After a challenging stretch, has fashion turned the corner? Things are looking up, but the rebound may be uneven, says this year’s The State of Fashion report.
There is general agreement that 2016 was one of the most challenging years the fashion industry has ever seen. But we are now detecting glimmers of hope: executives report optimism (even amid uncertainty), and the McKinsey Global Fashion Index forecasts industry sales growth to nearly triple between 2016 and 2018, from 1.5 percent to between 3.5 and 4.5 percent. Emerging markets remain a crucial source of this growth; indeed, in 2018, for the first time, more than half of apparel and footwear sales will originate outside Europe and North America.
These are some of the findings from our latest The State of Fashion report, written in partnership with the Business of Fashion (BoF) to explore the industry’s fragmented, complex ecosystem. Our first report, last year, laid the foundation for rigorous in-depth research and analysis, focusing on the themes, issues, and opportunities affecting the sector and its performance. (For more, see our infographic on the ten trends that will define the fashion agenda in 2018.) This year, we are seeing real signs of change.
Fashion’s growth outlook by region, and by category
Although the fashion industry appears to be turning a corner, the rebound is not being felt evenly across the globe. In fact, 2017 signals the end of an era, as the West will no longer be the global stronghold for fashion sales—more than half of apparel and footwear sales will originate outside of Europe and North America. The main sources of growth are emerging-market countries across Asia–Pacific, Latin America, and other regions; they are forecasted to grow at rates ranging between 5 and 7.5 percent in 2018 (exhibit). 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. Here, we expect a modest growth of 1 to 2 percent. Not surprisingly, this regional divide is reflected in fashion executives’ sentiments, as respondents to the BoF–McKinsey Global Fashion Survey from emerging countries are more optimistic about the industry’s outlook in 2018 than their European or North American counterparts.
The outlook for the fashion industry varies across different value segments, too. The industry continues to polarize: consumers are trading away from the midmarket price points even while the luxury, value, and discount segments are picking up speed. When it comes to categories, the improvement of fashion-industry sales is reflected in stronger sales 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. Nonetheless, this is still expected to be the fastest-growing category, with continued strong demand in many markets.
Shifts among consumers
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. Consumers in Southeast Asia spend about eight hours a day online on average. The modern shopper’s comfort with digital channels and content has created a complex customer journey across online and offline touchpoints. 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.
Customers’ attention is also tuned to new channels. This has a profound impact as purchase decisions are influenced by social media, peer reviews, influencer marketing, and traditional marketing, and even many purchases themselves are made consumer-to-consumer. With information and the ease of comparison at their fingertips, consumers are becoming less brand loyalamong millennials, two-thirds say they are willing to switch brands for a discount of 30 percent or more. Shoppers are also becoming more selective. More and more, they base their purchase decisions on whether a company’s practices and mission aligns with their values—while at the same time they are highly price sensitive.
So consumers expect it all: convenience, quality, values orientation, newness, and price. In response, leading fashion players are offering innovative business models, using granular customer insights as a source of differentiation, and pushing the limits of go-to-market times. Sales of the traditional fast-fashion sector have grown by 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.
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; in 2016, the top 20 percent’s contribution had increased to 144 percent.
The challenges of a fundamentally changing industry and a continued unpredictable macroeconomic environment has led fashion players to toughen up. Industry players are coming to accept unpredictability as the new norm, and fashion executives will in 2018 respond by focusing their energy on improving what is 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.
- Download The State of Fashion 2018, the full report on which this article is based (PDF–3 MB).
About the author(s)
Johanna Andersson is a consultant in McKinsey’s Stockholm office, where Sara Kappelmark is a partner; Achim Berg is a senior partner in the Frankfurt office, Martine Drageset is a consultant in the Oslo office, and Saskia Hedrichis a senior expert in the Munich office. Imran Amed is the founder, editor-in-chief, and CEO of the Business of Fashion.