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State of Fashion 2018: McKinsey Says Emerging Markets Key to Growth, Industry Improvement Ahead

McKinsey & Co.’s “State of Fashion 2018” report sees improvement ahead after a challenging last couple of years, although the rebound might be uneven.

Executives report optimism, even amid uncertainty, and the McKinsey Global Fashion Index forecasts industry sales growth to nearly triple from 2016 to 2018, to 3.5% to 4.5%, from 1.5%. Emerging markets remain a crucial source of this growth, and in 2018, for the first time more than half of apparel and footwear sales will originate outside Europe and North America, the report predicts.

“Although the fashion industry appears to be turning a corner, the rebound is not being felt evenly across the globe,” according to the report, written in partnership with Business of Fashion. “The main sources of growth are emerging-market countries across regions such as Asia-Pacific and Latin America, which are forecast to grow at rates ranging between 5 percent and 7.5%. Meanwhile, the economic outlook in the mature part of Europe is stable, and fashion-industry sales growth is likewise expected to remain at a modest but steady 2 to 3 percent. In North America, while overall consumer confidence is strong, the impact of policy changes is uncertain, and markdown pressures, market corrections, and store closures continue.”

The outlook for the fashion industry varies across value segments as well. Consumers are trading away from the midmarket price points even while the luxury, value and discount segments are picking up speed, the report notes. When it comes to categories, the improvement of fashion-industry sales is reflected in stronger volume growth forecasts across the board, including apparel and footwear. Handbags and luggage, and to some extent watches and jewelry, are returning slowly to their historic highs, driven by demand in Asia-Pacific.

“Athletic wear is the only category where record growth rates look to slow down slightly in 2018, as the athleisure trend has reached its peak in some mature markets,” the State of Fashion report noted. “Nonetheless, this is still expected to be the fastest-growing category, with continued strong demand in many markets.”

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These developments take place at the same time as the fashion industry goes through other transformative shifts. Mainstream customers are moving into a decisive phase of digital adoption, and online sales of apparel and footwear are projected to grow rapidly. The report notes that consumers in Southeast Asia spend an average of eight hours a day online.

“The modern shopper’s comfort with digital channels and content has created a complex customer journey across online and offline touchpoints,” the report said. “But regardless of touchpoint, consumers expect a consistent brand experience across channels. Consumers also have higher expectations of customer experience and scrutinize convenience, price, quality and newness.”

Digital-first companies such as Alibaba, Amazon, Net-a-Porter and Zappos continue to force fashion companies to provide an even more premium experience. Many consumers today expect perfect functionality and immediate support at all times, coupled with rapid delivery times as players constantly compete to expedite products, McKinsey said.

[Read more about McKinsey research: McKinsey: Automation Could Displace as Many as 800 Million Jobs, and Here’s Which Ones Will Go]

With information and the ease of comparison at their fingertips, millennial consumers in particular are becoming less brand loyal, with two-thirds of respondents to a survey conducted in conjunction with the report saying they are willing to switch brands for a discount of 30 percent or more. Shoppers are also becoming more selective, with more saying they base purchase decisions on whether a company’s practices and mission aligns with their values. At the same, time they are highly price sensitive.

Sales of the traditional fast-fashion sector have grown more than 20 percent over the last three years, and new online fast-fashion players are gaining ground. To keep up, leading fashion players are accelerating their speed from design to shelf.

“This ‘need for speed’ is driven partly by social media accelerating the movement of fashion trends to the masses, and by industry leaders using analytics and customer insights to meet customer needs better and increase responsiveness,” according to the report. “But speed and flexibility bring added complexity. Shortening lead times requires major changes to the traditional business model and supply chain, and a shift in focus to a customer-centric model. Laggards face increased fashion risk and excess inventory if they fail to match customer demand. Frontrunners are building agile supply chains supported by higher-quality consumer insights, with the frontier being close to a real-time supply chain fed by ‘test and learn’ and data analytics.”

In the light of all this change, the performance gap between frontrunners and laggards continues to widen–from 2005 to 2015, the top 20 percent of fashion companies contributed 100 percent of the industry’s entire economic profit, while in 2016, the top 20 percent’s contribution had increased to 144 percent.

The report concludes that companies are coming to accept unpredictability as the new norm, and fashion executives in 2018 will respond by focusing their energy on improving what’s within their control.

“For those leaning forward and willing to help design the new features of the modern fashion system, the opportunities at hand to truly connect with fashion consumers across the globe have never been greater,” according to the report.