The year 2020 may go down as fashion’s worst, as the discretionary category fields blows from all sides in the crisis brought on by COVID-19.
And as the industry moves further into the second quarter, conditions are only expected to worsen.
“From a revenue perspective 2020 is looking grim for the global fashion industry,” according to a new report, ‘Time for Change: How to use the crisis to make fashion sourcing more agile and sustainable,’ informed by a McKinsey and Company survey executed in collaboration with Sourcing Journal. “Following five years of positive growth, we estimate that revenues for the apparel and footwear sectors will contract by 27 to 30 percent in 2020 year-on-year with even deeper declines in some sub-sectors and geographies.”
The past two months have been marked by mounting pressure as stores sit closed amid lockdowns and inventory piles up in line, so retailers have backed out of factory orders for product they don’t know what to do with, putting both the facilities and the garment workers who support them at risk of destitution. And the vicious cycle of virus-prompted reactions will take its toll on the industry in the next two months.
“The impact will hit sourcing volumes fully in the second quarter of 2020, when two-thirds of fashion sourcing executives expect a cut in volumes by at least 20 percent,” the survey found. Twenty-two percent of the supply chain stakeholders who responded expect their sourcing volumes will be halved this quarter, though the shrinkage may ease in the back half of the year, with just 7 percent of sourcing executives expecting their volumes to be cut by more than half.
Forty-nine percent, however, do expect their sourcing volumes to contract between 20 percent and 50 percent in the second half of 2020, making it a far cry from smooth sailing for all links in the supply chain.
The state of sourcing affairs
At present, fashion brands and retailers are struggling to find best paths forward for survival, and an overwhelming majority have taken to canceling orders.
According to the McKinsey and Sourcing Journal survey, 75 percent of respondents have canceled existing production orders. Collectively, those actions are weighing heavily on often cash-poor manufacturers, many of which can’t survive a sustained no-revenue period. In Bangladesh, the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) says the liability for factories has already reached $10 billion. While just 8 percent of retailers have canceled more than half of their orders, the effect has still been severe in Bangladesh and beyond.
Examining the matter by geography, fashion players in North America have relied more heavily on the cancellation option than their European counterparts. While one-third of European companies say they haven’t cancelled any existing orders, only 13 percent of U.S. businesses can say the same. The discrepancy, McKinsey says, could be owed to the difference in assortment structure and sourcing mix—something U.S. businesses will have to consider as they move forward from here.
“Smaller European players often draw on a more varied set of sourcing countries, including significant nearshoring options,” the report noted. “Some are also more advanced than their North American peers with regards to flexibility and in-season reactivity.”
With retailers themselves strapped for cash in a dashed demand scenario (clothing and footwear spending in the U.S. sank more than 28 percent in March), many are also looking to amend how they pay for their orders. Seventy-one percent of respondents in the survey said they’re paying less than half of their existing orders as agreed, and 18 percent are not paying as agreed at all. What’s more, as many as 41 percent are renegotiating payment terms on more than half of their orders, and 25 percent are deferring payment on half of their orders.
In somewhat of a concession to factory partners, more than half of fashion players (55 percent) now say they are taking responsibility for paying for already purchased, and in some cases, already used raw materials. Just 13 percent have agreed to pay production workers’ wages for more than half of their orders.
By all accounts, and at all points in the chain, funds are tight.
Fifty-six percent of respondents from global fashion businesses have taken measures to manage operating costs: 18 percent have reduced salaries, 26 percent reported furloughing or temporarily laying off staff, and 9 percent have shed some staff permanently.
“More and more companies will be moving into distress unless their cashflow is secured, resulting in a possible shakeout of retailers and fashion brands,” McKinsey said. “Many of their suppliers may not survive either. Most fashion retailers and brands report that at least 25 percent of their suppliers are facing financial distress. The situation is set to get worse, with 45 percent of sourcing executives expecting more than half of their suppliers to be in financial distress in six months’ time.”
Sourcing’s ‘next normal’
Survival mode for sourcing now means more than just putting out present fires or finding innovative solutions for offloading mounting inventory, it’s going to be about embracing the supply chain’s next normal, a long-necessary move for an industry that has still been spinning the wheel of it old ways.
“Fashion brands will need to operate more flexibly across the value chain—including the product development process—to cut down lead times and adapt more responsively with a deeper understanding of consumer trends and needs,” McKinsey said. “Crucial ingredients in a demand-driven supply chain include segmented assortments with smaller batch sizes, increased transparency, removal of functional silos, utilizing highly efficient processes supported by tools and analytics, and making use of dual sourcing and nearshoring.”
As much as 76 percent of the international sourcing community think the pandemic will finally propel speed and flexibility models for the industry, the survey found. Of that three-quarters collective, 52 percent expect to see a “high acceleration” of flexible product development with shorter lead times and smaller batch sizes. Sixty percent think they’ll see an acceleration of on-demand production.
“For fashion companies to tackle the prevalent overstocking issue and provide an attractive assortment to customers, they will need to invest in these areas as a key priority,” McKinsey said. “Digital escalation is another repercussion of the crisis—as online channels gain share, they will contribute to a more volatile sales curve in the future. In this next normal, it will be paramount to improve full-price and product margin, while managing sourcing costs, and this will require fashion companies to achieve the demand-driven paradigm shift.”
And, perhaps surprisingly, sustainability will be critical in that shift.
The nice-to-have has evolved to necessary in recent years as the world clued into fashion’s environmental impact, but with coronavirus forcing consumers to reflect on essentials versus excess, many are growing more interested in consuming responsibly from businesses that embrace sustainability.
In a separate McKinsey consumer survey conducted recently, 40 percent of consumers in Europe and North America indicated a favorable preference for brands somehow aiding in the COVID-19 crisis. More than 20 percent said they want to curb their clothing consumption, and when they do buy, they want to spend more on local businesses. Sixteen percent of European consumers and 13 percent of their North American counterparts said they’ll be buying more “socially and ecologically sustainable clothing” in their post-pandemic lives.
“Though sustainability has moved down the executive agenda in recent weeks as fashion retailers and brands struggle to secure their existence, it is expected reemerge at the top of the executive agenda—and stay there,” McKinsey said. “Sustainable sourcing at scale was a new must-have pre-COVID-19; social and environmental sustainability is becoming mainstream in the next normal.”
In the face of criticism over a lack of commitment to suppliers in developing countries and workers with no other livelihood, plus public pleas for brands to #PayUp for their orders, the social errs surfaced amid the pandemic are sizable, so retailers can’t risk stepping back on sustainability.
“The move to a new, and possibly better, normal has begun and executives need to bring sustainability back onto the agenda now,” McKinsey said. The survey with Sourcing Journal revealed that 70 percent of respondents believe the pandemic will fuel closer partnerships between buyers and suppliers, and 60 percent think it will finally push sustainable materials into the mainstream.
“The crisis has disrupted old ways of working and given rise to new tools and processes being piloted out of necessity,” McKinsey said. “This presents an opportunity for fashion companies to learn from these unprecedented times and reshape their sourcing practices—instead of reverting back to the old ways post-crisis.”
Neither status quo, nor a slow crawl toward change will work for companies hoping to be around in a post-crisis world.
“The most fundamental shift the crisis has brought to fashion sourcing is the massive acceleration of change. Supplier consolidation, sustainable sourcing, control over Tier 2+3 supply, digitization of processes–all these trends existed before COVID,” McKinsey senior partner Karl-Hendrik Magnus said. “The difference is that these will now shape up within months rather than years.”