — store Store profiles and locations are then scrutinised
network optimisation — now needs a major rethink in the context of the retailer’s global, regional,
too. So much so that some commercial real estate national and city footprints.
experts have begun to encourage retail clients to “Taking into account the sector of retail,
examine their global store portfolio as though it [we’re asking fundamental questions again like]
doesn’t already exist. whether you need to be close to transport hubs, or
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FASHION SYSTEM
a more organic footfall residential neighbourhood, taken private by Alibaba in 2017 which is at the
or whether you [really] need to have a site on what forefront of the Chinese tech giant’s “New Retail”
has been historically one of the busiest and most experiments, the store’s Miaojie app not only
prominent streets in that city,” she added. promises two-hour delivery for local consumers,
The answers to these questions will, of it also tracks stock on shelves and in storage in
course, differ by brand and — given the pace of real time, allowing merchants to adjust supply and
change in the industry — many of the consider- pricing swiftly.
ations that are relevant now may be different in
2021. With disruptions and uncertainty likely to be Far from diminishing the role
constant in the year ahead, how can global fashion
brands practically map out their retail portfolio for of the physical store network,
the future? online shopping can actually
Adapt Retail Spaces for Post-Pandemic Purpose
elevate the importance of some
physical stores.
Traditionally, the return on investment of
a retail store was measured in terms of how much Physical stores such as this are acting as
product was sold within the four walls of that hubs of discovery, places for entertainment and
physical space. But when a growing percentage gathering and, increasingly, as fulfilment centres.
of sales occurs online or through omnichannel Even before the pandemic, a significant number of
The State of Fashion 2021
strategies, that calculation no longer adds up. under-performing retail outlets were converted to
Instead, according to retail futurist Doug fulfilment centres. A CBRE study from 2019 found
Stephens, retailers should think of physical store that, in the US, 7.9 million square feet of retail
investments as they have traditionally considered space had been turned into 10.9 million square
media investments — as a vehicle for customer feet of new industrial space (mainly warehouses
acquisition, rather than purely as a distribution and e-commerce distribution centres) since 2016.
venue for product. Covid-19 has only accelerated this shift.
“We need to determine what the value of an Major US retail players like Walmart, Kohl’s
impression in a physical store is,” Stephens said, and Target have been working to convert their retail
much like we have determined a market value for spaces into mini distribution hubs to shorten the
views and clicks in the digital space. “Then you last mile for customers. In other markets, physical
wind up with: here are the four-wall sales, here’s retailers are swiftly reimagining and repurposing
what we can reasonably attribute to that store in their valuable real estate assets, including those in
terms of online sales and here’s the media value we markets that had less-developed e-commerce infra-
can attribute to that store, and that gives you a full structure and lower rates of internet penetration
picture of what a store is worth.” prior to the pandemic.
Far from diminishing the role of the physical According to Thiago Alonso de Oliveira,
store network, online shopping can actually elevate chief executive of JHSF Participações, the parent
the importance of some physical stores. This trend company of luxury retailer Cidade Jardim in São
has already become apparent in Asia, particularly Paulo and several other upmarket shopping malls
in China, where “New Retail” (a term coined by across Brazil, the firm’s revamped online platform
Alibaba founder Jack Ma back in 2016 to describe CJ Fashion has helped temporarily transform
the seamless merging of retail’s online, offline and their malls into de facto fulfilment centres for
logistics arms) has seen the integration of digital wealthy clients ordering by WhatsApp. “It’s more
into all manner of offline store experiences. like a marketplace [as] our data is integrated to
At Intime, a department store chain the inventory of the physical stores, so we know
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in real-time what products are available in which over-saddled with physical retail.”
sizes, and so on.” The one notable exception to the inevitable
Physical stores in this context become cull of physical retail is China, where the offline
hybrid shopping destinations, community-building market is expected to grow by up to 5 percent in
centres (for consumers) and logistics and distribu- 2021, compared to 2019 levels. Here, some brands
tion centres (for brands) — a combination of duties will actually need to expand their footprint to meet
that is unlikely to fade even after the Covid-19 surging domestic demand spurred on by
emergency subsides. One reason for this is the trust the pandemic.
that some legacy retailers have built with their Indeed, as travel retail and outlet centres
clients over generations. “For brands, it feels safer in Europe are starved of all-important Chinese
to be with us,” said Juan Carlos Escribano, chief consumers, and where travel restrictions (alongside
executive of El Palacio de Hierro, a department geo-political strife) have decimated destina-
store chain in Mexico that has been in business for tions once favoured by mainland shoppers like
over 130 years and serves as a shop-in-shop location Hong Kong, new hubs such as Sanya and Haikou
for major luxury brands. on the southern Chinese island of Hainan are
attracting investment.231 In October 2020, Chinese
Physical stores act as hubs department store operator Youa announced a 1
billion yuan ($148 million) investment to further
of discovery, places for
improve the island’s luxury offering,232 creating
entertainment and gathering and, even greater interest in the cluster of resorts
increasingly, as fulfilment centres. located there for conglomerates like LVMH, Kering
and Richemont.
While some department stores and shopping Indeed, one of the biggest retail stories of
centres will continue to serve an important role 2020, particularly for luxury, has been the repa-
in brands’ overall retail network as anchors for triation of Chinese spend as the sector’s most
concessions and other formats, the locations for important consumer group stayed home and, as
future large-scale developments could be very such, there is now an even greater imperative for
different if footfall in city centres does not return to brands to re-balance their mainland store networks
close to pre-pandemic levels. against their global footprint. Store numbers for
top luxury brands in China rose 4 percent in the
Consolidate in Most Markets Except in China first half of 2020, while those for cosmetics brands
jumped 8 percent, according to a report by property
Nowhere will the store footprint change consultancy Savills.
more than in the rebalancing of store numbers and
locations across the world, as some markets prove The one notable exception to
to be more resilient than others. In 2021, Europe
the inevitable cull of physical
is likely to see an 8 to 13 percent decline in offline
sales and the US will likely see a drop of 22 to 27 retail is China, where the offline
percent, compared to 2019 levels.230 market is expected to grow by up
This suggests that store networks in these
regions will need to be significantly reduced. Retail to 5 percent in 2021, compared
consolidation has been happening in the US and to 2019 levels.
other mature markets for years, but the crisis
amplified the sense of oversupply. As Doug Stephens One notable addition to China’s luxury
bluntly puts it: “The US market could literally scene will be Harrods’ first outpost, which is
shed 50 percent of its physical assets… they are [so] scheduled to open in Shanghai in late 2020. Rather
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than follow the ambitious roll-out strategies of with Japanese fast-fashion giant Uniqlo going all-in
international competitors like Galeries Lafayette, for physical retail in China,235 even as rivals Inditex
Harrods will open a format called The Residence, and H&M Group slash global store counts. Unlike
which is more akin to a private members’ club than many Western fashion chains, which have largely
a traditional store. Though plans for this were in the struggled to gain significant market share in China,
works prior to the pandemic, it highlights the need Uniqlo has been winning in the country in
for global brands and retailers to reconsider how large part due to its flexible approach to physical
they serve their consumers by fostering community retail formats.
in a physical space.
According to Josh Gardner, chief executive “The very wealthy consumers…
of Beijing-based Kung Fu Data, the good news have stayed in local markets
for those looking to increase their physical retail
presence in China is that there are fantastic deals to and there is significant spend
be had in the current climate. trapped there.”
“It’s now cheaper to convert offline in China
than it is to convert online,” he said, referencing A look at the current situation in the Middle
the skyrocketing costs of customer acquisition on East suggest a potentially similar pattern to China,
the major e-commerce platforms that internation- albeit on a much smaller scale. According to JLL’s
al retailers use to penetrate the Chinese market. Elstob, stores in the region are benefiting from the
“Chinese landlords will take rent share, so you can repatriation of domestic spend as luxury consumers
The State of Fashion 2021
activate your brand almost instantly through their were unable to travel to Europe for much of 2020.
networks. Everyone is just looking for business.” “The very wealthy consumers… have stayed in those
markets and there is significant spend trapped
“It’s now cheaper to convert there,” she said.
If the crisis leads to more permanent shifts
offline in China than it is to in shopping patterns, then one implication could
convert online.” be that brands start to value their local stores
in cities like Riyadh, Jeddah, Doha, Abu Dhabi
Brands should, however, approach and Kuwait City more than they did before the
expansion with caution. At the luxury end of the pandemic. Dubai, however, could follow a slightly
spectrum, retailers have been burned in the past different trajectory, according to Rania Masri,
by over-ambitious physical retail rollouts across Chief Transformation Officer of Chalhoub Group, a
China. After a slowdown in spending attributed luxury retail and distribution company headquar-
to Chinese President Xi Jinping’s crackdown on tered there. “Tourism is very important for Dubai.
corruption in the early 2010s, more than 80 percent Travel has had a big effect on us here [in contrast
of luxury brands,233 including Prada and Gucci, to the other Arabian Gulf consumer markets] that
closed some of their stores in China in 2015. The depend [more] on their local populations.”
years since have seen Chinese spend come roaring
back, but luxury brands will likely be more prudent Anticipate the Changing Nature of Cities
this time around. Nevertheless, the reshoring of
spending could see new store openings, particularly People all over the world have been forced
in key locations,234 such as Changsha, Shenyang, this year to change the way they live and work. As a
Wuxi and in China’s virus epicentre result, both the function of cities and the relation-
of Wuhan. ship that consumers have with them are in a state
The store network proposition is rather of flux.
different for the mass-market fashion segment,
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“All of a sudden — whether we are talking years will be in secondary and decentralised areas
about people in London, New York City or Shanghai of the city, according to figures from CBRE. This
— we feel untethered to that [urban] system [which would leave only 2 percent for traditional “prime”
has been prevalent since the industrial age]. So as retail areas.238 Highly anticipated new develop-
I am able to work, or educate and entertain myself ments in the pipeline, such as Swire Properties’
remotely, as opposed to feeling that I have to 120,000-square-metre Taikoo Li Qiantan in the
gravitate to any particular city centre or outer regions of Pudong district, are spread wide
high street, then things change dramatically,” across Shanghai’s fringes.
Stephens said.
Eight weeks after all shops were allowed to
reopen in England after a three-month lockdown,
Suburban retail was already
footfall in London’s prime retail neighbourhood in gaining ground over central
the West End remained 63 percent down compared locations, as affluent people
with 2019 levels, according to data from New West
End Company, which represents 600 businesses preferred shopping centres and
across Oxford Street, Bond Street, Regent Street malls in well-off residential
and Mayfair.236
Conversely, edge-of-town retail parks
peripheries of emerging market
such as South London’s Brocklebank, have seen megacities such as Moscow,
much better bounce-back, with customers finding
Istanbul, Mumbai, Lagos
the convenience of easy parking more appealing
than using public transport. Fast fashion retailer and Jakarta.
Primark said its retail-park sales were up in 2020
significantly compared with the previous year.237 “The people who live in a community [now]
Suburban retail was already gaining ground tend to live, work and play in that community,” said
over central locations, as affluent people preferred Albert Chan, Director of Development, Planning and
shopping centres and malls in well-off residential Design for Chinese real estate giant Shui On Land.
peripheries of emerging market megacities such as The same pattern is playing out in other
Moscow, Istanbul, Mumbai, Lagos and Jakarta. parts of the world, where some of the most exciting
According to Alexander Pavlov, chief new retail developments are being constructed
executive of Tsum department stores in Russia, outside of city centres, to cater to middle-class
which are managed by Mercury Group, the consumers with cars looking for shopping,
Barvikha Luxury Village has seen high rates of dining, entertainment and community services
growth in 2020. The retail complex, which features in one place. The much-anticipated Capital Mall
stores including Valentino, Celine, Chopard and development in South Africa’s Pretoria West
Ralph Lauren, is located on the fringes of Moscow region, located at the intersection of several major
close to many of the dachas (second country homes) motorways, is just one example.
where the group’s wealthy consumers have been Though this race to the suburbs may appear
spending more time since the pandemic. “Fashion to be a mere replication of the outbreak of suburban
brands should put more focus and attention on the malls in more developed markets, especially North
local market to increase their market share. Once America, the next generation of spaces could be
the borders are open, clients will keep buying the markedly different if they are specifically designed
brands that they got used to buying locally,” he said. to cater to their local communities in the post-pan-
In Shanghai, 98 percent of the 2.65 million demic era, rather than just taking advantage of
square metres of the total new physical retail space cheaper land on the city fringes.
supply expected to be developed over the next few
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“If you look at the complexion of shopping peripheral part of the retail environment to the
centres in the mature markets of the US and very core.
Europe… oftentimes they are monolithic centres In Shanghai, for example, a new, youth-fo-
[with] no real sense of authentic place.” Stephens cused mall which opened to the public at the end
said. “But [nobody needs] 200 of the same stores of 2019, TX Huaihai, has this ephemeral mentality
cookie cut across the land.” at the centre of its lease agreements.239 According
However, according to JLL’s Elstob, the to company founder Dickson Szeto, who is in the
increasing importance of suburban and satellite process of opening half a dozen more TX properties
city locations doesn’t necessarily mean that city around China, its malls will feature a rotation
centre locations become less attractive. “We are of brand pop-ups changing every three months in
advising some clients that are looking to enter the a bid to keep up with young consumers’ desire
New York market [to now] consider some more for newness.
high-profile locations than they could have before
because the terms available are better and they can “If I give a brand three years of
get more incentivised deals,” Elstob explained.
space, I am taking a risk, but
Embrace the Impermanence of Built they are also taking a risk, so
Environments
pop-ups are the best model for
Not long ago, ideas about the use of built both parties.”
The State of Fashion 2021
mantra is about flexibility and manoeuvrability, in terms of location, format and next-generation
which is a concept that is often hard to square with strategies that generate good return on investment.
the solid nature of bricks and mortar. “I think, going forward, brands will and
But with the only alternative being rows should become far more opportunistic in terms of
of empty storefronts marring the faces of cities where the brand appears, where it pops up, where
around the world, landlords are likely to become it delivers experiences,” Stephens said. “It may be a
more receptive to experiments and accept question of having fewer stores, but fundamentally
ephemeral concepts. In some markets, transient better stores.”
retail formats will probably move from being a
96
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10. WORK REVOLUTION
The pandemic has had a dramatic impact importance, fashion companies have shown
on fashion industry employment. Many jobs have resilience since the start of the crisis by translating
been lost — and many more are at risk — across all their traditional ways of working to the online
industry functions, from the factory floor to stores environment. Social distancing measures and the
on the world’s most exclusive shopping boulevards. inability to travel have accelerated the shift to digital
In August 2020, the UK saw the lowest retail in design, product development, buying, sell-in and
employment levels since 2009,240 while the US more. Tools such as virtual sampling, digital material
reported that more than 2 million retail jobs had libraries and 3D rendering of collections for sales,
been lost due to coronavirus.241 which weren’t broadly used before the pandemic,
Other factors could contribute to higher have increasingly become the norm.
unemployment levels across the industry next
year, as brands conduct store network reviews and Fashion companies have shown
companies in a variety of fashion industry sectors resilience since the start of
feel the pressure from tighter budgets. Luxury
brands, for instance, have cut advertising spend
the crisis by translating their
by as much as 80 percent,242 and US model agency traditional ways of working to the
revenues are estimated to see a 7.5 percent decline in online environment.
2021.243 Across functions, recent graduates and young
professionals will continue to be severely impacted Similarly, the reinvention of trade shows
by the crisis as many job opportunities have either and showrooms predicted in our “Unconventional
disappeared or remain on hold. And for those who do Conventions” theme last year took off quicker than
remain in gainful employment, many are witnessing expected, as seen in the adoption of a number of
profound changes to the way that innovations like digital trade hubs, marketplaces
they work. and fashion shows. For instance, 220,000 attendees
In an industry where in-person interaction joined the digital edition of key Latin America fashion
and long-distance travel have long been of paramount fair ColombiaModa in July 2020, during which more
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FASHION SYSTEM
than 4,000 digital appointments were scheduled.244 Interestingly, some of the skills gaps that
Some of the solutions offered by companies for exist within fashion companies may be filled by
these new formats are even being monetised. PVH’s hardwiring remote working practices and thereby
self-built virtual showroom Hatch, for example, has tapping into a global — rather than local — talent
now become a standalone B2B tool which is offered to pool. Swedish underwear brand CDLP, for instance,
other fashion players.245 already announced it plans to hire 50 percent of
its staff outside of Stockholm, which means those
Around 90 percent of fashion employees could work remotely in fashion hubs
executives anticipate that hybrid like Paris, London and New York or much further
afield.249 As proximity to the workplace becomes a
working will become the norm less critical factor for employment, fashion firms also
in 2021. now have the opportunity to reach their diversity and
inclusion (D&I) goals by overcoming location bias.
As the pandemic has called into question the With 27 percent of diversity efforts put on hold during
role of the physical workplace, fashion companies Covid-19, fashion executives need to urgently revive
must balance business efficiency with employees’ D&I as a priority.250
needs and preferences, creating a new hybrid work
model that supports organisational priorities. As entirely new skill needs continue
Around 90 percent of fashion executives answering to emerge next year, fashion
our BoF-McKinsey State of Fashion 2021 Survey
anticipate that hybrid working will become the norm
companies will either have to
in 2021 (see Exhibit 13).246 Hugo Boss announced develop them in-house or acquire
in August 2020 it would allow employees to work them by recruiting.
remotely two days per week, following the results of
an internal survey in which more than 90 percent of The talent mix is also likely to change next
respondents had asked to switch to a hybrid model.247 year. In the reskilling process, some firms may try
In July, apparel group G-III was forced to postpone to increase their workforce flexibility and limit
its date of return to the office after many employees employee costs by increasing their reliance on
complained about not being able to continue freelancers and contractors. Across industries, one
remote working.248 Gartner survey showed that 32 percent of organ-
Work location, however, is just one of the isations were replacing full-time employees with
many questions that fashion businesses must answer contingent workers, as a cost-saving measure.251 If
to prepare for the future of work. Another major the trend confirms itself this could lead to a further
challenge is the need for reskilling, as the pandemic fragilisation of fashion workers, in an industry
has highlighted the importance of certain roles over already highly reliant on contingent work in roles
others and certain areas of responsibility within such as models, stylists and photographers.
roles. As entirely new skill needs continue to emerge Another area revolutionised by the legacy of
next year, fashion companies will either have to the pandemic’s restrictions will likely be the social
develop them in-house or acquire them by recruiting. role played by companies and the importance of the
Fashion schools expect the weight of digital and workplace in building social capital and maintaining
analytics skills, for example, to increase significantly social cohesion. The rise of digital nomadism —
in their curricula, as a result of higher demand from whereby employees can work from anywhere in
fashion employers. the world and do not have one fixed workplace — is
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FASHION SYSTEM
not optimal for all. Some people have suffered from that the pandemic has accelerated, executives will
poor mental health, loneliness and a lack of social also need to upgrade business processes in order to
interaction, as shown by a cross-industry survey prioritise the recruitment and upskilling of talent to
ran by The Martec Group in which 42 percent of fill these gaps. The key for many fashion companies
remote workers said their stress levels had risen since will be to invest not only in urgent training
working from home.252 The risk is even greater in an programmes but also in employees’ longer-term
industry like fashion, where there has historically learning journeys.253
been a high reliance on interpersonal connections, At the same time, C-suite executives should
networking and collaboration. In this context, the work with human resource departments to formalise
physical workplace could still play an important role a new hybrid model of working as soon as possible
in the future as a space for dispersed employees to — one that achieves the right balance between
meet in real life. stakeholder preferences and business requirements.
Regardless of the recovery timeline, the new Given the destabilising impact of the pandemic,
operations of the fashion industry emerging from fashion companies will be challenged to foster a
the crisis will be radically more digital than in the strong collective spirit and organisational culture.
past and will require new pools of skills. The year To make sure that they do, company leaders will need
ahead offers opportunities for fashion executives to to double down on their mission and values, while
The State of Fashion 2021
introduce skill sets that drive value in their future committing even more to representation in
business models. To benefit from the work revolution the workplace.
Exhibit 13:
Creative business people meeting via video conference. Photo by Ariel Skelley via Getty Images
% OF RESPONDENTS
100
101
THE STATE
OF BEAUTY
2021
The State of Fashion 2021
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Key Insights
• Recovery will be led by China, where sales have already rebounded. The US
is on track to recover within the first half of 2021, while sustained declines in
travel retail extend the timeline to 2022 for Europe and Japan.
• Fragrance and colour cosmetics faced steep declines in 2020, but beauty
demand overall remains strong as consumers turn to the “self-care”
categories of skincare, haircare and personal care — all of which face less
disruption from new Covid-19 routines and lend themselves well to digital
discovery and purchase.
• Brands and retailers are responding to the “new normal” in their product and
channel strategies, with successful players focused on building direct, trust-
based connections with the beauty consumer in an increasingly virtual world.
Pandemics do not alter history in as much These shifts are less a disruption of norms
as they accelerate it. This principle holds true for than a surfacing of trends already latent pre-crisis.
the changes witnessed across the global beauty With the exception of certain elements of beauty
industry, which saw nearly half a trillion dollars services and travel retail, many of these changes
spent on beauty products in 2019. While beauty have played out on accelerated timelines, taking
sales in the first half of 2020 declined by 10 to three to five months to materialise, rather than
30 percent, the sector — encompassing colour three to five years. Retailers and brands are rising
cosmetics, fragrance, haircare, personal care and to meet consumer demand and make the digital
skincare — is recovering.254 The reshaped market shifts needed in terms of product, commitments
that will emerge out of the crisis, however, will and purchasing experiences.
reflect significant shifts across different regions,
categories and channels.
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THE STATE OF BEAUTY 2021
Recovery Speed and Character by Region paying off, with L’Oréal Group reporting almost 60
percent growth of digital sales in China in the first
Inevitably, the recovery picture varies half of 2020 compared to 2019.261
by region. Europe and Japan have been hit hard In the US, by comparison, we forecast a
by their relatively low e-commerce penetration return to pre-crisis beauty sales by as early as the
compared to other advanced economies and high first half of 2021, with an average annual growth
exposure to the collapse of the $40 billion travel rate of 3 to 4 percent between 2019 and 2021 — if
retail beauty market.255 In the context of continued the pandemic is managed effectively in the interim.
negative consumer sentiment about economic Like in China, digital will drive recovery. Pre-crisis,
recovery and new waves of local lockdowns and e-commerce accounted for 20 percent of the US
permanent department store closures, we do beauty market; by 2021, McKinsey estimates
not expect beauty sales in Europe or Japan to that penetration could accelerate to 35 percent.
return to 2019 levels until the first half of 2022 at This chimes with our consumer research, which
the earliest.256 found that one-third of US consumers plan to
permanently make e-commerce their primary
China had already surpassed purchase channel for beauty.262 The ascendance of
2019 beauty sales by the first half Amazon, which is on track to capture $10 billion,
or over 10 percent, of US beauty sales in 2020 (up
of 2020, with an 8 to 10 percent
The State of Fashion 2021
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that channel.264 Many brands long-associated with fragrance business.271 It follows that fragrance-
Instagram, from Morphe to Charlotte Tilbury, have focused players have been hit hard: Coty reported
been quick to embrace Gen-Z-favourite TikTok, in August that quarterly net revenues in its
where users often showcase videos of themselves prestige division dropped almost 75 percent.272
doing “challenges” in the form of a before and after While Interparfums saw net revenues drop over
video.265 Revlon’s #DoItBold challenge on TikTok, 70 percent in its second quarter, the company
which invited fans to post content (not necessarily expressed optimism that it would be able to close
featuring Revlon products) that “tap[s] into your 2020 with revenues down only 38 percent relative
bold, bad self,” reached two billion views within to 2019.273
three days of its October 16, 2020 launch.266 Colour cosmetics had also experienced
tempered sales going into 2020, after a growth
Category Comeback and the Shift to streak between 2015 and 2018.274 Now, mask-wear-
Self-Care ing and the limitations of colour-matching online
inhibit lipstick and face makeup sales. During the
The overall return to pre-crisis levels in popular 618 shopping festival in June, China saw
2021 hides variations across and within categories. growth in the makeup category shift from lip
According to NPD, fragrance and colour cosmetics products (the historic growth-driver of cosmetics
sales will likely continue to fall at an average in China) to eye makeup, which grew 159 percent.275
annual rate of 12 percent and 2 percent respectively Across the globe, eye makeup has emerged as a
between 2019 and 2021.267 In contrast, haircare, relative bright spot, with NPD reporting 6 percent
skincare and personal care are predicted to grow growth of prestige eye makeup in the US in the
in 2021.268 second quarter of 2020 relative to 2019. However,
Going into the crisis, fragrance was already its growth cannot compensate for declines in the US
facing headwinds. Its biggest markets in Western prestige colour cosmetics category overall,
Europe — UK, France and Germany, each worth which saw sales down by 52 percent in the
approximately $3 billion in 2019 — had declined second quarter.276
8 percent, 6 percent and 3 percent respectively
in 2019 versus 2018.269 Disruption in travel retail Across the globe, eye makeup
(which accounts for approximately 20 percent of the
total global fragrance market), in addition to fewer
has emerged as a relative bright
out-of-home occasions, the inability to translate spot, with NPD reporting 6 percent
olfactory experiences online, and a spending shift growth of prestige eye makeup
to scented premium bath, body care and home
fragrances, all pose challenges to recovery of the
in the US in the second quarter of
fragrance category.270 2020 relative to 2019.
Some niche, luxury fragrance brands have
been relatively insulated by the strength of their But demand is not diminished entirely —
home fragrance and bath and body business. it is just different — with growth coming from
However, these brands only represent a sliver of “self-care” products as consumers favour creams,
the fragrance market. Estée Lauder Companies masques, jade rollers and bath bombs. These
reported in May 2020 that Jo Malone had doubled categories are aligned with broader wellness
its home fragrance and bath and body business in trends and, crucially, lend themselves well to
China yet gains in Asia were not enough to offset digital discovery and purchase. Across the globe,
an overall decline in the Estée Lauder group’s consumers indicate a growing preference for
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THE STATE OF BEAUTY 2021
natural or so-called “clean” formulations, with 41 being satisfied with the results of DIY beauty. For
percent of German consumers and 30 percent of consumers who normally frequent salons, the
British consumers saying they prioritise this over a percentage who were satisfied with DIY results
“stronger” formula.277 dropped to just 15 percent.280
Consumers are also turning to personal
care and skincare products to address conditions Today’s consumer is more
specifically related to Covid-19, whether that is to ethically minded, demanding that
address dry hands, breakouts from mask-wearing
(“maskne”), or puffy eyes from hours squinting brands and retailers build their
at a computer screen while working remotely. businesses with a conscience.
Doctors around the world have noted a spike in
patients experiencing stress-induced hair loss. When consumers do return to salons, they
New York-based LM Medical practice, for instance, may be seeking different services and products
has seen the number of patients seeking solutions more focused on embracing and enhancing their
for hair loss go from one patient a day to five a natural look. “Natural” does not, however, mean
day. They have also seen a 30 percent increase in no products or services — this is a “you, but better”
procedures, which facial plastic surgeon Dr Lesley look. Over one-third of consumers report they plan
Rabach attributes to “people taking advantage of to spend less on chemical treatments permanently
The State of Fashion 2021
downtime — the whole recovery process is covered altering the hair’s texture, such as keratin
by a mask.”278 treatments, perms or relaxants; instead they report
plans to purchase services and products that will
When consumers do return to better nourish their hair, such as bond building
treatments. The natural look has its limits though:
salons, they may be seeking Consumers’ intent to continue covering their grey
different services and products hair remains undimmed.
more focused on embracing and In terms of price points, we have seen a shift
towards more affordable products in the US and
enhancing their natural look. Western Europe, but this appears to be driven by
store closures in prestige beauty channels rather
DIY and the Return of Beauty Services than a lasting trend. Mass-market nail polish, facial
moisturiser, cleanser and haircare all saw growth
Throughout the pandemic, “do it yourself” driven by price, not volume. In China, we have
products have also performed well. On Amazon, continued to see strong growth from premium and
DIY categories of nail care and hair dye have seen luxury segments as well as deep-discount focused
growth of 300 percent and 200 percent respec- “shopping festivals” — such as as Singles’ Day and
tively in the US relative to 2019 levels. To put this JD.com’s 618 sale — which drive disproportionate
into context, this represents four to six times the growth.281
growth rate of Amazon beauty overall.279 However,
we anticipate that the majority of consumers will Conscious Consumption and a Call to Action
return to receiving beauty services in salons once
they feel physically and financially secure enough Today’s consumer is more ethically
to do so. In McKinsey’s June 2020 salon services minded, demanding that brands and retailers
survey, when asked why they were spending less, build their businesses with a conscience. 2020
only 25 percent of consumers said it was due to has seen a continued focus on sustainability, with
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beauty manufacturers facing pressure from both The very public acts of racial injustice in
consumers and shareholders to take action. What the US and around the world in 2020 have also
constitutes “sustainable,” however, is not clear-cut, pushed the beauty industry to reflect on its role and
as there is no regulation defining what it means responsibilities in shaping beliefs and behaviours.
to be “natural”, “clean” or “sustainable.” Retailers Consumers have called on global beauty giants
from mass market to luxury are responding by to stop using promises of “whiteness” to sell
creating their own standards, with “clean beauty- products, citing the harmful stereotypes (if not
only” retailers flourishing, from US-based Credo ingredients) inherent in such claims. In the US,
Beauty to Oh My Cream in France.282 283 While we are seeing companies join initiatives such as
claims around sustainability are increasingly table Aurora James’ 15 Percent Pledge (committing to
stakes in the beauty business, consumers are not dedicating at least 15 percent of their shelf space
necessarily willing to pay more for it. Two-thirds to Black-owned businesses)285 or Uoma Beauty
of consumers in Germany and the UK consider a founder Sharon Chuter’s #PullUpOrShutUp
brand’s actions on sustainability to be an important movement that challenged companies to go beyond
buying factor, but only one-third of Germans and words of support and be transparent about their
16 percent of Britons are trading up their purchases actions. Beauty companies are recognising that
to more sustainable brands, versus 46 percent and being ethical and inclusive as organisations is both
36 percent of Germans and Britons, respectively, important and good for business — but that the
trading up for quality.284 industry has a long way left to go.
Exhibit 14:
40
20
-20
-40
-60
J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J
2020 2021 2022
SOURCE: FORECASTS FOR GLOBAL BEAUTY RECOVERY BY REGION, CATEGORY AND CHANNEL, REFLECT MCKINSEY PERSPECTIVE, MGI MACRO-ECONOMIC SCENARIOS
AND NPD, NIELSEN, IRI, AMAZON STACKLINE AND PUBLICLY REPORTED COMPANY FINANCIALS FOR Q1 AND Q2 2020
107
THE STATE OF BEAUTY 2021
Digital Discovery and the Changing Role of 2021. Sephora Americas CEO Jean-André Rougeot
the Store described the stores as playing an increasingly
critical role as part of the end-to-end supply chain,
Retailers around the world are rethinking not its end point. The retailer has plans to test using
their assortments to meet changing demand. Not stores as quasi-warehouses to facilitate same-day
surprisingly, many are planning to expand their delivery of holiday orders. In other words, the need
2021 assortment in skincare and natural products, for stores remains strong but the reason to go to the
according to a survey of 50 US beauty merchants store is changing.288
across mass market and premium beauty retail.286
They also plan to focus on “hero” SKUs (a brand’s Outlook for 2021 and Beyond
bestsellers). As Fabrizio Fredo, chief executive of
Estée Lauder Companies, said in the company’s There is no question that 2020 has
earnings call in May 2020, consumers are proving brought unprecedented challenges to consumers
more inclined to “seek brands and products they and companies around the world. Compared to
trust” while in-store retail remains challenged.287 other sectors such as fashion, beauty has been
relatively insulated from the impact of Covid-19, as
Retailers are adapting their store consumers continue to look to it as an affordable
The State of Fashion 2021
108
Exhibit 15:
9 14 -2 Colour Cosmetics
Haircare
15 -12 Fragrances
+2 Haircare
30
Personal
Care +5 Skincare
32
SOURCE: FORECASTS FOR GLOBAL BEAUTY RECOVERY BY REGION, CATEGORY AND CHANNEL, REFLECT MCKINSEY PERSPECTIVE, MGI MACRO-ECONOMIC SCENARIOS
AND NPD, NIELSEN, IRI, AMAZON STACKLINE AND PUBLICLY REPORTED COMPANY FINANCIALS FOR Q1 AND Q2 2020
Exhibit 16:
’19-’21 CAGR, %
Online
$485 bn +0.6% p.a. $491 bn
100%
E-commerce1
10
In-store
19 +36
Drugstores
17
Grocery 2
16 -2 Mass, club retailers 3
16 -1 Direct5
15
Department stores
14 -1 Other channels 6
14
Travel retail
14 -1
8
8 -2
8
4 6 -12
4 -4
8
4 -27
2019 2021
1 E-commerce includes all online sales (i.e., marketplace, brand.com, retailer.com) 4 Beauty specialist retailers does not include any retailer.com's; these are included in e-commerce
2 Grocery includes convenience stores, forecourt retailers and supermarkets 5 Direct includes MLM (middle level marketing)
3 Mass, club retailers include discount/warehouse and hypermarkets 6 Other channels include hair salons, home shopping, apparel specialty, vending, etc.
Note: Due to rounding, numbers presented may not add up precisely to 100
SOURCE: FORECASTS FOR GLOBAL BEAUTY RECOVERY BY REGION, CATEGORY AND CHANNEL, REFLECT MCKINSEY PERSPECTIVE, MGI MACRO-ECONOMIC SCENARIOS
AND NPD, NIELSEN, IRI, AMAZON STACKLINE AND PUBLICLY REPORTED COMPANY FINANCIALS FOR Q1 AND Q2 2020
109
MCKINSEY
GLOBAL
FASHION
The State of Fashion 2021
INDEX
110
MCKINSEY GLOBAL FASHION INDEX
Key Insights
• After 4 percent economic growth in 2019, the events of 2020 devastated
fashion industry performance with economic profit estimated to be down
93 percent year-on-year.
• Fashion industry value is now further concentrated among the top
players — 60 percent of the industry was value-destroying in 2019,
growing to an estimated 73 percent in 2020.
• Investors put their trust in internet retailers, companies that have a
high proportion of sales in the APAC region, and companies that have
previously been in our Super Winners list — implying the strong will get
stronger in 2021 if stock valuations are a signal of future success.
The McKinsey Global Fashion Index (MGFI) economic profit composition and development across
offers a bird’s-eye view of the fashion industry, the industry. We then explore the impact of Covid-19,
tracking financial development and value creation which has caused a combined $50 billion of value
through economic profit. Spanning regions, value within the fashion companies studied to fall into a
segments and product categories, the MGFI is state of distress by September 2020. Finally, we look
comprised of a proprietary data set of public at stock market valuations and their implications for
companies whose predominant revenue streams are what it will take to succeed in 2021.
from fashion.
In this fifth edition of the MGFI, we continue Looking Back at 2019 — The “Pre-Crisis Year”
our exploration of economic profit — a measure
of value creation that comprises operating profit The last edition of the MGFI showed that the
less adjusted taxes and cost of capital. The metric majority of fashion executives across value segments
measures absolute value created over time, taking and geographies anticipated an industry slowdown
into account how much each company invests to in 2020, after two years of growth in economic
generate its performance. First, we unpack historical profit. The industry would continue to expand, but
111
Exhibit 17:
YoY economic
+3 +2 -1 -15 -15 -31 +35 +21 +42 -93
profit change, %
51
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E
EBITA
11.7 12 11.7 11.7 11.2 10.8 10.3 10.8 10.9 10.6 3 n/a
margin, %
The State of Fashion 2021
N= 306 325 332 339 341 344 349 352 353 336 326
1 Long-term Economic Profit implied by 2020 market valuations, while assuming constant debt and WACC
2 “Normalised” industry EP growth of 4% is based on the assumption that 58 companies with COVID-effects in their 2019 result (FY19 reported in March, April or May 2020),
would have had similar growth to the rest of industry if their financial year aligned with calendar year 2019. The first half 2019 results support this assumption, as 58 COVID-
affected companies had EBITA growth of 10% vs. 14% in the rest of industry
3 EBITA margin in 2019 is 10.3% when excluding 58 COVID-affected companies
Exhibit 18:
21-80%
-1 -9
-3 -2
-77 -67
-101 -95
Bottom 20%
Note: Due to rounding, numbers presented may not add up precisely to 100
SOURCE: MCKINSEY GLOBAL FASHION INDEX (MGFI)
112
MCKINSEY GLOBAL FASHION INDEX
at a slower pace, amid macroeconomic uncertainty, destroyers in 2019, meaning they delivered negative
political upheaval and the threat of trade wars. Now, economic profit. That was the highest proportion for
of course, the coronavirus pandemic towers above all at least a decade, compared with 55 percent in the
challenges, and its economic impact will likely be felt three previous years, and consecutively decreasing
for years to come. amounts in the years going back to 2011, when just
In 2019, the fashion industry delivered an 26 percent of companies were value destroyers.
estimated 4 percent increase in economic profit, In fact, the proportion of players that destroy value
keeping it on the growth track that began in 2017, has grown steadily since 2011, causing the industry
only at a slower pace.289 Drilling down into the to move from a value-creating majority to a value-de-
growth number, revenues fell by 0.9 percent, offset stroying majority. The high share of value destroyers
by cost of goods sold (COGS) decreasing 3.2 percent, could imply that some companies would struggle
which resulted in a 6.9 percent increase in industry to re-finance if needed, as they cannot earn their
gross profit. However, a rise in other operating cost of capital — likely leading to more companies
cost items created a net decline in earnings before facing financial distress in the future. Underlying
interest, taxes and amortisation (EBITA). Finally, this economic polarisation is a continuing shift in
improvement in capital efficiency took capital consumer behaviours, with the highly populated
charges down by 4.8 percent, turning economic mid-market suffering at the expense of relatively few
profit to positive growth. The industry’s EBITA dominant luxury, value and discount players.
margin in 2019 was 10.6 percent, compared with
10.9 percent in 2018. The First Half of 2020 — As Covid-19 Hit
The evolution of economic profit within
performance quintiles tells a story that has now The Covid-19 pandemic has disrupted
become an established narrative; namely that industry performance and will have a significant
economic profit is gravitating further towards the impact on the absolute value and trajectory of the
most successful companies, leading to a widening gap industry’s economic profit in both 2020 and 2021.
between the “top and bottom.” In fact, the polarisa- Over the past 10 years, economic profit indexed to a
tion trend accelerated in 2019, with the top 20 percent value of 100 in 2010 has been in a range between
of performers by economic profit accounting for 203 105 (in 2012) and 51 (in 2016) — though the latter was
percent of total industry profit. (The percentage an outlier year with the next-lowest year being 2017
figure above 100 is possible because so many at 69. While performance year-to-year has varied,
companies contributed negative economic profit.) it has consistently remained within a fairly narrow
The bottom 20 percent posted -95 percent range. The year 2020, however, is in a different
of the economic profit, compared with -67 percent league of underperformance. While full-year reports
in 2018 and -77 percent in 2017. Only in 2016 was the are not yet published, MGFI estimates based on
industry more polarised, with the top 20 percent market capitalisation development290 suggest that
accounting for 204 percent of economic profit, the industry’s economic profit in 2020 will fall by
while the bottom quintile generated -101 percent. 93 percent, after rising 4 percent in 2019.
In a continuation of the trend seen in recent years, This would produce an index reading of just 6
the middle segment, representing the 21st to 80th compared to 100 in 2010, and far below the previous
percentile, failed to make a positive contribution to worst performance in 2016.
economic profit, in fact seeing its share slide to The resulting fall in economic profit will also
-9 percent, the lowest level since at least 2016. be reflected in the proportion of value destroyers,
Tracking the same data from a different which is estimated to rise to a record 73 percent in
perspective illustrates the extent of the industry’s 2020, easily surpassing the 60 percent record level
challenge. Some 60 percent of companies were value set in 2019, and almost three times the number
113
Exhibit 19:
40
45 45 45
49
Value 55
60
creators 64
69
74
60
55 55 55
51
Value 45
40
destroyers 36
31
26
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Exhibit 20:
111
104
100 102
98
100
93
89
94 86 87
87
80 83 76
71 80 80
74
72
69
67
60 62
Dec 19 Jan 20 Feb 20 Mar 20 Apr 20 May 20 Jun 20 Jul 20 Aug 20 Sep 20 Oct 20
N = 336; Market capitalisation data for last trading day of each month, and October 23, 2020 (latest available at time of analysis)
114
MCKINSEY GLOBAL FASHION INDEX
seen in 2011. That would mean that out of the 326 stores around the world (16 percent of the total).
companies in the index, 238 will be value-destroy- It then saw a surge in online shopping that helped it
ing, while the industry’s positive profits will be post a healthy profit, as digital sales jumped by
divided between just 88 companies. 74 percent between February and July 31, compared
Analysis of quarterly revenues shows with the same period in 2019 — the company at
the devastating impact of the virus on industry one point sold a million items in a day.293 Guess Inc.
performance. As the pandemic first began to spread said in June that it was re-evaluating its brick-and-
quickly around the world, shopping for clothing was mortar strategy as coronavirus-related shutdowns
far from people’s minds. Based on a dataset of 176 continue to impact its business, revealing plans
companies that reported quarterly results in April, to permanently shutter about 100 stores in North
May or June, revenues fell 34 percent compared with America and China, or roughly 9 percent of its global
the same period in 2019, and EBITA margins fell 21 network, over the ensuing 18 months.294
percentage points. The scale of the challenge facing fashion
From a segment perspective, luxury and companies is revealed by our McKinsey Fashion
affordable luxury continued to do business, while Scenarios analysis of financial distress and the
value and discount took a hit, perhaps reflecting impact of government subsidies. Without subsidies
how the initial months of Covid-19 cast relatively and other government support, the analysis shows
less uncertainty over the spending of the wealthiest that 75 percent of European companies would be in
consumers. In the discount and value segment, the financial distress, based on the sample of 73 listed
share of e-commerce is often low, influencing fashion companies from the EMEA region (Europe,
those companies’ performance during the the Middle East and Africa) with more than $250
lockdown period.291 million in net sales. With partial subsidies and
In light of the long-term pressure on physical a weaker recovery, the proportion of distressed
retail, and the relatively large proportion of fashion companies could fall to 58 percent or 52 percent
companies that came into the crisis losing money, with a stronger recovery. It is fair to expect that a
it is not surprising that the shock caused by the supportive policy landscape will keep around half of
pandemic was a step too far for many brands. companies above water, and will precipitate a wave
Following a steady trickle of bankruptcy filings over of consolidation in 2021, as stronger players take the
the past few years, the trend accelerated during opportunity to pick off weaker rivals.295
the early part of the outbreak, with more than $30
billion of sales in the US under financial distress by Looking Ahead — Winning Traits
September 2020. In Europe, the number totalled
more than $20 billion in sales in the same The forward-looking MGFI theme in last
time period.292 year’s report was “apprehension and uncertainty.”
However, there are some silver linings This year, the same sentiments apply. However, the
amid the clouds. While the impact of the crisis on analysis also shows signs of a slow recovery, with
businesses and jobs has been devastating, it may fashion companies beginning to adjust to the new
have accelerated strategic responses that turn out to normal and resetting their strategic ambitions.
be somewhat more positive in the long run. Several Average fashion company market capitalisations
companies have taken the opportunity during the were at their lowest point in March 2020, with
crisis to reshape and recalibrate their business valuations 38 percent below their December 2019
models, often moving away from physical retail to levels. However, valuations have since started to
digital-first or digital-only platforms. slowly recover, and by October 23, 2020 they were
Zara’s parent company Inditex said in early down only 13 percent in comparison to
summer that the group will close as many as 1,200 December 2019.
115
Exhibit 21:
APAC more than 30% of sales APAC less than 30% of sales
100
100
94
92
87 87
93 85
81
79
82 77 83
75
75 72
74 75
68
66
62
60
52
50
Dec 19 Jan 20 Feb 20 Mar 20 Apr 20 May 20 Jun 20 Jul 20 Aug 20 Sep 20 Oct 20
N Mkt cap 2019, Change vs. Dec 2019, %
USD BN
Stronger
footprint 171 793 - -6 -15 -28 -25 -23 -21 -19 -13 -13 -8
(>30%)
Weaker
footprint 140 824 - -7 -18 -48 -40 -38 -34 -32 -26 -25 -17
(<30%)
The State of Fashion 2021
N = 311; Market capitalisation data for last trading day of each month, and October 23, 2020 (latest available at time of analysis)
SOURCE: ANNUAL REPORTS, MCKINSEY GLOBAL FASHION INDEX (MGFI)
Exhibit 22:
180 176
Internet retailers Others
142 145
140
118
100 97
100 94
86
83
75
91
80 62 77 81
71 72 76
60 67 68
58
Dec 19 Jan 20 Feb 20 Mar 20 Apr 20 May 20 Jun 20 Jul 20 Aug 20 Sep 20 Oct 20
N = 336; Market capitalisation data for last trading day of each month, and October 23, 2020 (latest available at time of analysis)
116
MCKINSEY GLOBAL FASHION INDEX
Perhaps not surprisingly, investors had the market in March — they were 5 percent up from
more confidence in our list of top 20 fashion players December 2019 figures by October 2020. Despite the
by economic profit in 2018 (the “Super Winners” previously mentioned relatively stronger quarterly
published in our last edition), reflecting a flight to results in luxury and affordable luxury, the segments
well-known brands that meant the March 2020 have been showing valuations only marginally
stock market plunge was less severe for this group above mid-scale brands, with luxury and affordable
(down 29 percent from December, compared with 38 luxury 14 percent below December 2019 levels in
percent down for the total market on average), and October, while the mid-scale brand segment was
by October the Super Winners had recovered to 11 down 15 percent. It must be noted, however, that
percent past pre-crisis levels. Through the pandemic looking at luxury fashion companies only (excluding
period, Super Winners performed better than the affordable luxury segment), they show a more
their peers with 22 percent higher indexed positive outlook and were down only 12 percent
stock valuations. in October.
Companies that performed best in the Taking a category perspective, sportswear
months leading up to October 2020 shared two key has had a strong recovery, reflecting the accel-
characteristics. Many of them had a strong APAC erating “casualisation” trend. By October, the
focus, reflecting the economic strength of that region category was up 7 percent compared with December
and the relatively smaller impact of the pandemic, 2019. Jewellery and watches were the next-best
and others offered a compelling digital proposition. performing category, suggesting that investors
Looking at 311 fashion companies with believe that consumers remained happy to make
revenue available on a regional level, those that “investment” purchases during lockdown, even as
had a sizeable (minimum 30 percent) share of sales their appetite for new clothes declined. The market
in APAC consistently posted higher valuations — capitalisation of jewellery and watch specialists was
staying at on average 18 percent higher indexed down 7 percent compared to their December 2019
valuations than companies with a weaker APAC valuations by October 2020. Clothing and footwear
sales footprint (less than 30 percent) in the period of categories were down 18 and 19 percent respectively
January to October. by October from their December 2019 levels.
One persistent, and unsurprising, theme, is While 2021 is likely to be challenging for
that pure play internet retailers such as Farfetch, almost all fashion companies, there will be oppor-
Zalando, Asos and Revolve have consistently outper- tunities for some. Those that find success are
formed in 2020 as locked-down customers turned to likely to continue to pivot to digital, understand
their digital devices to shop. Despite initially seeing where demand lies, and target better-performing
their market valuations decline alongside the wider geographies, segments or product categories.
market, these digital-first players picked up much In challenging times, bold decisions often reap the
faster from March, and by October were trading 76 richest rewards. However, decision-makers must
percent higher than in December 2019. Across the also show they are able to respond quickly to a
January to October period, internet retailers on dynamic situation, while managing risk effectively,
average traded 42 percent higher than other fashion because the decisions they make over the coming
companies (by indexed stock valuations), in the months will be critical to the future of their business.
process lifting their share of total industry market
capitalisation to 3.4 percent, up from 2 percent Editor’s note: We are not releasing our list of the industry’s Super
Winners in this year’s edition of The State of Fashion. Due to
previously. different reporting periods for 2019 financial year results, some
Looking at value segments, the analysis companies have the impact of Covid-19 reflected in their results while
some do not, and therefore does not provide us with apple-to-apple
shows that value and discount segments surge to comparisons to rank companies on their performance this year.
higher figures than others despite declining with
117
GLOSSARY
1.5-degree pathway Carbon neutrality severe acute respiratory syndrome Europe (mature)
A scientific estimate that indicates Balancing the level of carbon coronavirus 2 and was classified Austria, Belgium, Denmark,
limiting global warming to 1.5 emissions with an equal level of a pandemic by the World Health Finland, France, Germany,
degrees Celsius would reduce carbon removal through the shift Organisation on March 11, 2020. Gibraltar, Greece, Iceland, Ireland,
the odds of initiating the most to new energy sources, changes Italy, Liechtenstein, Luxembourg,
dangerous and irreversible effects of in industry processes, circular Deleveraging Malta, Monaco, Netherlands,
climate change. business models and carbon The process of reducing a company’s Norway, Portugal, Spain, Sweden,
offsetting. debt by paying existing debt and Switzerland, United Kingdom.
3D design obligations on its balance sheet.
Design enabled through software Central Asia Deleveraging allows companies to EV/sales
tools for virtual rendering and 3D Kazakhstan, Kyrgyzstan, reduce the riskiness of their firm. A measure that compares a
visualisation of products with the Tajikistan, Uzbekistan. company’s enterprise value to its
ultimate goal of replacement for Digital material libraries annual sales. It is typically used
physical prototypes. China’s National Day (Golden A central repository for all available as a metric that quantifies the
Week Holiday) raw materials and components of a purchasing cost of a company’s
APAC (emerging) China’s National Day Holiday product, enabling designers to have sales. Enterprise value accounts for
American Samoa, Bangladesh, occurring over seven to eight days at full visibility over the options they market capitalisation, debt and cash.
Bhutan, Brunei, Cambodia, China the beginning of October celebrating can use to complete a design.
(including the Mainland, Hong the formal establishment of the Extended Producer
Kong SAR, Macau SAR), Fiji, French People’s Republic of China on Digital sell-in Responsibility
Polynesia, Guam, India, Indonesia, October 1, 1949. A digital interface that is comparable Extended Producer Responsibility
Kiribati, Laos, Malaysia, Mongolia, to an online store, designed for (EPR) is a policy approach under
Myanmar, Nauru, Nepal, New Circularity showcasing products and order which producers are given a
Caledonia, North Korea, Papua New An economic system aimed at intake with B2B customers. significant responsibility – financial
Guinea, Philippines, Samoa, Solomon eliminating waste and promoting and/or physical – for the treatment
Islands, Sri Lanka, Thailand, Tonga, the continual use of resources; Earlier Recovery Scenario or disposal of post-consumer
Tuvalu, Vanuatu, Vietnam. minimising resource inputs and Effective virus containment products.
the creation of waste, pollution through vaccine and/or state
APAC (mature) and carbon emissions. In apparel, intervention, leading to the lift of GDP
Australia, Japan, New Zealand, we refer to the six Rs: reducing the travel restrictions within a couple The total monetary or market value
Singapore, South Korea, Taiwan. materials needed and waste created of months and enabling faster of all the finished goods and services
when making products; recycling economic recovery, with global produced within a country’s borders
Artificial intelligence the materials used to produce new fashion sales returning to 2019 in a specific time period and thus
The State of Fashion 2021
The theory and development of products; refurbishing deadstock levels in the second half of 2022. serving as a measure of economic
computer systems able to perform and used products into new health.
tasks that normally require products – without re-processing EBITA
human intelligence, such as visual the ‘raw’ materials; reselling An income statement item that Generation-Z
perception, speech recognition, second-hand or used products deducts amortisation from earnings Demographic cohort born circa
decision-making and translation with no refurbishment; renting before interest and taxes (EBIT). An 1996–2012, following the Millennial
between languages. products through one-off rental or alternative measure of income a firm generation.
subscription models, and; repairing makes from its core operations.
Baby boomers products, by professional or GFA
Demographic cohort born circa amateur means during the product’s EBITA margin Global Fashion Agenda.
1946-1964, following the “Silent use-phase – without changing A measurement of a company’s
Generation.” ownership. EBITA as a percentage of its total Government support scheme /
revenue. subsidy
Biodegradable Closed-loop recycling Actions by governments to support
Material capable of being A recycling process where post- EBITDA small and large businesses during
decomposed naturally by bacteria consumer waste is collected and An income statement item the Covid-19 crisis. Relevant
when discarded as waste. used to manufacture new products. that deducts depreciation and government aid to brands and
amortisation from earnings before retailers includes rental support,
BoF-McKinsey State of Fashion COGS interest and taxes (EBIT). An salary support for furloughed staff,
2021 Survey An income statement item stating alternative measure of income a firm and loans on good terms.
Proprietary joint survey by the total costs used to create a makes from its core operations.
The Business of Fashion and product or service, which has been Hybrid working
McKinsey. The survey asks sold. Economic profit Flexible work structure in which
international fashion executives A measure of value created by employees can split their working
and experts to rate their business Concession models businesses, whereby opportunity hours between working from a
sentiment, investment plans, and Partnership model where brands use costs are deducted from revenues central office and working remotely
industry trends. 328 respondents a retailer’s space and benefit from its earned. A company creates value from their homes.
participated in the State of Fashion foot traffic in exchange for a rent or a when its operating profit exceeds
Survey for the State of Fashion sales commission. The model allows the dollar cost of capital. Economic In-game skins
2021 report between August and the brand to retain control over its Profit is defined as Net Operating Outfit worn by a virtual avatar in
September 2020. image, customer experience and Profit, less Adjusted Taxes a game; a selection of skins may be
assortment, while it is less risky for (NOPLAT) minus Capital Charge provided to the player for free or
BOPIS retailers who do not purchase and (WACC multiplied by Invested for a cost.
An omnichannel service enabling manage inventory like in a wholesale Capital).
customers to order products online model. Inventory turnover
and pick them up in stores (buy Europe (emerging) A ratio showing the number of times
online, pick up in store). Consumer sentiment Albania, Andorra, Armenia, a company has sold and replaced
An indicator that measures how Azerbaijan, Belarus, Bosnia- inventory during a given period.
Capital efficiency optimistic consumers feel about Herzegovina, Bulgaria, Croatia, A decreasing turnover implicates
A measure of profitability used to their finances, the state of the Cyprus, Czech Republic, Estonia, lower sales and potentially a
assess how effective a company is economy and purchasing behaviour. Georgia, Hungary, Kosovo, Latvia, build-up of excess inventory.
at turning capital into financial Lithuania, Macedonia, Moldova,
performance. Covid-19 Montenegro, Poland, Romania, LatAm
Coronavirus disease 2019 (COVID-19) Russia, Serbia, Slovakia, Slovenia, Anguilla, Antigua, Argentina,
is an infectious disease caused by Turkey, Ukraine. Aruba, Bahamas, Barbados, Belize,
118
Bermuda, Bolivia, Brazil, British MEA QR codes airports, airlines, cruises, train
Virgin Islands, Cayman Islands, Afghanistan, Algeria, Angola, Matrix barcodes that contain stations, downtown locations and
Chile, Colombia, Costa Rica, Cuba, Bahrain, Benin, Botswana, Burkina information about the item or the border shops.
Curacao, Dominica, Dominican Faso, Burundi, Cameroon, Cape location it is attached to and that can
Republic, Ecuador, El Salvador, Verde, Central African Republic, be read by smartphones. TRS
Grenada, Guadeloupe, Guatemala, Chad, Comoros, Congo, Democratic A measure of stock performance,
Guyana, Haiti, Honduras, Jamaica, Republic of Congo, Djibouti, Regenerated fibre factoring in capital gains and
Martinique, Mexico, Nicaragua, Egypt, Equatorial Guinea, Eritrea, Fibre created from pre-existing dividends to show the total return
Panama, Paraguay, Peru, Sint Ethiopia, Gabon, Gambia, Ghana, fibres whose cellulose areas are to shareholders. It is expressed as an
Maarten, Suriname, St Kitts, Guinea, Guinea-Bissau, Iran, dissolved in chemicals and rebuilt annualised percentage.
St Lucia, St Vincent and the Iraq, Israel, Ivory Coast, Jordan, into new fibres by viscose method.
Grenadines, Trinidad and Tobago, Kazakhstan, Kenya, Kuwait, Value creator
Uruguay, Venezuela. Kyrgyzstan, Lebanon, Lesotho, Return rate A company generating positive
Liberia, Libya, Madagascar, Malawi, Rate of product returns. economic profit.
Later Recovery Scenario Maldives, Mali, Mauritania,
Periodic virus resurgence in Mauritius, Morocco, Mozambique, ROI Value destroyer
different regions of the world, Namibia, Niger, Nigeria, Oman, Return on investment assesses A company generating negative
resulting in new waves of lockdowns Pakistan, Qatar, Réunion, Rwanda, the benefit of an investment by economic profit.
and continued restrictions Sao Tomé e Príncipe, Saudi Arabia, comparing the cost of an investment
preventing the start of the economic Senegal, Seychelles, Sierra Leone, to its return. For stores, this relates Value segment
recovery, with global fashion sales Somalia, South Africa, South to comparing store investments The company segmentation based
returning to 2019 levels by the last Sudan, Sudan, Swaziland, Syria, and costs in store operations to the on a Sales Price Index, which
quarter of 2023. Tajikistan, Tanzania, Togo, Tunisia, store’s profitability. provides a range of prices for a
Turkmenistan, Uganda, United standard basket of products within
Livestream commerce Arab Emirates, Uzbekistan, Yemen, S&P 500 each segment and company’s home
A service that combines live video Zambia, Zimbabwe. The S&P 500 is a stock market market. The companies in the
streaming, the ability to interact index that tracks the stocks of 500 McKinsey Global Fashion Index
with sellers and the functionality to Microplastics large-cap US companies. and the BoF-McKinsey State of
buy products immediately. Very small pieces of plastic, typically Fashion survey are categorised in six
less than 5mm in length, that SG&A segments, which are based on a price
Livestreaming pollute the environment. Their An income statement item stating index across a wide basket of goods
The broadcasting of an event or environmental harm is caused by all costs not directly tied to making a and geographies. The segments
product offering (e.g., fashion show their slow degradation, which occurs product or service. comprise from lowest to highest
livestream). over hundreds if not thousands of price segment: Discount, Value,
years. SKU Mid-market, Premium/Bridge,
M&A activity Stock Keeping Unit. Affordable Luxury, Luxury.
The consolidation of companies Millennials (or Generation-Y)
through various types of financial Demographic cohort born circa SKU productivity Virtual sampling
transactions, including mergers, 1982–1995. Also commonly referred A measure of the effectiveness and A digitised product development
acquisitions, consolidations, tender to as Generation-Y (this name profitability of an assortment by process in which designers create 3D
offers or the purchase of assets. is based on Generation-X, the stock keeping unit against strategic virtual samples that are later shared
generation that preceded them). and financial targets. with value-chain stakeholders in
Machine learning the product development and sell-in
A form of artificial intelligence North America SME processes. This technology reduces
that automates analytical model Canada, Puerto Rico, United States Small and medium enterprises. time and cost from the traditional
building, enabling systems to of America. physical garment-making process,
“learn” with minimal human Social commerce which requires shipping physical
intervention. Northeast Asia The use of networking websites samples (e.g., for design approval or
China (including the Mainland, and platforms such as Facebook, for sell-in).
McKinsey Fashion Scenarios Hong Kong SAR, Macau SAR), Instagram and Twitter to promote
Covid-19 recovery scenarios in the Japan, Mongolia, South Korea, and sell products and services. Zero-based approach
fashion industry across regions Taiwan. An approach that seeks to link
and segments based on holistic Southern Mediterranean organisational designs to strategic
fact-bases and key sources of Overstock countries priorities (e.g., areas for investment
intelligence; includes fashion, An excess in inventory, which has Albania, Andorra, Bosnia & compared to efficiency optimisation)
accessories and shoes; last updated not been purchased by consumers. Herzegovina, Croatia, Cyprus, instead of a “one-size-fits-all”
on September 23, 2020 as per Greece, Israel, Italy, Malta, solution across the business.
Edition XII. Predictive analytics Montenegro, North Macedonia,
Data analytics aimed at building Portugal, San Marino.
McKinsey Global Fashion Index predictions about future outcomes
Proprietary and copyrighted based on historical data and Super Winners
McKinsey tool that provides a global analytics techniques like statistical The top 20 fashion players by
and holistic industry benchmark modelling and machine learning. economic profit according to The
for the entire fashion industry. The State of Fashion Report.
MGFI was first created for The State Price segments
of Fashion 2017 to track industry As definitions of market segments Sustainability
performance through three key often vary across sources, all Within a business context,
variables: sales, operating profit and companies in the MGFI are sustainability encourages
economic profit. MGFI is composed categorised based on a Sales Price businesses to frame decisions in
of an extensive list of public and Index, providing a range of prices terms of environmental, social and
private companies spanning for a standard basket of products human impact for the long-term
across market segments, product within each segment and home and relates to how a company’s
categories and geographies. The market — thereby relying only on products and services contribute to
analysis of public companies is built a quantitative measure, whereby sustainable development.
with data from McKinsey Corporate companies in each segment price
Performance Analytics. their items similarly. Travel retail sector
Retail located in travel hubs and
key tourist destinations, such as
119
END NOTES
1 McKinsey Fashion Scenarios, Earth’ programme”, Drapers, August will likely get worse due to the virus. www.voguebusiness.com/fashion/
September 2020 17 2020, https://www.drapersonline. This is what governments could dolce-and-gabbana-couture-thriving-
com/insight/analysis/selfridges-anne- do about it”, CNBC, July 28 2020, covid-19
2 McKinsey Fashion Scenarios, pitcher-on-the-department-stores- https://www.cnbc.com/2020/07/28/
September 2020 radical-new-sustainability-initiative coronavirus-making-income- 43 Bottomley, Tom, “Reiss launches
inequality-worse-this-is-what-leaders- new ‘Luxe Leisure’ collection in answer
3 BoF-McKinsey State of Fashion 17 “Allbirds Is The First Fashion can-do.html to the ‘new normal’”, The Industry
2021 Survey Brand To Label Its Carbon Footprint Fashion, August 26 2020, https://www.
Like Calories”, Forbes, April 15 2020, 32 Unemployment rate forecast, theindustry.fashion/reiss-launches-
4 BoF-McKinsey State of Fashion https://www.forbes.com/sites/ OECD, accessed on September 29 new-luxe-leisure-collection-in-answer-
2021 Survey; McKinsey Fashion lelalondon/2020/04/15/allbirds-is- 2020, https://data.oecd.org/unemp/ to-the-new-normal/
Scenarios, September 2020 the-first-fashion-brand-to-label-its- unemployment-rate-forecast.htm 44 Throughout Jan to Aug 2020, when
carbon-footprint-like-calories/?sh=2 indexing stock prices to December
5 “UN/DESA Policy Brief #72: 220ecb170db#604e05f670db 33 “Survey: US consumer 2019 levels
COVID-19 and sovereign debt”, UN/ sentiment during the coronavirus
DESA, May 14 2020, https://www. 18 McKinsey Fashion Scenarios, crisis”, McKinsey, October 20 45 When indexing stock prices to
un.org/development/desa/dpad/ September 2020 2020, https://www.mckinsey. December 2019 levels.
publication/un-desa-policy-brief-72- com/business-functions/
covid-19-and-sovereign-debt/ 19 “Coronavirus: ‘World faces worst marketing-and-sales/our-insights/ 46 McKinsey Fashion Scenarios,
recession since Great Depression’”, survey-us-consumer-sentiment- September 2020
6 “P&G beauty suffers amid travel BBC, April 14 2020, https://www.bbc. during-the-coronavirus-crisis
retail closures despite strong Q3 com/news/business-52273988 47 “Zalando expects double-digit
group sales”, Cosmetic Design 34 “Q2 2020 Quarterly Statement”, growth in 2020”, Zalando Corporate,
Europe, April 20 2020, https:// 20 McKinsey Fashion Scenarios, Hugo Boss, August 4 2020, https:// May 6 2020, https://corporate.
www.cosmeticsdesign-europe.com/ September 2020 group.hugoboss.com/fileadmin/ zalando.com/en/investor-relations/
Article/2020/04/20/P-G-Q3-sales- media/hbnews/user_upload/Investor_ news-stories/zalando-expects-double-
rise-but-beauty-shrinks-amid-travel- 21 McKinsey Survey, “US Relations/Finanzberichte/2020/ digit-growth-2020
retail-closures consumer sentiment during the HUGO_BOSS_Quarterly_Statement_
coronavirus crisis”, McKinsey, Q2_2020.pdf 48 “Farfetch announces second quarter
7 UNTWO Market intelligence July October 7 2020, https://www. 2020 results”, Farfetch Earnings
2020 update, https://www.unwto.org/ mckinsey.com/business-functions/ 35 Curry, Rhiannon, “Fashion retailers Release, August 13 2020, https://
The State of Fashion 2021
120
57 BoF interview with Rania Masri, gaming”, Vogue Business, 81 Auxier, Brooke, “Activism on for migrant domestic workers”,
September 2020 August 28 2020, https://www. social media varies by race and Human Rights Watch, September
voguebusiness.com/technology/ ethnicity, age, political party”, 18 2020, https://www.hrw.org/
58 “Adapting to the next normal fashion-esports-gaming-monetisation Pew Research Center, July 13 news/2020/09/18/lebanon-new-
in retail: The customer experience 2020, https://www.pewresearch. safeguards-migrant-domestic-workers
imperative”, McKinsey, May 14 70 Lam, Teresa and Chan, Tracy, org/fact-tank/2020/07/13/
2020, https://www.mckinsey.com/ “Beyond COVID-19: How Asia’s activism-on-social-media-varies-by- 93 Magazine, Aanchal, “Explained:
industries/retail/our-insights/ retailers can navigate the post- race-and-ethnicity-age-political-party/ In labour codes, what changes for
adapting-to-the-next-normal-in-retail- pandemic new normal”, Fung Business workers and hirers?”, The Indian
the-customer-experience-imperative Intelligence, May 2020, https://www. 82 Nazir, Sahar, “Will Boohoo’s Express, September 23 2020, https://
fbicgroup.com/sites/default/files/ young customers overlook the indianexpress.com/article/explained/
59 “Consumer sentiment and Beyond_COVID-19.pdf modern slavery scandal?”, Retail govts-new-versions-of-labour-codes-
behavior continue to reflect the Gazette, July 16 2020, https://www. key-proposals-and-concerns-6603354/
uncertainty of the COVID-19 crisis”, 71 Gomelsky, Victoria, “Watch brands retailgazette.co.uk/blog/2020/07/
McKinsey, July 8 2020, https://www. go digital. (No, it’s not 2010.)”, The New will-boohoo-young-customers- 94 Sanchez, Chelsey, “California
mckinsey.com/business-functions/ York Times, June 10 2020, https:// overlook-modern-slavery-scandal/ Legislators Fail to Pass a Bill That
marketing-and-sales/our-insights/a- www.nytimes.com/2020/06/10/ Would Have Protected Garment
global-view-of-how-consumer- fashion/watch-online-sales-digital. 83 Levitt, Alison, “Independent Workers”, Harper’s Bazaar, September
behavior-is-changing-amid-covid-19 html Review into the Boohoo Group PLC’s 4 2020, https://www.harpersbazaar.
Leicester supply chain”, Boohoo Group com/fashion/designers/a33917990/
60 “Shoppable livestreaming is 72 “Adapting to the next normal Plc, September 24 2020, https:// california-garment-worker-protection-
the rage in China. Will it take off in in retail: The customer experience www.boohooplc.com/sites/ act-dies/
the US?”, Forbes, August 19 2020, imperative”, McKinsey, May 14 boohoo-corp/files/final-report-open-
https://www.forbes.com/sites/ 2020, https://www.mckinsey.com/ version-24.9.2020.pdf 95 “Travel & Tourism – Global
richardkestenbaum/2020/08/19/ industries/retail/our-insights/ economic impact & trends 2020”,
shoppable-livestreaming-is-the- adapting-to-the-next-normal-in-retail- 84 “An agenda for change in June 2020, https://wttc.org/
rage-in-china-will-it-take-off-in-the- the-customer-experience-imperative UK garment manufacturing”, Research/Economic-Impact/
us/#455c54b52049 Boohoo Group Plc, September 25 moduleId/1445/itemId/91/
73 McDowell, Maghan, “Burberry tests 2020, https://www.boohooplc. controller/DownloadRequest/action/
61 “Luxury’s livestreaming gamble”, ‘social retail’ in China’s tech capital”, com/sites/boohoo-corp/files/ QuickDownload
The Business of Fashion, May 14 Vogue Business, July 31 2020, https:// boohoo-group-publication-of-and-
2020, https://www.businessoffashion. www.voguebusiness.com/consumers/ response-to-independent-review.pdf 96 McKinsey Tourism Recovery Model
com/articles/professional/ burberry-tests-social-retail-in-chinas-
luxurys-livestreaming-gamble tech-capital 85 Nazir, Sahar, “Will Boohoo’s 97 “Impact assessment of the
young customers overlook the Covid-19 outbreak on international
62 Wang, Xueqiao, “Luxury groups 74 BoF-McKinsey State of Fashion modern slavery scandal?”, Retail tourism”, UNWTO, May 2020,
experiment with China’s livestreaming 2021 Survey Gazette, July 16 2020, https://www. https://www.unwto.org/
boom”, Financial Times, June 27 2020, retailgazette.co.uk/blog/2020/07/ impact-assessment-of-the-covid-19-
https://www.ft.com/content/1a31079c- 75 Khambay, Alysha, “Garment will-boohoo-young-customers- outbreak-on-international-tourism
69ff-4646-aeed-cce1a80e34c8 workers are facing a humanitarian overlook-modern-slavery-scandal/ McKinsey Travel, Logistics &
crisis – but don’t blame COVID-19”, Transport Infrastructure
63 “Luxury’s livestreaming gamble”, Open Democracy, June 23 2020, 86 Howard, Tom, “Boohoo investors
The Business of Fashion, May 14 https://www.opendemocracy.net/en/ smiling again after slavery row”, 98 “International tourism and
2020, https://www.businessoffashion. oureconomy/garment-workers-are- The Times, September 24 2020, Covid-19” dashboard,
com/articles/professional/ facing-a-humanitarian-crisis-but- https://www.thetimes.co.uk/article/ UNWTO, September 15 2020,
luxurys-livestreaming-gamble dont-blame-covid-19/ boohoo-investors-smiling-again-after- https://www.unwto.org/
slavery-row-7tl5vkchb international-tourism-and-covid-19
64 Kestenbaum, Richard, “Shoppable 76 McNamara, Mei-Ling “World’s
livestreaming is the rage in China. Will garment workers face ruin as 87 McKinsey Fashion Scenarios, 99 “UNTWO World Tourism
it take off in the US?”, Forbes, August fashion brands refuse to pay $16bn”, consumer survey, N = 1,050 across Barometer” UNWTO, August/
19 2020, https://www.forbes.com/ The Guardian, October 8 2020, Germany, Spain and UK in August 2020 September 2020, https://
sites/richardkestenbaum/2020/08/19/ https://www.theguardian.com/ www.e-unwto.org/doi/epdf/10.18111/
shoppable-livestreaming-is-the- global-development/2020/oct/08/ 88 Rougeau, Naomi, “How Aurora wtobarometereng.2020.18.1.5
rage-in-china-will-it-take-off-in-the- worlds-garment-workers-face-ruin-as- James took the 15 percent pledge
us/#455c54b52049 fashion-brands-refuse-to-pay-16bn from an Instagram post to A501(C) 100 “Rinascente Joins the
(3)”, Elle, September 15 2020, https:// Omnichannel Arena”, WWD,
65 “Livestreaming e-commerce takes 77 “The BoF podcast: Kalpona Akter on www.elle.com/fashion/a33966286/ June 10 2020, https://wwd.
off in the US”, Coresight Research, choosing between lives and livelihood”, aurora-james-15-percent-pledge/ com/business-news/retail/
July 22 2020, https://coresight.com/ The Business of Fashion, May 5 2020, rinascente-joins-the-omnichannel-
research/livestreaming-e-commerce- https://www.businessoffashion. 89 Brown, Sarah, “How fashion arena-1203650431/
takes-off-in-the-us/ com/articles/podcasts/ and beauty can better engage with
the-bof-podcast-kalpona-akter-on- black businesses”, The Business 101 BoF interview with Anne Pitcher,
66 “Announcing more access to choosing-between-lives-and-livelihood of Fashion, October 7 2020, September 2020
checkout on Instagram and new https://www.businessoffashion.
tools for businesses with shops”, 78 “Arcadia redundancies: retail com/articles/professional/ 102 McKinsey Tourism Recovery
Instagram, August 25 2020, https:// group announces full payouts in fashion-black-owned-businesses Model
business.instagram.com/blog/ reversal”, The Guardian, September
updates-to-checkout-on-instagram- 13 2020, https://www.theguardian. 90 “EU Commissioner for Justice 103 BoF-McKinsey State of Fashion
and-shops-features com/business/2020/sep/13/ commits to legislation on mandatory 2021 Survey
arcadia-redundancies-retail-group- due diligence for companies”, Business
67 “TikTok unveils first shoppable announces-full-payouts-in-reversal and Human Rights Resource Centre, 104 “The Travel Industry Turned
livestream with Ntwrk”, Mobile April 29 2020, https://www.business- Upside Down”, Skift Research &
Marketer, August 24 2020, https:// 79 Howland, Daphne, “Consumers humanrights.org/en/latest-news/ McKinsey, September 2020, https://
www.mobilemarketer.com/news/ want retailers to do the right eu-commissioner-for-justice-commits- www.mckinsey.com/industries/travel-
tiktok-unveils-first-shoppable- thing”, Retail Dive, June 15 2020, to-legislation-on-mandatory-due- logistics-and-transport-infrastructure/
livestream-with-ntwrk/583992/ https://www.retaildive.com/news/ diligence-for-companies/ our-insights/the-travel-industry-
consumers-want-retailers-to-do-the- 91 Abdulla, Hannah, “German turned-upside-down-insights-analysis-
68 McDowell, Maghan, “Ralph Lauren right-thing/579130/ supply chain act blocked by and-actions-for-travel-executives
thinks people want to shop their economics ministry”, Just Style,
Bitmoji”, Vogue Business, August 6 80 “The influence of ‘woke’ consumers September 1 2020, https:// 105 “Can China Save Travel Retail
2020, https://www.voguebusiness. on fashion”, McKinsey, February 12 www.just-style.com/news/ in 2020?”, The Business of Fashion,
com/technology/ralph-lauren-thinks- 2019, https://www.mckinsey.com/ german-supply-chain-act-blocked-by- September 24 2020, https://www.
people-want-to-shop-their-bitmoji industries/retail/our-insights/ economics-ministry_id139479.aspx businessoffashion.com/articles/
69 Biondi, Annachiara, “Fashion’s the-influence-of-woke-consumers- professional/china-travel-retail-duty-
new playground: Esports and on-fashion 92 “Lebanon: new safeguards free-dfs-group-wangfujing-group-
121
bailian-group-wuhan-wushang-group new-york-retailers-follow-their- Street Journal, June 17 2020, nike-inc-nke-q4-2020-earnings-call-
customers-to-the-hamptons/ https://www.wsj.com/articles/ transcript.aspx
106 “China’s domestic flights recover to sales-are-going-out-of-style-at-these-
pre-Covid-19 levels”, Argus, September 119 Samsonite Group H1 2020 retailers-11592391603 143 “Tapestry Inc., Q4 2020 earnings
3 2020, https://www.argusmedia.com/ earnings webcast and presentation, call”, The Motley Fool, June 27 2020,
en/news/2138209-chinas-domestic- http://webcast.archive.wisdomir. 131 BoF interview with Michael Ward, https://www.fool.com/earnings/
flights-recover-to-precovid19-levels com/10240/1/1/ September 2020 call-transcripts/2020/08/13/
tapestry-inc-tpr-q4-2020-earnings-
107 “More than 600 million people 120 “Rimowa Branches Out Into 132 “Consumer sentiment on call-transcript/
traveled in China during ‘Golden Eyewear”, WWD, June 23 2020, sustainability and fashion in the
Week’”, CNBC, October 9 2020, https://wwd.com/accessories-news/ COVID crisis”, McKinsey, May 144 “SMCP Q2 earnings call”, Intrado
https://www.cnbc.com/2020/10/09/ eyewear/rimowa-launches-eyewear- 2020, https://www.mckinsey.com/ Globe Newswire, July 29 2020, https://
china-attractions-630-million-people- collection-1203657839/ industries/retail/our-insights/ www.globenewswire.com/news-
travel-during-golden-week.html survey-consumer-sentiment-on- release/2020/07/29/2069137/0/en/
121 Edited.com 2019 analysis of share sustainability-in-fashion SMCP-2020-Q2-Sales.html
108 “Can China Save Travel Retail of product offering sold at a discount in See the “End of Ownership” theme
in 2020?”, The Business of Fashion, “Fashion on climate: “How the fashion in “The State of Fashion 2019”, BoF, 145 “Tipping Point: Will the Flood of
September 24 2020, https://www. industry can urgently act to reduce its McKinsey, November 2018, https:// Collections Yield to Slower Fashion?”,
businessoffashion.com/articles/ greenhouse-gas emissions”, McKinsey www.mckinsey.com/industries/retail/ WWD, April 2 2020, https://wwd.
professional/china-travel-retail-duty- & Global Fashion Agenda, August our-insights/the-state-of-fashion- com/fashion-news/designer-luxury/
free-dfs-group-wangfujing-group- 26 2020, https://www.mckinsey. 2019-a-year-of-awakening will-coronavirus-reduce-fashion-
bailian-group-wuhan-wushang-group com/industries/retail/our-insights/ seasons-collections-1203549445/
fashion-on-climate 133 “The BoF Podcast: Farfetch’s
109 “China’s domestic flights recover to José Neves Says Profitability Is Still 146 “Fashion’s New Order – How
pre-Covid-19 levels”, Argus, September 122 McKinsey analysis based on Possible in 2021”, The Business of The Coronavirus Pandemic Has
2020 3, https://www.argusmedia.com/ S&P Capital IQ Company Screening Fashion, July 9 2020, https://www. Changed The Fashion Industry”, Elle
en/news/2138209-chinas-domestic- Report — Selection of companies businessoffashion.com/articles/ UK, July 29 2020, https://www.elle.
flights-recover-to-precovid19-levels coded as Apparel, Accessories podcasts/the-bof-podcast-farfetchs- com/uk/fashion/trends/a33442347/
& Luxury, Apparel Retail and jose-neves-says-profitability-is-still- covid-affected-fashion-industry/
110 “The Travel Industry Turned Department Stores with revenues possible-in-2021
Upside Down”, Skift Research & >$100M, August 2020 147 “Gucci bids farewell to fashion
McKinsey, September 2020, https:// 134 BoF interview with Michael Burke, week as brand goes seasonless”, The
www.mckinsey.com/industries/travel- 123 McKinsey analysis based on S&P October 2020 Guardian, May 25 2020, https://www.
logistics-and-transport-infrastructure/ Capital IQ Company Screening Report theguardian.com/fashion/2020/
our-insights/the-travel-industry- - Selection of companies coded as 135 “Reebok’s ‘First Pitch’ may/25/gucci-fashion-week-
turned-upside-down-insights-analysis- Apparel, Accessories & Luxury, Apparel Lets Shoppers Decide Which seasonless-cuts-shows
and-actions-for-travel-executives Retail and Department Stores with Sneakers Get Made”, Sourcing
revenues >$100M, August 2020 Journal, August 5 2020, https:// 148 “Open Letter to the Fashion
111 McKinsey Fashion Scenarios, sourcingjournal.com/footwear/ Industry”, May 2020, https://
The State of Fashion 2021
122
fashion-on-climate kohls-sees-billions-in-market-share- Style, June 9 2020, https://www. 193 “How garment factories are
free-as-retailers-go-bankrupt.html just-style.com/analysis/us-apparel- vetting customers during COVID-19”,
156 “Resale growth during Covid-19: imports-from-central-america-fall-off- Sourcing Journal, July 24 2020, https://
sellers engage in ‘quarantine clean 169 Anderson, George, “Will a-cliff-in-april_id138904.aspx sourcingjournal.com/topics/sourcing/
out frenzies’”, FashionUnited, June 8 Bloomingdale’s grab hold of the garment-factories-retail-customers-
2020, https://fashionunited.uk/news/ luxury products market?”, Retail 182 “Fashion’s Supply Chain coronavirus-supplier-payments-hsbc-
fashion/resale-growth-during-covid- Wire, September 3 2020, https:// Disruptions: What You Need to Know”, tradewind-222930/
19-sellers-engage-in-quarantine-clean- retailwire.com/discussion/ The Business of Fashion, March 31
out-frenzies/2020060849257 will-bloomingdales-grab-hold-of-the- 2020, https://www.businessoffashion. 194 H&M Group Fair Living Wages
luxury-products-market/ com/articles/professional/ program, https://hmgroup.com/
157 “Fashion on climate”, Mckinsey fashions-supply-chain-disruptions- sustainability/fair-and-equal/wages.
& Global Fashion Agenda, August 170 Ellinger, Allan, “COVID-19 will what-you-need-to-know html
26 2020, https://www.mckinsey. spark a new wave of consolidation –
com/industries/retail/our-insights/ and not just from the usual players”, 183 “Time for Change: how to use the 195 “Fashion on Climate”, Mckinsey
fashion-on-climate Sourcing Journal, May 3 2020, crisis to make fashion sourcing more & Global Fashion Agenda, August
https://sourcingjournal.com/topics/ agile and sustainable”, McKinsey, 26 2020, https://www.mckinsey.
158 Economic profit from listed thought-leadership/coronavirus- May 6 2020, https://www.mckinsey. com/industries/retail/our-insights/
companies only, McKinsey Global fashion-retail-consolidation-mergers- com/industries/retail/our-insights/ fashion-on-climate
Fashion Index in The State of Fashion acquisitions-dtc-208710/ time-for-change-how-to-use-the-
2021 crisis-to-make-fashion-sourcing-more- 196 “Time for Change: how to use the
171 “India’s Reliance Retail in ‘talks’ agile-and-sustainable crisis to make fashion sourcing more
159 “The State of Fashion 2020 on Debenhams”, Fashion Network, agile and sustainable”, McKinsey,
Coronavirus Update”, McKinsey 24th September 2020, https:// 184 “Italy’s artisan luxury suppliers fear May 6 2020, https://www.mckinsey.
& Company and BoF, April 7 2020, uk.fashionnetwork.com/news/ Covid-19 will finish them”, Financial com/industries/retail/our-insights/
https://www.mckinsey.com/ India-s-reliance-retail-in-talks-on- Times, August 28 2020, https://www. time-for-change-how-to-use-the-
industries/retail/our-insights/ debenhams,1246003.html ft.com/content/cd276ecb-8d64-4aff- crisis-to-make-fashion-sourcing-more-
its-time-to-rewire-the-fashion-system- 9ead-26c8b8febb1b agile-and-sustainable
state-of-fashion-coronavirus-update 172 “The next normal: Retail M&A
and partnerships after COVID-19”, 185 “US apparel imports from Central 197 “Fashion on Climate”, Mckinsey
160 “Retail woes: a running list McKinsey, April 24 2020, https:// America fall off a cliff in April”, Just & Global Fashion Agenda, August
of fashion bankruptcies”, the www.mckinsey.com/business- Style, June 9 2020, https://www. 26 2020, https://www.mckinsey.
Fashion Law, September 10 2020, functions/m-and-a/our-insights/ just-style.com/analysis/us-apparel- com/industries/retail/our-insights/
https://www.thefashionlaw.com/ the-next-normal-retail-m-and-a-and- imports-from-central-america-fall-off- fashion-on-climate
retail-woes-a-bankruptcy-timeline/ partnerships-after-covid-19 a-cliff-in-april_id138904.aspx
198 See, for example, David Simchi-
161 Mau, Dhani, “All the fashion 173 “Who wants to buy Europe’s 186 “The true cost of brands not paying Levi, Willian Schmidt, and Yehua Wei,
and beauty brand closures and failing fashion brands?”, The Business for orders during the COVID-19 “From superstorms to factory fires:
bankruptcies caused by the pandemic”, of Fashion, August 10 2020, https:// crisis”, Forbes, March 30 2020, Managing unpredictable supply-chain
Fashionista, September 10 2020, www.businessoffashion.com/articles/ https://www.forbes.com/sites/ disruptions,” Harvard Business Review,
https://fashionista.com/2020/05/ professional/who-wants-to-buy- brookerobertsislam/2020/03/30/ January-February 2014 issue; and
fashion-beauty-brands-shut-down- europes-failing-fashion-brands the-true-cost-of-brands-not-paying- Yossi Sheffi, “The power of resilience:
bankrupt-coronavirus for-orders-during-the-covid-19- How the best companies manage the
174 Ibid crisis/#7514dbfd5ccc unexpected”, Cambridge, MA: MIT
162 “Renown files for bankruptcy”, Press, 2015
Retail in Asia, May 17 2020, https:// 175 McKinsey analysis of public 187 “Digital map shows Bangladesh
retailinasia.com/in-trends/ company financial data, CapitalIQ factory closures since pandemic”, 199 Masters, Jeff, “Earth’s 40 billion-
renown-files-for-bankruptcy/ Just Style, August 3 2020, https:// dollar weather disasters of 2019,”
176 Rooney, Kate, “Private equity’s www.just-style.com/news/ Scientific American blog, January 22
163 “Fashion’s bankruptcy watch record $1.5 trillion cash pile comes digital-map-shows-bangladesh-factory- 2020; and Coronese, Matteo et al.,
list is growing in the US”, Vogue with a new set of challenges”, closures-since-pandemic_id139299. “Evidence for sharp increase in the
Business, August 3 2020, https:// CNBC, January 3 2020, https:// aspx economic damages of extreme natural
www.voguebusiness.com/consumers/ www.cnbc.com/2020/01/03/ disasters,” Proceedings of the National
fashion-bankruptcy-watch-list-is- private-equitys-record-cash-pile- 188 “Time for Change: how to use the Academy of Sciences, volume 116,
growing-in-the-us comes-with-a-new-set-of-challenges. crisis to make fashion sourcing more number 43, October 2019
html agile and sustainable”, McKinsey,
164 McKinsey Fashion Scenarios, May 6 2020, https://www.mckinsey. 200 Losses measured in net present
September 2020 177 “Buyer ratings by Better Buying”, com/industries/retail/our-insights/ value. If losses are not discounted,
Better Buying, September 2019, time-for-change-how-to-use-the- they would range significantly higher,
165 “Department store chain Neiman https://betterbuying.org/wp-content/ crisis-to-make-fashion-sourcing-more- wiping out the majority of a year’s
Marcus emerges from bankruptcy”, uploads/2019/09/4523_better_buying_ agile-and-sustainable profits
Reuters, September 25 2020, report_summer2019_final.pdf
https://uk.reuters.com/article/ 189 “Farce majeure: How global 201 Andrews, Edmund, “How to survive
us-neiman-marcus-gp-bankruptcy- 178 “Fashion’s new must-have: apparel brands are using the the disruption in global supply chains,”
idUKKCN26G2RT sustainable sourcing at scale”, COVID-19 pandemic to stiff suppliers Fast Company, April 21 2020, https://
McKinsey, October 17 2019 https:// and abandon workers”, ECCHR, www.fastcompany.com/90491078/
166 Moin, David, “J. Crew Group www.mckinsey.com/industries/retail/ ILAW, Workers Rights Consortium, how-to-survive-the-disruption-in-
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September 11 2020, https://wwd.com/ sustainable-sourcing-at-scale eu/fileadmin/ECCHR_PP_FARCE_
business-news/retail/j-crew-emerges- MAJEURE.pdf 202 Wahba, Phil, “How Nike is
bankruptcy-1234580243/ 179 “Time for Change: how to use the overcoming the coronavirus impact
crisis to make fashion sourcing more 190 BoF Interview with Helena on its China business,” Fortune,
167 “The BoF podcast: Neiman Marcus agile and sustainable”, McKinsey, Helmersson, October 2020 March 25 2020, https://fortune.
Chief Executive sees stores as vital May 6 2020, https://www.mckinsey. com/2020/03/25/nike-coronavirus-
for digital growth”, The Business of com/industries/retail/our-insights/ 191 “Can fast fashion’s 2.5tn supply business-impact-china/; and NIKE,
Fashion, July 16 2020, https://www. time-for-change-how-to-use-the- chain be stitched back together?”, Inc. Fiscal 2020 Third Quarter Results,
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podcasts/the-bof-podcast-neiman- agile-and-sustainable www.ft.com/content/62dc687e-d15f-
marcus-chief-executive-sees-stores-as- 46e7-96df-ed7d00f8ca55 203 “25,000 stores are predicted
vital-for-digital-growth 180 “The ‘Zero Inventory’ Solution”, to close in 2020, as the coronavirus
The Business of Fashion, September 7 192 “Luxury brands have a ‘respect pandemic accelerates industry
168 Thomas, Lauren, “Kohl’s sees 2020, https://www.businessoffashion. deficit’ with Indian artisans”, The upheaval”, CNBC, June 9 2020,
billions in market share up for com/articles/professional/ Business of Fashion, May 18 2020, https://www.cnbc.com/2020/06/09/
grabs as retailers go bankrupt, shut zero-inventory-fashion-business https://www.businessoffashion.com/ coresight-predicts-record-25000-
stores”, CNBC, August 18 2020, 181 “US apparel imports from Central articles/professional/luxury-artisans- retail-stores-will-close-in-2020.html
https://www.cnbc.com/2020/08/18/ America fall off a cliff in April”, Just india-craftsmanship-kering-lvmh
123
204 McKinsey Fashion Scenarios, veut recycler ses vieux modèles ”, https://www.theceomagazine. shows-covid
September 2020 Challenges, September 7 2020, https:// com/business/retail-wholesale/
www.challenges.fr/green-economie/ luxury-brands-japan-asia 241 “2.1 million retail jobs lost from
205 McKinsey Real Estate Practice pionniere-de-la-basket-ecolo-veja- impact of coronavirus”, Fashion
analysis met-un-pied-dans-l-economie- 229 “Uniqlo: plans to open 80-100 United, May 8 2020, https://
circulaire_725761 stores every year in China unchanged”, fashionunited.com/news/business/2-
206 “Zara Owner to Invest $3 East Money Information, March 1-million-retail-jobs-lost-from-impact-
Billion to Expand Amid Covid-19 218 “Luxury Brands Face Uncertain 18 2020, http://finance.eastmoney. of-coronavirus/2020050833478
Crisis”, Bloomberg, June 10 Future in Latin America”, The Business com/a/202003181422082781.html
2020, https://www.bloomberg. of Fashion, June 30 2020, https:// 242 The coronavirus effect
com/news/articles/2020-06-10/ www.businessoffashion.com/articles/ 230 McKinsey Fashion Scenarios, on advertising”, Advertiser
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231 “Can China Save Travel Retail com/wp-content/
207 “Nike Is Shifting Resources to 219 “The rise of ‘dark stores’—and how in 2020?”, The Business of Fashion, uploads/2020/04/03.2020-
Digital: Layoffs + More Changes they could save struggling retail”, Fast September 24 2020, https://www. Coronavirus-Effect-on-Advertising-
Ahead”, Footwear News, June Company, September 11 2020, https:// businessoffashion.com/articles/ White-Paper-FINAL.pdf
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acceleration-1203013370/ 2020, https://www.ft.com/content/
220 “Nordstrom’s digital sales 232 “Luxury brands set sights on e0470438-0334-4e96-9253-
208 “The Case for Opening a New grow 5% in Q1”, Digital Commerce Chinese tourists in Hainan as extended 8c2d0883d237
Store Right Now”, The Business of 360, May 29 2020, https://www. duty-free quotas and pandemic-free
Fashion, August 25 2020, https:// digitalcommerce360.com/2020/05/29/ shopping attract travellers”, South 244 “Terminó Colombiamoda
www.businessoffashion.com/articles/ nordstroms-digital-sales-grow-5-in-q1/ China Morning Post, October 8 2020, 2020 en una edición atípica”, El
professional/brick-and-mortar-retail- https://www.scmp.com/lifestyle/ Tiempo, August 5 2020, https://www.
coronavirus-off-white 221 “Covid-19: Stores go dark to fashion-beauty/article/3104395/ eltiempo.com/colombia/medellin/
serve online demand”, Essential luxury-brands-set-sights-chinese- termino-colombiamoda-2020-en-
209 “Closing the skills gap in retail with Retail, April 16 2020, https://www. tourists-hainan-extended#_=_ una-edicion-atipica-526226
people analytics”, McKinsey, August essentialretail.com/features/
25 2020, https://www.mckinsey. dark-stores-to-serve-online-demand 233 “High-end brands closing 245 “Defining the go-to-market
com/industries/retail/our-insights/ mainland stores as Chinese spend & pricing strategy for HATCH, a
closing-the-skills-gap-in-retail-with- 222 “Macy’s Still Wants To Open New more overseas”, Global Times, April fashion start up”, Riverflex, April
people-analytics Stores—Just Don’t Go Looking For 25 2016, https://www.globaltimes.cn/ 21 2020, https://riverflex.com/
Them In A Mall”, Forbes, February content/980009.shtml go-to-market-pricing-strategy-hatch/
210 “How an Exodus from Cities Will 5 2020, https://www.forbes.com/
Reshape Retail”, The Business of sites/laurendebter/2020/02/05/ 234 “Why Gucci Is Investing Big in 246 BoF-McKinsey State of Fashion
Fashion, June 10 2020, https://www. macys-still-wants-to-open-new-stores- These Five Cities”, The Business of 2021 Survey
The State of Fashion 2021
124
start reskilling their workforces 2019, https://www.glossy.co/beauty/ 279 Amazon Stackline data as of August such as Walmart or Amazon
now”, McKinsey, May 7 2020, https:// beauty-brands-are-setting-their- 2020, extrapolated for 2020
www.mckinsey.com/business- sights-in-tiktok/ 292 McKinsey Fashion Scenarios,
functions/organization/our-insights/ 280 McKinsey Premium Haircare September 2020
to-emerge-stronger-from-the-covid- 266 “Beauty brands are setting their Consumer Survey, June 2020
19-crisis-companies-should-start- sights on TikTok”, Glossy, July 31 293 Wise, Harry, “Skyrocketing
reskilling-their-workforces-now 2019, https://www.glossy.co/beauty/ 281 “NPD Reports Huge Growth in online sales help Zara owner Inditex
beauty-brands-are-setting-their- China’s Prestige Beauty E-commerce return to profitability over the
254 McKinsey Beauty Sales Forecastt sights-in-tiktok/ Sales”, Beauty Packaging, summer - despite in-store sales
September 1 2020, https://www. being decimated by lockdown”,
255 “How beauty is taking flight in 267 “NPD Q2 2020: Prestige Beauty beautypackaging.com/contents/ This is Money, September 16 2020,
the turbulent world of travel retail”, Sales Fall 36%”, BeautyMatter, view_breaking-news/2020-09-01/ https://www.thisismoney.co.uk/
Cosmetics Business, July 2019, https:// August 3 2020, https://beautymatter. npd-reports-huge-growth-in-chinas- money/markets/article-8738629/
cosmeticsbusiness.com/news/ com/2020/08/npd-q2-2020-prestige- prestige-beauty-e-commerce-sales/ Surging-online-sales-helps-Zara-
article_page/How_beauty_is_taking_ beauty-sales-fall-36/ owner-Inditex-return-profitability.
flight_in_the_turbulent_world_of_ 282 “Du consommateur responsable html
travel_retail/156351 268 McKinsey Beauty Sales Forecast à l’hyperactiviste, comment les
codes de la cosmétique ont changé”, 294 Bhasin, Kim, “Guess to close
256 Forecasts for global beauty 269 “There’s an Air of Uncertainty Madame Figaro, October 15, 2020, 100 stores worldwide over next 18
recovery by region, category and In a Weak Fragrance Sector”, Happi, https://madame.lefigaro.fr/beaute/ months”, Bloomberg, 10th June
channel, reflect McKinsey perspective, May 1 2020, https://www.happi.com/ du-consommateur-responsable- 2020, https://www.bloomberg.
MGI macro-economic scenarios and issues/2020-05-01/view_eurotrends/ a-lhyperactiviste-comment-les- com/news/articles/2020-06-10/
NPD, Nielsen, IRI, Amazon Stackline theres-an-air-of-uncertainty-in-a- codes-de-la-cosmetique-ont- guess-to-close-100-stores-worldwide-
and publicly reported company weak-fragrance-sector/ change-091020-182969 over-next-18-months
financials for Q1 and Q2 2020
270 “Travel Retail Slowly Revs Up 283 “She built the ‘Sephora of 295 McKinsey Fashion Scenarios,
257 “How China’s Beauty Business Again”, WWD, October 2 2020, https:// clean beauty.’ These are her September 2020
Is Rebounding Post-Coronavirus wwd.com/beauty-industry-news/ favorite products”, Fast Company,
Crisis”, WWD, March 27 2020, beauty-features/travel-retail-starts- July 29 2020, https://www.
https://wwd.com/beauty- revving-up-again-1234612278/ fastcompany.com/90528076/
industry-news/beauty-features/ she-built-the-sephora-of-clean-beauty-
beauty-inc-newsletter-how-chinas- 271 “The Estée Lauder Companies these-are-her-favorite-products
beauty-business-is-rebounding-post- Reports Fiscal 2020 Results”, August
coronavirus-crisis-1203546924/ 20 2020, The Estée Lauder Companies 284 McKinsey Consumer Sentiment
https://www.elcompanies.com/en/ on Sustainability and Fashion in the
258 “Pandemic playbook: How news-and-media/newsroom/press- Covid Crisis, May 2020
China’s beauty industry weathered eleases/2020/08-20-2020-114523255
the COVID-19 crisis”, Cosmetics ; https://seekingalpha.com/
Design Asia, 15th of June 2020,
285 “How Aurora James Took
article/4342120-estee-lauder-
https://www.cosmeticsdesign- The 15 Percent Pledge From An
companies-inc-el-ceo-fabrizio-freda-
asia.com/Article/2020/07/15/ Instagram Post To A 501(C)(3)”,
on-q3-2020-results-earnings-call-
How-China-s-beauty-industry- Elle, September 15 2020, https://
transcript?part=single
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272 “Coty Inc. (COTY) CEO Sue Nabi
aurora-james-15-percent-pledge/
259 “How China’s Beauty Business on Q4 2020 Results - Earnings Call
Is Rebounding Post-Coronavirus 286 McKinsey Merchant Survey:
Transcript”, Seeking Alpha, August
Crisis”, WWD, March 27 2020, Beauty & Personal Care Merchant
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industry-news/beauty-features/ nabi-on-q4-2020-results-earnings-
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coronavirus-crisis-1203546924/ 273 “Inter Parfums, Inc. Results - Earnings Call Transcript”,
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260 “Perfect Diary: Strategies Seeking Alpha, September 9 seekingalpha.com/article/4342120-
For Winning The Chinese Beauty 2020, https://seekingalpha.com/ estee-lauder-companies-inc-el-ceo-
Market”, Jing Daily, March 19 pr/17999070-inter-parfums-inc- fabrizio-freda-on-q3-2020-results-
2020, https://jingdaily.com/ announces-2020-guidance earnings-call-transcript
perfect-diary-strategies-for-winning-
the-chinese-beauty-market/ 274 “The Great Makeup Crash of 2019”, 288 “Sephora’s Jean-André Rougeot
The Business of Fashion, September 13 on the Future of Beauty Retail”,
261 “L’Oréal outperforms in 2019, https://www.businessoffashion. WWD, October 14 2020, https://
China: CEO hails strength of com/articles/professional/ wwd.com/beauty-industry-news/
e-commerce, digital marketing and the-great-makeup-crash-of-2019 beauty-features/sephora-ceo-jean-
brands”, Aug 11 2020, https://www. andre-rougeot-1234630830/
loreal-finance.com/eng/news- 275 “China Prestige Beauty
release/2020-half-year-results; E-commerce Sales in June Grew 87% 289 “Normalized” industry EP growth
https://www.cosmeticsdesign-asia. Thanks to Mid-Year Promotions, is based on the assumption that the 58
com/Article/2020/08/11/L-Oreal- According to The NPD Group”, companies with Covid-effects in their
outperforms-in-China-CEO-hails- NDP, August 31 2020, https:// 2019 results (FY19 reported in March,
strength-of-e-commerce-digital- www.npd.com/wps/portal/npd/ April or May 2020), would have had
marketing-and-brands us/news/press-releases/2020/ similar growth to the rest of industry
china-prestige-beauty-e-commerce- if their financial year aligned with
262 McKinsey Consumer Sentiment sales-in-june-grew-87-thanks-to-mid- calendar year 2019. The first half 2019
Survey, July 2020 year-promotions/ results support this assumption, as 58
Covid-affected companies had EBITA
263 Amazon Stackline data as of August 276 “NPD Q2 2020: Prestige Beauty growth of 10% versus 14% in the rest
2020, extrapolated for 2020 Sales Fall 36%”, BeautyMatter, of industry.
August 3 2020, https://beautymatter.
264 McKinsey Consumer Sentiment com/2020/08/npd-q2-2020-prestige- 290 Long-term Economic Profit
Pulse Survey, September 2020, n=1,026, beauty-sales-fall-36/ implied by 2020 market valuations,
Sampled and weighted to match the US 277 McKinsey Future of Wellness while assuming constant debt and
general population 18+ years Survey, August 2020 WACC
265 “Beauty brands are setting their 278 McKinsey Interview, October 2020 291 Our figures do not include apparel
sights on TikTok”, Glossy, July 31 sales of mixed multi-category players
125
INFOGRAPHICS
1. Living with the Virus Exhibit 1: Industry Outlook Stackline and publicly reported company
Source: BoF-McKinsey State of Fashion 2021 Source: BoF-McKinsey State of Fashion 2021 financials for Q1 and Q2 2020
Survey survey
Exhibit 17: McKinsey Global Fashion Index
2. Diminished Demand Exhibit 2: Industry Outlook Source: McKinsey Global Fashion Index (MGFI)
Source: McKinsey Fashion Scenarios Source: BoF-McKinsey State of Fashion 2021
Survey Exhibit 18: McKinsey Global Fashion Index
3. Digital Sprint Source: McKinsey Global Fashion Index (MGFI)
Source: BoF-McKinsey State of Fashion 2021 Exhibit 3: Living with the Virus
survey Source: McKinsey Corporate Finance Practice Exhibit 19: McKinsey Global Fashion Index
Source: McKinsey Global Fashion Index (MGFI)
4. Seeking Justice Exhibit 4: Diminished Demand
Source: “Survey: Consumer sentiment on Source: McKinsey Fashion Scenarios Exhibit 20: McKinsey Global Fashion Index
sustainability in fashion,” McKinsey, July 17 Source: McKinsey Global Fashion Index (MGFI)
2020 Exhibit 5: Digital Sprint
Source: McKinsey analysis; Expert interviews; Exhibit 21: McKinsey Global Fashion Index
5. Travel Interrupted Euromonitor International Limited, Apparel Source: Annual reports, McKinsey Global
Source: BoF-McKinsey State of Fashion 2021 2020 edition and Luxury Goods 2019 edition, Fashion Index
Survey share of e-commerce sales (for 2019)
Exhibit 22: McKinsey Global Fashion Index
6. Less is More Exhibit 6: Seeking Justice Source: McKinsey Global Fashion Index (MGFI)
Source: BoF-McKinsey State of Fashion 2021 Source: McKinsey Fashion Scenarios: consumer
Survey survey in Germany, UK and Spain, August 2020
8. Deeper Partnerships
Source: BoF-McKinsey State of Fashion 2021 Exhibit 8: Less is More
Survey Source: BoF-McKinsey State of Fashion 2021
Survey
9. Retail ROI
Source: McKinsey Fashion Scenarios: consumer Exhibit 9: Opportunistic Investment
survey in Germany, UK and Spain, August 2020 Source: McKinsey Global Fashion Index in State
of Fashion 2021
10. Work Revolution
Source: BoF-McKinsey State of Fashion 2021 Exhibit 10: Deeper Partnerships
Survey Source: McKinsey “Time For Change” Report,
April 2020, Fashion Sourcing survey, n=348,
Sourcing stakeholders and fashion sourcing
executives
126
127
FOR EDITORIAL ENQUIRIES PLEASE CONTACT:
128
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
Naoyuki Iwatani Althea Peng
Senior Partner, Japan Partner, North America
Anita Balchandani
naoyuki_iwatani@mckinsey.com althea_peng@mckinsey.com
Partner, EMEA/United Kingdom
anita_balchandani@mckinsey.com
Fernanda Hoefel Jennifer Schmidt
Partner, Latin America Senior Partner, North America
fernanda_hoefel@mckinsey.com jennifer_schmidt@mckinsey.com
FOR PRESS ENQUIRIES PLEASE CONTACT:
adriana_clemens@mckinsey.com
Aimee Kim Alexander Thiel
Senior Partner, Asia Pacific Partner, Switzerland
FOR REGIONALLY FOCUSED ENQUIRIES: aimee_kim@mckinsey.com alexander_thiel@mckinsey.com
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The State of Fashion 2021
130