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What Will it Take to Emerge from Fashion’s ‘Great Depression’? McKinsey Has Some Ideas

There’s no question that 2020 presented a multitude of never-before-seen challenges for the fashion industry—and those hurdles proved too high for a number of brands and retailers to clear.

But according to Achim Berg, McKinsey’s apparel, fashion and luxury global leader, 2020 wasn’t just a lost year—it was the worst period the sector has seen since it began collecting figures on economic performance.

The McKinsey’s State of Fashion 2021 report published in December showed that the global fashion industry’s profits were expected to drop by 93 percent in 2020. “It’s not comparable to a financial crisis,” Berg said Friday on The McKinsey Podcast. “It’s probably closer to what people must have seen during the Great Depression.”

Berg is cautiously optimistic about seeing improved outcomes for fashion this year, despite brands nearly losing it all. That’s thanks to strong public health responses and government intervention, like stimulus packages, that help bolster businesses and line consumers’ pocketbooks with funds they can pump back into the economy.

Too big to fail

Unfortunately, the upsides won’t be felt by all of retail—just by a select few, Berg said. To a significant extent, fashion is a “winner-takes-all industry,” he added, noting that “the top 20 percent of the industry was already responsible for the lion’s share of value creation.”

McKinsey’s previous analysis found that only about 45 percent of fashion companies generate a true profit—meaning that they not only earn capital, but enjoy healthy margins. That trend only accelerated throughout the pandemic, Berg said, with just 27 percent of brands now expected to be deemed value creators. That leaves 73 percent of industry players in a much less desirable camp.

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Those that were able to survive and even thrive throughout retail’s darkest days were the household names, or “the typical suspects,” Berg added. They are “very strong brands with a strong balance sheet that were already in a better position when this crisis hit.” That strength comes from a few key places: robust digital positioning, exposure across global markets (especially big buyers like China), sustainable investments and deep connections with consumers through social media and other channels.

“The trend of a greater share of the industry now being in value-destruction territory is clearly accelerated from the run rate we were seeing prior to Covid-19,” added Anita Balchandani, who leads McKinsey’s apparel, fashion, and luxury business in the U.K., Europe, the Middle East, and Africa.

Mass casualization

At the beginning of the crisis, shoppers immediately retreated from purchasing fashion, quickly shifting into survival mode and hoarding provisions like food and household supplies, she said. Even when the scramble for toilet paper waned, consumers’ priorities continued to evolve.

“This pandemic has forced a demand rethink,” Balchandani said. Once shoppers began to contemplate their wardrobes again, they did so from a much more practical standpoint. The product mix became “dramatically different” as they began spending more time at home. “All of that has caused a real demand shock in the system,” she added.

Casualization is “not an invention of Covid-19,” Berg noted—it’s a longstanding trend toward less formal, proscribed rules for attire, especially notable in the workplace. It’s about “having casual Fridays not only on Fridays—but also from Monday to Thursday,” he said. Working from a home office or even from the couch drastically impacted the way professionals dressed last year, as all expectations were virtually erased.

What’s more, shoppers had fewer occasions to socialize or attend special events that would prompt them to spring for a new dress or suit. “A lot of culture and people-gathering had to be canceled due to the pandemic,” Berg said, adding that “all of that has an impact on how we dress, what we shop for, and how we shop for it.”

The product mix became “dramatically different” as they began spending more time at home.
Working from a home office or even from the couch drastically impacted the way professionals dressed last year, as all expectations were virtually erased. mavoimages / Adobe Stock

Digital dominance

Amid rolling retail shutdowns, the sector has seen a “huge pivot to digital,” Balchandani added, causing pain and panic among traditional retail channels like wholesale and independent stores. In some cases, capacity restrictions and long lines to get into stores became a compounding deterrent, making e-commerce all the more appealing. “If you were a player that wasn’t fully able to capitalize on that, then we’ve typically seen a deflection,” she said.

While larger, more established brands emerged victorious over their smaller, younger counterparts last year, McKinsey’s analysts are loathe to chalk it up to loyalty. In fact, Balchandani said, consumers have demonstrated during the crisis that they’re open to trying new brands—especially those that are digitally native or have a strong web and social presence. “Those have typically been the players that to some extent have also been, relatively speaking, more resilient.”

“In many countries, as of this year, 40 percent of all sales will be digital,” she added. “As players have seen stores reopen, digital channels continue to grow.”

McKinsey’s report indicated that retail has “vaulted five years forward” in the adoption of digital, both from a consumer and brand perspective, in just a matter of months. The firm expects to see more than 20 percent annual growth for online sales channels during 2021, and up to 30 percent in Europe in the U.S. in particular.

Sustainable investments pay off

“In last year’s report, we said, ‘Sustainability will be the big topic in 2020,’” Berg said, and “despite the fact that obviously the coronavirus crisis was the big topic, sustainability still stayed hugely relevant.”

Brands interested in remaining in shoppers’ good graces couldn’t afford to hit the snooze button on sustainability last year. The relative pause in everyday life activities helped shoppers slow down and take stock of their values related to consumption, Berg said.

“Market research makes us believe that people have become more conscious,” he added. “They had time to look into their wardrobes,” and they realized that “they need far less fashion if they don’t have the occasions to wear it.”

While the total number of eco-conscious fashion products across the industry remains relatively low, there has been a fivefold increase in sustainable SKUs over the past two years alone—evidence that the industry’s commitment to cutting environmental impacts has been real and fixed, even in the face of adversity. Still, McKinsey data showed that fashion’s negative effects on the planet remain a source of concern. The textile sector alone is responsible for 6 percent of global greenhouse-gas emissions. The industry’s crops account for 10-20 percent of pesticide use, while the solvents and dyes used in processing fabrics make up one-fifth of industrial water pollution. Fashion accounts for up to 35 percent of microplastics flowing into the planet’s waterways, according to McKinsey’s report.

It’s yet to be seen whether the pandemic has elevated consumer consciousness for good, Berg said, but when viewed in conjunction with ongoing trends like casualization, it’s easy to see how shoppers could continue to move toward a desire to do more with less.

“I think that a jogging pant can get you a long way these days,” he said. “But we will see—if the Roaring Twenties are back and if we are all going to celebrate that the pandemic has vanished, we might go back to buying more.”

Balchandani said that “this day of reckoning for fashion” is about revisiting how the industry works more broadly, and reimagining it “in a way that’s future-proof.”

It’s not just about curbing supply-chain impacts, she added, but about digging into increasingly popular business models like resale, repair and reuse. “These are trends that are here to stay for the consumer of tomorrow,” she said. “If you’re a luxury brand that’s going to remain relevant in the next decade, then some of these opportunities present tailwinds that you should be accelerating toward as well.

“This moment—and certainly the last nine months—has really shown us that there are almost no sacred cows in a way,” she added. “Fashion businesses are taking stock of how they can reshape their futures on a number of different dimensions.”