“2020 was a devastating year for the fashion industry,” Achim Berg, global fashion, apparel and luxury lead at McKinsey & Company, started to say before changing his mind. “You know, devastating is probably an understatement.”
Berg was speaking at the launch of the consulting giant’s annual State of Fashion report, published in partnership with the Business of Fashion, which takes a no-punches-pulled look at the industry nearly two years after Covid-19 gripped the globe, throwing supply chains into a state of unprecedented frenzy. But while global fashion sales are showing encouraging signs of recovery—McKinsey Fashion Scenarios suggest they will reach 96 percent to 101 percent of 2019 levels in 2021 and 103 percent to 108 percent in 2022—not everyone will reap the benefits. Profits will concentrate within a shrinking number of top players as the pandemic continues to exacerbate inequalities in performance in a “kind of winner takes all” scenario.
“The shakeout that we had foreseen is already underway,” Berg said. “All the trends that we’ve seen coming into place before Covid have basically continued to play out throughout the crisis,” with this year’s group of the top 20 “super winners” dominated by sportswear brands, luxury purveyors and homegrown Chinese players. Anta Sports, Deckers, Hermès, L Brands, Moncler and Nike, in particular, made more economic profit, meaning operating profit minus the cost of capital, in 2020 than they did in 2018. These winners will also keep winning, since they can afford to invest in omnichannel, sustainability and “adapt their business models to all the changes we see happening,” he added.
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While fashion industry revenues in 2020 fell by 20 percent from 2019 levels as a whole, they’re expected to rebound to -4 percent and +1 percent of the baseline, according to the report. Growth is projected to rear its head in 2022, when revenues are expected to see a 3 percent to 8 percent boost, though Berg cautioned that analysts haven’t taken into account any potential disruptions the omicron variant might pose.
“This could hit us harder than what we expected when we made our analysis but we stay cautiously optimistic,” he said. “Our forecasts are not going to be changed by one or two weeks of potential partial lockdowns in some of the European countries.”
One thing that’s certain is that 2022 will see an uneven recovery, with performance varying across geographies, consumer markets and sourcing regions, said Anita Balchandani, EMEA apparel, fashion and luxury lead at McKinsey. Non-luxury fashion sales in China and the United States, for instance, will finish off 2021 slightly above 2019 levels, while Europe will not recover fully until 2022.
The luxury sector also shows strong markers of growth in China due to ongoing travel restrictions and increased domestic spend, with sales in the segment expected to reach +70 percent to +90 percent over 2019 levels by the end of 2021. The U.S. luxury segment is expected to return to -5 percent to +5 percent of 2019 levels by year’s end. At the same time, the European luxury segment will remain below 2019 levels until at least 2022, since fewer Chinese nationals are traveling abroad.
This is part of the new “shape of demand,” Balchandani said. “We’ve all seen a big repatriation of consumption into fashion and luxury into local boundaries as a consequence of travel being disrupted, and particularly long-haul travel, and when you look at the prognosis for international long haul tourism in particular, we don’t expect it to fully recover until somewhere between 2023 and 2024.”
By the time travel returns, analysts expect some of this repatriation to be “relatively sticky,” she added. “So what this means if you’re a fashion and luxury player is that the domestic customer starts to get much more important.” Still, luxury has held up in 2021 and Balchandani expects that resilience to continue into 2022 because of demand from high-net-worth consumers who have been largely insulated from the financial strains of the pandemic. The future of luxury may just be more domestic.
Meanwhile, logistical bottlenecks are “for real,” Balchandani said, and supply-chain stresses on input costs will compel many companies to increase retail prices next year. In an accompanying survey, 67 percent of fashion executives said they anticipated an increase in retail prices for 2022, with an average hike of 3.2 percent. Some 14 percent of C-suiters expected prices to increase by more than 10 percent. Another 17 percent are girding themselves to lower prices, especially for the mid-market, perhaps due to the segment’s continued squeeze as the number of people who are either very rich or very poor grows during the pandemic, widening the gap between the luxury and value sectors.
With the logistical gridlock poised to persist into 2022, 49 percent of fashion executives indicated that overcrowded ports, container shortages and other disruptions as the No. 1 issue that will affect their bottom lines in 2022. “This is going to have implications for consumers,” Balchandani said. Some of this is already playing out, with fewer discounts being offered and a “much lower promotional intensity” for the month of November, one of the busiest shopping periods of the year.
The metaverse will become more important in the year ahead, Balchandani said, as consumers spend more time online and the digital “hype” spills over into virtual goods such as non-fungible tokens, or NFTs, offering fashion leaders the opportunity to engage with high-value younger cohorts in creative ways. Some 81 percent of Gen Z, she noted, played video games in the past six months, averaging 7.3 hours per week, though gaming is also “becoming much more democratic in terms of its age spread.”
Similarly, the use of social media to discover products and shop, better known as social shopping, is ready for a post-Covid boom. Indeed, more than one-third (37 percent) of fashion executives polled cited social commerce as one of the top three themes that will impact their business in 2022. Brands and retailers, Balchandani said, need to double down on in-app purchase “journeys,” livestreaming, augmented reality try-on and other innovations. “Historically this has been more of a Chinese phenomenon,” she said. “But it’s one of the new battlegrounds and even companies in the West will have to really think about how they close the loop from social discovery into commerce.”
Sustainability is another critical concern for the year ahead, Balchandani said, adding that 2022 will “be the year where companies have to go beyond making pledges.” Instead, they will have to start bringing their promises to fruition by scaling technologies, whether it’s circular textiles or product passports. According to McKinsey’s poll, 60 percent of fashion executives have invested or plan to invest in closed-loop recycling next year, while roughly two out of five have adopted or plan to adopt product passports in 2022.
“Executives have been telling us this year that sustainability is the No. 1 opportunity as well as the No. 1 challenge for this industry and certainly coming out of COP26 we’ve seen a huge number of pledges and commitments,” she said. “2022 is really important here to move from pledges to actions.”