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State of Fashion 2019: Why Next Year Will be One of Awakening for the Apparel Industry, According to McKinsey

If 2018 was a reckoning for the fashion industry, McKinsey & Company says 2019 will be the awakening of it.

And what’s more, in the midst of that awakening, the U.S. will cede its position as the world’s largest fashion market to China.

While it’s been clear that companies must be nimble and able to quickly react to speed to market demands with digital-focused strategies, there’s more the industry must come to terms with in order to survive successfully.

The third annual State of Fashion Report, co-published by McKinsey & Company and Business of Fashion, makes clear that, in the coming year, companies “need to take an active stance on social issues, satisfy consumer demands for ultra-transparency and sustainability, and, most importantly, have the courage to ‘self-disrupt’ their own identity and the sources of their old success in order to realize these changes and win new generations of customers.”

What’s more, according to the report, “They also need to invest in enhancing their productivity and resilience, as the outlook is increasingly uncertain. External shocks to the system continue to lurk around the corner, and growth cannot be taken for granted…”

In 2019, both optimism and growth will taper.

The McKinsey Global Fashion Index forecasts growth of 3.5 percent to 4.5 percent next year, which will come in slightly below the predicted 4 percent to 5 percent growth for 2018. And the outlook isn’t as bright among the industry’s leaders either.

“Optimism can be found only in pockets, notably in North America and in the premium and luxury segments, aided by their strong performance in 2018,” McKinsey noted. Other segments are more pessimistic—a sentiment dragged further down by risks of trade disruptions, slowing economic growth and Brexit. That volatility and uncertainty ranked among industry players surveyed for the report, as the No. 1 challenge for 2019.

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Likewise, the industry’s overall recovery remains unequal, with luxury and emerging markets in Asia driving most of the growth.

“Greater China is expected to overtake the U.S. as the largest fashion market in the world in 2019,” according to McKinsey FashionScope. “Mid-market companies and mature economies continue to lag, with the exception of North America, which saw higher than expected growth supported by an expansive fiscal policy.”

Similarly unequal, the top 20 companies in the industry account for 97 percent of economic profit, while a growing number of publicly-traded fashion companies have been hard-pressed to create any economic value at all.

“The prizes for those who can adapt may be greater than ever—but so are the penalties for those who fail,” McKinsey said.

Endeavoring to skirt failure, companies have been keen to invest in added value, particularly where omnichannel is concerned.

“For the third year straight, the top sales growth investment priority remains developing omnichannel capabilities,” McKinsey said. “This reinforces our perception that executives have finally come to terms with the fact that the industry is digitizing, but are not yet satisfied with their own response.”

On the operational side, companies are also focused on addressing cost structures at an organizational level, namely as it relates to improving productivity. Underlining the need to adapt staid operating models to yield more agile organizations, 29 percent of those surveyed for the report said they’ll be reviewing existing structures and focusing on improving productivity in the coming year.

“Overall, the fashion industry continues to hover in a state of flux and the fortunes of individual players can turn with frightening speed,” McKinsey said. “We predict that 2019 will be a year shaped by consumer shifts linked to technology, social causes and trust issues, alongside the potential disruption from geopolitical and macroeconomic events.”