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These 20 Companies Will Dominate Value Creation in 2019, McKinsey Says

We’ve heard of the 80-20 rule, but in fashion it seems it’s the 97-20 rule that applies: According to McKinsey & Company, 97 percent of economic profits for the fashion industry are earned by just 20 companies—many of which are in the luxury segment.

The top 20 cohort, according to the recently released State of Fashion Report, co-published by McKinsey & Company and Business of Fashion, has remained stable over time, despite the rampant market shifts impacting the sector.

“Long-term leaders include, among others, Inditex, LVMH and Nike, which have more than doubled their economic profit over the past 10 years,” McKinsey noted. “According to our estimates, each racked up more than $2 billion in economic profit in 2017.” The findings are derived from the McKinsey Global Fashion Index (MGFI), which tracks financial development across six price segments in the sector, and looks at more than 500 public and private companies globally.

Inditex, the parent company of Zara and the yet unreachable fast fashion success story, generated more than $4 billion in economic profit last year. Nike followed with nearly $3 billion, and then LVMH with $2.3 billion. TJX Companies, Hermès, H&M, Richemont, Ross, Adidas, and Kering rounded out the top 10. And from there, L Brands, Pandora, Fast Retailing, Next, VF Corporation, Luxottica, Michael Kors, Gap, Hanesbrands and Burberry closed out the top 20 group.

“By segment, we also continue to see polarization, with luxury and value advancing and mid-market players falling behind. Companies able to differentiate on price point/efficiency or brand have performed best,” McKinsey said. “The most resilient winners included luxury, sportswear and fast fashion players, reinforcing the point that brand investment and operational efficiency are key drivers of sustainable business models.”

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Notably, no department stores made the top 20 at all, whereas three were on the list 10 years ago. That fact, according to McKinsey, is “a stark illustration of the fragility of the traditional retailing model.”

Perhaps more surprisingly considering e-tailing’s ascent, online players aren’t part of the top 20 group either. “Their average top-line growth is four times higher than that of other fashion players, but this tends to translate only into valuation multiples (twice as high as average) while profitability still lags behind,” McKinsey said.

What’s driving the top 20 “super winners’” long-term success? Profitability and capital efficiency.

“Winners all had above-average EBITDA margins and most exhibited below-average invested-capital-to-revenue ratios, while the percentage of revenue growth was in line with the wider sample,” McKinsey said. “Still, the lesson from 2017 is that size continues to matter. There is demonstrable advantage to scale. The one caveat is that if you can’t be big, be nimble: challengers that have identified a niche have also found favor.”

Either way, luxury will likely continue to lead in the coming year.

“As in previous years, we expect the best-performing segments in 2019 to be luxury, fueled by fast-growing Asia Pacific economies and the continuing boom in global travel, and value, fueled by strong propositions globally,” McKinsey said. “Prospects for affordable luxury are likely to be more fragmented, with some regions expecting above-average growth (e.g., emerging and mature Europe and China), while others such as Japan, Latin America and North America underperform.”

By product, the youth will drive sportswear’s ongoing success.

“Handbags and luggage are also likely to see strong growth, reflecting a global tourism boom that shows no sign of slowing,” McKinsey said. “In apparel, the rising sustainability movement may be a slowing factor in some markets, but the impact will probably be offset by growth in emerging markets.”