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If Fashion Can’t Rewire Itself, Here’s What’s Going to Happen, McKinsey Says

Fashion has aired more of its erring ways in recent weeks as the coronavirus pandemic exposes both cracks in the supply chain system and the fault lines in its ethics.

Now more than ever—and whether industry players get on board or not—fashion needs rewiring if it has any hopes of moving forward sustainably.

“COVID-19 could spur the biggest economic contraction since World War II, hitting every sector from finance to hospitality. Yet fashion, due to its discretionary nature, is particularly vulnerable,” McKinsey & Company and Business of Fashion wrote in a coronavirus update to the State of Fashion 2020 report out Wednesday.

From the beginning of January through March 24, the average market capitalization across apparel, fashion and luxury players plunged nearly 40 percent, a drop bigger than what the overall stock market experienced, according to the report. In 2020, McKinsey estimates revenues for the apparel and footwear sector will contract between 27 percent and 30 percent year over year. For luxury, the outlook is worse: projections peg contraction between 35 percent and 39 percent.

If brick-and-mortar stores—which are shuttered worldwide to protect staff and consumers from the highly contagious virus—remain closed for two months, as much as 80 percent of publicly listed Western brands will face financial distress.

“Combined with the McKinsey Global Fashion Index (MGFI) analysis, which found that 56 percent of global fashion companies were not earning their cost of capital in 2018, we expect a large number of global fashion companies to go bankrupt in the next 12 to 18 months,” McKinsey cautioned.

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The quick upheaval of business as usual has brought the developed world to its knees, sending everything into a state of dormancy, retail spending included. Both supply and demand have taken a pounding, and sales that have been slowed to a halt means spending has been frozen for many businesses.

“Widespread store closures for an industry reliant on offline channels, coupled with consumer instinct to prioritize necessary over discretionary goods, hit brands’ bottom lines and depleted cash reserves,” McKinsey said. “Even online sales have declined 5 to 20 percent across Europe, 30 to 40 percent in the US and 15 to 25 percent in China.”

But it’s the humanitarian repercussions that will reverberate across fashion well into a post-COVID-19 world.

“Dire consequences for fashion, one of the biggest industries in the world generating $2.5 trillion in global annual revenues before the pandemic hit, entails joblessness or financial hardship for people across the value chain—from those harvesting the fibers used to make textiles to shop assistants selling the finished fashion product,” McKinsey said.

Already, factories across Bangladesh, India, Pakistan and Myanmar are reeling, with workers taking to strikes and protests for pay as owners dealing with cancelled orders question how they’ll come up with the salaries necessary to pay them. It’s a conundrum even governments in these sourcing countries are ill equipped to face, without mechanisms in place to get pay to workers who aren’t physically in the factories they work for owed to current lockdown measures.

“Though the duration and ultimate severity of the pandemic remains unknown, it is apparent that the fashion industry is just at the beginning of its struggle,” McKinsey said.

It’s a bleak, albeit realistic, outlook. And one that means fashion is finally facing its reckoning.

“The resulting ‘quarantine of consumption’ could accelerate some of these consumer shifts, such as a growing antipathy toward waste-producing business models and heightened expectations for purpose-driven, sustainable action,” McKinsey said. “The coronavirus also presents fashion with a chance to reset and completely reshape the industry’s value chain—not to mention an opportunity to reassess the values by which we measure our actions.”

For one, fashion players will have to ramp up resilience planning and adapt their operating models, McKinsey said.

In a post-COVID-19 world that will almost surely align with a recession and lackluster consumer spending (which could take as much as two years to return to normal, as it did after the 2008 recession), brands and retailers will have to give their operating models a second look.

“Companies must adopt a recovery position based on impact severity to help prepare for the deployment of a recovery action plan. This means reassessing their geographical footprint, store network and growth opportunities, while also looking for any emerging whitespace, be it during recovery or an extended crisis period,” McKinsey said. “In the event that collateral economic damage from the pandemic continues for an extended period of time, brands should review cost bases to identify measures for quick wins, set up employee plans to assess workforce decisions, and rationalize overhead spend to plan for potential store closures.”

It will also mean a reinvention of the value chain, including reviewing production regularly, considering a recalibration of fashion’s cadence, and strengthening regional integrated supply chains. Giving greater thought to nearshoring and what it could mean for the business’ flexibility and autonomy, will be key, too.

“Speed and adaptability are of the essence for this crisis. But when the first signs of normalcy do begin to emerge, companies are cautioned not to be complacent,” McKinsey said. “Instead, they must double-down on recovery and resiliency measures for this will be a time of unprecedented transformation for the global fashion industry. Only then can companies begin to decipher what their “new normal” actually looks like.”

That new normal may mean changes to the discounting cycle, too.

“As deep discounting plagues retailers for the remainder of 2020, a decade-long build-up of bargain shopping culture will be exacerbated by a rise in anti-consumerism, a glut in inventory and cash-strapped consumers looking to trade down or turn to off-price channels,” the report noted.

From today’s standpoint, more than 65 percent of consumers in the U.S. and Europe say they expect to decrease spending on apparel, which is more than the 40 percent decline they expect to see for their total household spending. The focus on essential versus discretionary spending will have its impact as many consumers will be facing their own financial distress. What’s perhaps of particular note, is that 56 percent of those surveyed said the only reason they’re buying clothing during the coronavirus crisis is because of special promotions.

While retailers will be inclined to offer steep discounts to clear inventory overflowing in warehouses, as well as leftover spring goods, and make up for lost time with closed stores, the effort may be off-putting to consumers whose appetite for consumerism and frivolous materialism will have diminished.

“This may signal the end of ‘extreme consumerism’ for some consumers who reject the idea of buying goods in large volumes,” McKinsey said. “Brands that are able to reorient their missions and business models in more sustainable ways will be able to cater to a more captive audience than ever before.”

Fashion companies will have to consider innovative ways to shrink stock and reinfuse value into their products, like accelerating “nascent sustainability trends,” the report noted.

“For many players, repurposing existing stock for new seasons will be a more viable option than recycling or upcycling with fabric additions or extractions,” McKinsey said. “Other opportunities include personalization, customer experience and a re-evaluation of the company’s fashion calendar, such as moving monthly drops into later seasons.”

Beyond discounting, the digitization the industry has been bandying about as a favorite buzzword in recent years has now reached peak necessity, and companies that can’t scale up and strengthen their digital capabilities now will suffer even more over the longer term.

“Almost overnight, the global fashion industry’s reliance on digital channels has accelerated faster than anyone could have anticipated prior to the crisis,” McKinsey said. “This could spell trouble for department stores and specialty retail, in addition to smaller players incapable of adapting to a digital-first mentality.”

What’s certain to happen as fashion moves toward its new reality, is that the weaker players simply won’t make it.

Thirty-four percent of Western fashion players were displaying signs of distress before the pandemic hit, according to McKinsey, and those are just the kinds of companies whose businesses are on the line. With shelter-at-home orders in place and businesses showing little sign of reopening soon, that number is expected to more than double.

“These headwinds will widen the gap between fashion’s winners and losers, with the latter likely to file for bankruptcy, seek government aid, close, or become targets for stronger players or private equity firms,” McKinsey said. “Early indicators of things to come are already playing out on the global stage, with heavily indebted U.S. department store Neiman Marcus reportedly commencing bankruptcy talks, Hong Kong-based supply chain giant Li & Fung receiving a $930 million privatization offer and U.K. retailer Laura Ashley declaring insolvency.”

With all that’s up ahead for fashion, innovation will be the only way forward, and the creative, critical thinking will have to extend across all points along the supply chain.

Fashion cycles will need a rethink with first-half product put-off, which will contribute to a season skip and force store merchandise to fall in line with the current season for the first time. Go-to-market processes will need to be tweaked now that brands and retailers have little option than to embrace 3D sampling and virtual production approvals, as the efficiencies have already become apparent.

Companies will have to reconsider normal production runs, embracing nearshoring as the desire for product made closer to home ramps up, and leveraging new manufacturing for capsule collections becomes an increasingly viable alternative. And sustainability will have to come to the fore as the new way to value a business as consumers retreat from over-consumption and irresponsible business practices become considerably less acceptable.

“To cope with new restrictions, mitigate the damaging impact of the pandemic and adapt to economic and consumer shifts, companies must introduce new tools and strategies across the value chain to future-proof their business models,” McKinsey said. “Fashion players must harness these innovations and scale up those that work in order to make radical and enduring changes to their organizations—and to the wider industry—after the dust settles.”