Documente Academic
Documente Profesional
Documente Cultură
2
The State
of Fashion
2019
The State of Fashion 2019
4
Contents
Executive Summary 10
Executive Summary
Industry Outlook 12
Global Economy
Trend 3: Trade 2.0 31
Global Value Chains in Apparel: The New China Effect 34
Consumer Shifts
Executive Interview: Cédric Charbit 48
Trend 6: Now or Never 51
Executive Interview: Jeff Gennette 54
Digital Innovation Made Simple 58
Trend 7: Radical Transparency 60
Dealing with the Trust Deficit 62
Fashion System
Fashion System 70—91
Trend 8: Self-Disrupt 71
The Explosion of Small 74
Trend 9: Digital Landgrab 77
Executive Interview: Nick Beighton 80
Trend 10: On Demand 83
Is Apparel Manufacturing Coming Home? 86
MGFI
Glossary 100
End Notes and Detailed Infographics 102
The State of Fashion 2019
Foreword
The year ahead is one that will go down
in history. Greater China will for the first time in
centuries overtake the US as the world’s largest
fashion market. It will be a year of awakening
after the reckoning of 2018 — a time for looking at
opportunities, not just challenges. In the US and
in the luxury sector it will be a year of optimism;
for Europe and for struggling segments such as
the mid-market, optimism may be in short supply.
Far-sighted companies will make bold moves in
Thomas Lohr
7
Contributors
8
Acknowledgements
The authors would like to thank all the members of The Business
of Fashion and McKinsey community for their contribution to
research and participation in our State of Fashion Survey and the
many industry experts, who generously shared their perspectives
during interviews. In particular, we would like to thank: Jessi
Baker, Nick Beighton, Alessandro Bogliolo, Tamsin Blanchard,
Leonardo Bonanni, Karin Brinck, Cédric Charbit, Joann Cheng,
Neliana Fuenmayor, Jeffrey Gennette, Jennifer Hyman, Sanjay
Kapoor, Lisa Lang , Yusaku Maezawa, Darshan Mehta, Ananth
Narayanan, Stephanie Phair, Rachel Scott, Mike Smith, Paulvan Zyl
Marco Beltrami and the McKinsey Senior Advisors Adrienne Lazarus, Ali Horowitz,
Colin Henry and John Hooks.
Based in London, Marco Beltrami is
part of McKinsey’s Apparel, Fashion The wider BoF team have also played an instrumental role in
and Luxury Practice. He has supported creating this report — in particular, Vikram Alexei Kansara,
apparel and beauty companies in the UK Victoria Berezhna, Nick Blunden, Kati Chitrakorn, Emma Clark,
and Europe, on topics including strategy, Amanda Dargan, Michael Edelmann, Casey Hall, Yara Heine,
mergers & acquisitions, and retail Chungaiz Mumtaz, Andres Pajon-Leite, Lauren Sherman, Kate
operations. Vartan, Anouk Vlahovic and Yifan Wang.
Felix Rölkens
Felix Rölkens is part of McKinsey’s
Apparel, Fashion & Luxury Group
and works with apparel, sportswear,
and pure play fashion e-commerce
companies in Europe and North America,
on a wide range of topics including
strategy, operating model and merchan-
dising transformations.
9
The State of Fashion 2019
For fashion players, 2019 will be a year of expressed in last year’s global fashion survey.
awakening. The ones who will succeed will have But even with this more positive backdrop,
to come to terms with the fact that in the new executives are now fully acknowledging the
paradigm that is taking shape around them, some changing nature of the industry, using words such
of the old rules simply don’t work. Regardless of as “changing,” “digital,” and “fast” to describe it.
size and segment, players now need to be nimble, In a year of reckoning, for which the McKinsey
think digital-first and achieve ever-faster speed Global Fashion Index predicts growth of 4 to
to market. They need to take an active stance 5 percent for 2018 (up from 2.5 to 3.5 percent
on social issues, satisfy consumer demands for in 2017), fashion players have begun to look
ultra-transparency and sustainability, and, most proactively at opportunities rather than just
importantly, have the courage to “self-disrupt” focusing on challenges ahead.
their own identity and the sources of their old
success in order to realise these changes and win According to McKinsey
new generations of customers.
FashionScope, Greater China is
They also need to invest in enhancing
expected to overtake the US as
their productivity and resilience, as the outlook
is increasingly uncertain. External shocks to the the largest fashion market in
system continue to lurk around the corner, the world in 2019.
and growth cannot be taken for granted: the
McKinsey Global Fashion Index (MGFI) forecasts However, recovery continues to be
growth of 3.5 to 4.5 percent for 2019, slightly below unequal, with most of the growth coming from
2018 growth, predicted at 4 to 5 percent. Optimism luxury and emerging markets in Asia. According
can be found only in pockets, notably in North to McKinsey FashionScope, Greater China
America and in the premium and luxury segments, is expected to overtake the US as the largest
aided by their strong performance in 2018. fashion market in the world in 2019. Mid-market
The majority of executives in the remaining companies and mature economies continue to lag,
segments and geographies are pessimistic, citing with the exception of North America, which saw
“dealing with volatility, uncertainty and shifts higher than expected growth supported by
in the global economy” as their primary concern an expansive fiscal policy. Meanwhile, polarisation
for the year ahead. Risks of trade disruptions and persists: the top 20 companies in the industry
slowing economic growth, even in key growth account for 97 percent of economic profit, while
markets in Asia, could undermine global growth an increasing proportion of publicly-traded
prospects, as could uncertainty over other major fashion companies struggle to create any economic
events such as Brexit or the possible onset of a value. The prizes for those who can adapt may be
global economic slowdown. greater than ever — but so are the penalties for
those who fail.
All this comes against a backdrop of a
fashion industry that turned a corner in 2018,
with increased growth justifying the optimism
11
Industry Outlook
12
Executives describe 2018 with the words “changing,”
“digital,” and “fast”
New
Exhibit 1:
Top 3 words to describe 2016 2017 2018
the industry
Top 3 words; % of respondents who
mentioned word, n=274
First Uncertain Uncertain Changing
54 53 34
Perceived impact of
2018 trends Mobile obsessed
Average rating of respondents (1-10)
Start-up thinking
Getting personal
Sustainability
credibility
Predictably
unpredictable
Asian trailblazers
Globalisation
reboot
13
Volatility, uncertainty and shifts in the global economy is
still foreseen as the industry’s #1 challenge
New
13% of respondents
7% of respondents
The State of Fashion 2019
Exhibit 4:
Market segment 2019F
Outlook for industry
conditions in 2019
Premium/luxury 32 12 56
% of respondents
Mid-market 58 42
Value 54 19 27
Geography 2019F
North America 30 6 64
Europe 47 9 44
Asia 51 19 30
Question: How do you expect conditions
for the fashion industry to develop over
the course of the next 12 months? Source: BoF-McKinsey State of Fashion Survey
14
Industry Outlook
again highlighting companies proactively dealing investing in e-commerce and digital marketing)
with digital disruption in the fashion system. is their number one priority for 2019 for the third
year running.
We were surprised to find artificial intel-
ligence (AI) less highly ranked. This shift may not From an operational perspective,
have reached critical mass in 2018, but we predict another persistent trend has been the desire to
it will continue to affect the industry in 2019 address cost structures at an organisational level,
and beyond. Players including Amazon, Alibaba, including efforts to improve productivity. This
Myntra and Stitch Fix have made progress across remains a key priority in 2019 with 29 percent
various areas of the value chain and others will of the BoF-McKinsey State of Fashion Survey
follow suit. Ananth Narayanan, chief executive respondents saying they wish to “review organisa-
of Myntra, remarked that, “for curation and tional structures and focus on increasing employee
assortment, we are using a lot more data science productivity.” This underlines the need to adapt
to tell what will sell. I think that could extend a lot operating models and create a more agile organisa-
more into manufacturing and the back-end system tion that can thrive in the digital world.
and we are doing parts of that already at Myntra.”
An increasingly important priority In 2018, fashion executives have
is sustainability and transparency, reflecting begun to think less about survival
rising concerns on the part of consumers and and much more actively about
companies about how to alleviate their impact on
the environment. Sustainability, which for the first their strategic agenda.
time breaks into our respondents’ list of the most
important challenges, is evolving from a tick-box Overall, the fashion industry continues
exercise into a transformational feature that is to hover in a state of flux and the fortunes of
engrained in the business model and ethos of many individual players can turn with frightening
recent success stories. speed. As our 10 trends indicate, new markets,
new technologies and shifting consumer needs
By geography, the most optimistic about
present opportunities but also risks. We predict
the coming year are executives in North America.
that 2019 will be a year shaped by consumer shifts
By segment, the most positive are executives
linked to technology, social causes and trust issues,
from luxury brands, reflecting their strong
alongside the potential disruption from geopoliti-
growth trajectory in 2018. In all other regions
cal and macroeconomic events. Only those brands
and segments, executives are notably pessimistic,
that accurately reflect the zeitgeist or have the
reflecting the potential challenges ahead.
courage to “self-disrupt” will emerge as winners.
Not surprisingly, executives are looking
to invest where they see the most need to add
value. For the third year straight, the top sales
growth investment priority remains developing
omnichannel capabilities. This reinforces our
perception that executives have finally come to
terms with the fact that the industry is
digitising, but are not yet satisfied with their own
response. Some 54 percent of the BoF-McKinsey
State of Fashion Survey respondents said
increasing omnichannel integration (alongside
15
The State of
GLOBAL ECONOMY CONSUMER SHIFTS
Downward India becomes a All companies will The lifespan of the Younger
movements in focal point for the need to prepare fashion product generations’
key economic fashion industry contingency plans is becoming passion for social
indicators and as its middle- to face a potential more elastic and environmental
other potentially class consumer shake-up of global as pre-owned, causes has reached
destabilising base grows and value chains. On refurbished, critical mass,
The State of Fashion 2019
forces will manufacturing the one hand, repair and rental causing brands
conspire to create sector strengthens. the apparel trade business models to become more
a more cautious Fashion players could be reshaped continue to evolve. fundamentally
mood. With the must redouble their by new barriers, Fashion players will purpose driven
possibility of a efforts in this highly trade tensions increasingly tap to attract both
global economic fragmented and and uncertainty into this market consumers and
slowdown by 2020, challenging market and, on the other to gain access to talent. Consumers
companies will turn where an educated hand, by new new consumers from some, but
more prudent and and tech-savvy opportunities from seeking both not all markets
start to look more demographic rub growing South- affordability and a will reward players
aggressively into shoulders with the South trade and move away from that take a strong
opportunities to poor and upwardly the renegotiation of the permanent stance on social
boost productivity mobile. trade agreements. ownership of and environmental
compared to clothing. issues beyond
previous years. traditional CSR.
690m
Percentage of survey Projected number of Percentage of survey Percentage of The number of times
respondents that were smartphone users in respondents that survey respondents the word “feminist” is
concerned about India by 2022, 2.3x believe changes in that believe the forecast to appear on
the overall global the usage in 2017. trade policy will pose pre-owned business retailer homepages
macroeconomic potential risks to global model will be more and newsletters in 2018
outlook in 2019. economic growth relevant in 2019 than compared to 2016.
(Q2 2018 sentiments, in 2018.
+8% from Q1).
16
Fashion 2019
FASHION SYSTEM
In the mobile After years of having Traditional brands As the race to be Automation and
consumer personal data are beginning to the platform of data analytics have
journey, the gap owned and handled disrupt their own choice for both enabled a new
between discovery by businesses, a business models, customers and breed of start-ups
and purchase more distrusting image and offering brands intensifies, to achieve agile
has become a consumer now in response to e-commerce made-to-order
pain-point for a expects companies a new breed of players will production. Mass
more impatient to reciprocate with small emerging continue to players will begin
fashion consumer, radical transparency brands that are innovate by adding to experiment next,
who seeks to and sharing of accelerating thanks profitable value- responding more
purchase exactly information. For to decreasing added services. rapidly to trends
the products companies to brand loyalty and Whether through and consumer
they discover, meet a new bar for a growing appetite acquisitions, demands,
immediately. consumer trust, they for newness. investments or achieving just-in-
Players will focus will need to offer a We expect more internal R&D, time production
on bridging this heightened level of brands to follow those players who and reducing
gap through transparency along suit on this path diversify their overstock and
shorter lead dimensions such of self-disruption, ecosystem will making short,
times, improved as value for money, which will have a strengthen their small-batch
availability creative integrity significant impact lead over those production cycles
of advertised and data protection. on their operating who remain pure the new norm.
products and new models. players relying
technologies such solely on retail
as visual search. margins.
24h
65% #1 2018 2025
4x
In 2018, customers Percentage of survey Top ranked trend that Revenue CAGR of Aspiration level for a
of Amazon in the US respondents that cited fashion executives fashion e-commerce shift to nearshoring
expected deliveries “consumer needs predict will shape retailers over traditional will double between
within 24 hours, for trust in product the fashion industry fashion retailers from 2018 and 2025.
as opposed to a authenticity and creative in 2019, included 2013 to 2017.
9-day delivery time originality” in their top in top 5 by 80% of
expectation in 1995. 5 trends for 2019; respondents.
ranked 2nd out of 12.
17
The State of Fashion 2019
18
Global
Economy
01. CAUTION AHEAD
While last year was characterised by cautious In addition, advanced economies are
optimism in the face of uncertainty, this year struggling to lift labour productivity, which has
various indicators point towards clouds on the remained basically flat over the past eight years,
horizon which could somewhat dampen global dampened by after-effects from the financial crisis,
economic growth prospects. Global growth has while significant advances in automation and
averaged above 2.5 percent in the years since the digitisation come with lag effects and transition
financial crisis, but there are signs of a plateau.1 cost. China and India have bucked the global
Additionally, after a long period of accommoda- trend and continue to see sharp productivity
tive monetary policy, the US Federal Reserve and increases, measured by GDP per person employed.
other central banks are starting to raise interest (Productivity growth and increases in the number
rates, increasing the cost of borrowing for many of employed people are the key drivers of
companies and consumers. The European Central economic growth.)
Bank is also signalling tightening monetary policy
These official forecasts are also reflected
in the coming months, increasing the chance that
in sentiment among industry leaders. In a survey
global economic growth could start to slow.
of more than 1,000 international executives and
Forecasts from the World Bank, chief executives across industries published by
IMF and OECD predict slower growth in developed McKinsey in September 2018, some 41 percent
markets through 2020, and a flattening of the expect global economic conditions to worsen,
growth curve in developing markets. Looking compared with 35 percent in June 2018 and just 15
Frédéric Soltan/Corbis via Getty Images
ahead to 2019, there are signs that Europe, percent in December 2017.2 This sentiment echoes
Latin America and the Middle East could be the views of the IMF, whose managing director
most vulnerable to a deceleration. The US and Christine Lagarde said during a Bretton Woods
China could also face a slowdown, with fears of a Committee meeting in October 2018 that “It’s not
potential bubble in the former, and trade dynamics just clouds on the horizon that we see, but some of
could impact consumer spending and fashion the clouds have started opening up, and it’s a bit
sector growth in both. more than a drizzle.”3
19
Global Economy
None of this has gone unnoticed in period. Several companies have already taken
the fashion industry. Executives view economic steps, implementing cost reduction and restruc-
conditions as a potential challenge, citing it as turing programmes. As a result, SG&A ratios have
the third biggest trend for 2019 in the latest become more fragmented, with leading companies
BoF-McKinsey State of Fashion Survey. Forty-two seeing a slower rate of cost increase than laggards.
percent expect industry conditions to worsen in Among companies to act are hosiery and bodywear
2019. Excluding respondents from North America specialist Wolford, which launched a restructur-
and the luxury segment, which are the main ing programme in late 2017,4 J.Crew, which said
pockets of optimism, the majority of executives in 2017 it aimed to cut costs and rebrand,5 and
are even more pessimistic about the year ahead. H&M, which said in 2017 that it was aiming to
reduce costs by 5-6 percent.6 More recently, Under
“It’s not just clouds on the Armour announced plans to continue to focus and
drive productivity in September 2018.7
horizon that we see, but some
of the clouds have started Looking at the year ahead, 17 percent of
respondents to the BoF-McKinsey State of Fashion
opening up, and it’s a bit more Survey said they would focus more on improving
than a drizzle.”
The State of Fashion 2019
20
01. Caution Ahead
percentage points respectively), compared over the longer term, fashion players should
with those in the bottom 80 percent, suggesting seek to couple productivity enhancements with
a strong link between keeping costs low and a necessary innovation efforts, such as automation
strong bottom line. of production, analytics-driven decision making,
review of omnichannel footprint and reorganisa-
As the macroeconomic landscape
tion for better agility. Those that are successful are
shifts, we expect companies will seek to protect
most likely to reap rewards in terms of outsized
themselves from slower growth by implementing
performance.
“shock proofing” measures. These will primarily
be aimed at boosting productivity through
greater efficiency and cutting costs. To ensure
these interventions deliver sustainable benefits
Exhibit 5:
Global economy
38
3
29 2
Moderately better 23
Moderately worse
14
1
24
Substantially worse
1
32
37
Respondents who answered “the same” are not shown. 3
In Dec 2017, n=1,648; and in Sep 2018, n=1,158.
4
Source: McKinsey Economic Conditions Snapshot, September 2018
21
Executive Interview
Joann Cheng
Chairman of Fosun Fashion Group & Lanvin
The State of Fashion 2019
22
01. Caution Ahead
but as long as our portfolio has the force on fast-changing social and the winning spirit amongst
[such diversity,] the impact can media to really integrate the teams. So, the whole organisa-
be mitigated. multi-social [experience]. Finally, tional chart needs to support our
[we are focusing on] improving future growth.
BoF: How do you think the brand shopping experience
Western luxury brands using O2O omnichannel.
BoF: How will your invest-
like Lanvin and St. John ment scope and target
can enhance their appeal to BoF: At Lanvin, you‘ve strategy change in 2019?
Chinese consumers? recently brought on a new
JC: At Fosun Fashion Group
JC: China is quite a unique chief executive. What do you
we consider ourselves as the new
market and also very crucial see as his priorities to revive
kid on the block. Our strategy in
for the luxury fashion business. the brand?
both investment and operations
Sometimes people think of JC: Yes, Jean-Philippe Hecquet could well be dynamic in view of
Greater China as one business, is super strong. The first priority the development of the whole
[but] actually, in my view, you is to recruit the right design group and the whole industry.
have different cities and different team to create appealing and However, whatever changes we
provinces across a very large well-balanced collections to make, it’s a broader core vision
geography, so if you handle reinterpret the brand DNA and that’s consistent with what
China it‘s not only handling one the clothes in a powerful and Fosun Group has been doing for
market region. You also handle modern way. Then we‘ll focus on years, which is to focus on the
different cultures, different the collections. consumer lifestyle.
demands in the system, different
tiers of cities. “For our portfolio, balance and diversity are
However, one thing is true:
Chinese consumers are
very important. When I refer to diversity,
becoming more internation- it’s not only a category diversification but also
al. They are more awakened; a geographic and demographic diversification...
they’ve learnt self-expression.
The young generation are digital We’re never able to omit all the risks, but as
natives; they are global citizens. long as our portfolio has [such diversity,]
Connecting better with our
Chinese audience is one of the the impact can be mitigated.”
priorities for brands like Lanvin,
St. John and Wolford. We have In terms of the retail network, One of the keys for Fosun Group
to go digital and offer offline I think he will focus on growing is happiness, so this has also
channels so people in China the key markets, including become our consistently-applied
[can] use their smartphone to Europe, yes, and Greater China. strategy — around the happiness
shop [in a seamless way.] Another priority will be the store [aspect of ] the consumers’
Also we need to create our brand concept, so that we can keep lifestyle.
narrative and tell the story in delivering a consistent message
their own language and how that in the brand expression. Digital This interview has been edited and
relates to our brand DNA. Of is [central] to that so we need condensed.
course, we need to optimise the to accelerate brand digitisation,
product portfolio to reflect the invest heavily on communication
consumers’ needs, so product and the e-commerce platform.
is key. Customised events and In terms of the culture and the
products will make our products people, I think it’s quite clear
more appealing to Chinese that we need to bring back the
consumers. And we have to drive confidence, the positive tones
23
02. INDIAN ASCENT
Economic expansion is happening across Asia, good, happy to feel good and are expanding the
but we expect that 2019 will be the year in which consumption of today.”
India will take centre stage. The country is being
Given these dynamics, it is little surprise
propelled by strong macroeconomic tailwinds
that more than 300 international fashion brands
and is predicted to grow 8 percent a year between
are expected to open stores in India in the next two
2018 and 2022. The Indian middle class is forecast
years. But India remains a complex market, which
to expand at 19.4 percent a year over the same
presents challenges as well as opportunities.
period, outpacing China, Mexico and Brazil.8
The apparel business is still largely “unorganised,”
As a result, India is set to move from being an
with formal retail accounting for just 35 percent of
increasingly important sourcing hub to being one
sales in 2016. Its share is likely to reach around 45
of the most attractive consumer markets outside
percent by 2025,10 still a relatively low proportion.
the Western world.
To build momentum around conventional
India’s apparel market will be worth $59.3
stores, Indian players are innovating the retail
billion in 2022, making it the sixth-largest in the
experience. Retailers are leveraging technology
world, and comparable to the UK ($65 billion) and
to enhance the in-store experience with digital
Germany ($63.1 billion), according to data from
marketing displays and improved check-out.
McKinsey’s FashionScope. The aggregate income
For instance, Madura Fashion & Lifestyle launched
of the addressable population (individuals with
the “Van Heusen Style Studio,” which uses
over $9,500 in annual income) is expected to triple
augmented reality to display outfits on customers.
between now and 2025.9 According to Sanjay
Malls have increased their share of food service
Kapoor, founder of Genesis Luxury, an Indian
and entertainment.
luxury retail conglomerate, higher incomes are
likely to create a whole new class of consumer: The growth in the apparel sector is also
“We are moving on towards the ‘gold collar’ being driven by increasing tech-savviness among
worker. It’s a term that defines the well paid, consumers. Ten years ago, technology was for
highly paid professionals, who are happy to look the few, with just five million smartphones11 in a
24
02. Indian Ascent
country of 1.2 billion people and only 45 million labour cost is significantly lower than China’s and
using the Internet.12 These figures have since comparable with Vietnam’s. There is also a high
increased to 355 million and 460 million respec- availability of raw materials (e.g., cotton, wool, silk,
tively (2018) and are expected to double by 2021, and jute), which enable participation in the entire
when more than 900 million Indian consumers fashion value chain.
will be online.
Still, players looking to enter the
E-commerce leaders are moving to Indian market should recognise several inherent
AI-based solutions. “Personalisation and curation, challenges. First, India is a mosaic of climates and
based on personal taste will become a lot more tastes. “If you break [India] up into four parts, i.e.,
important,” says Ananth Narayanan, chief north, east, south and west, North India is the only
executive of Myntra, a fashion e-commerce player region which is going to have winter, where you
acquired by Flipkart in 2014. “It’s not about having have mild to severe winter for eight weeks,”
the largest selection, it’s about presenting the most says Kapoor.
appropriate selection to the customer involved.”
“Brands that are successful in India have
The supply side of the industry is equally understood that, how [Indians] consume, what
robust, and the growth of textile and apparel colour they consume, what kind of designs work,
exports is expected to accelerate. According what touch points and personalisation work may
to a 2017 McKinsey survey, 41 percent of chief be very different from a consumer living in New
procurement officers expect to increase their York or Hong Kong,” Kapoor adds. “Indian women
sourcing share from India.13 India’s average have kept a lot of their traditional sensibilities alive
Brian Sokol/Bloomberg via Getty Images
25
Global Economy
and you see a beautiful mix of both Indian and and the middle class is at its highest level in 92
Western sensibilities across the spectrum.” years.18 Another consideration is the possibility
of corruption. According to Transparency
International companies considering
International, India ranks 81stout of 180 countries
an entry into India should heed this important
on its Corruption Perception Index (versus China
message. Traditional clothing is still very much the
at 77).19 A significant number of licences is required
default choice for women, making up an estimated
for new entrants, so executives should beware of
70 percent of women’s apparel sales in 2017.
the potential for complicated negotiations.
Appetite for Western styles is likely to increase,
but it is expected that traditional wear will still Still, many brands are determined to
account for a 65 percent market share by 2023.14 take advantage of India’s blossoming growth.
The majority are likely to choose one of three
“We are moving on towards the routes. First, players can partner with existing
e-commerce platforms. This is most suitable
‘gold collar’ worker. It’s a term for players with little brand awareness and with
that defines the well paid, highly relatively low capital to invest, and offers a good
paid professionals, who are way to test demand and customer preferences.
The State of Fashion 2019
26
02. Indian Ascent
Exhibit 6:
India 8.0
China 6.1
Turkey 3.7
Mexico 3.0
Brazil 2.3
Russia 1.5
27
Executive Interview
Darshan Mehta
President & Chief Executive of Reliance Brands
The State of Fashion 2019
28
02. Indian Ascent
out of within a kilometre distance DM: I think mid- to the high-end Trump government and their
to each other and Bandra Kurla because there is natural pro- approach [to] trade wars [are
Complex, are going to increase gression upwards. It’s what I call another concern].
competition. [going from] the hundred dollars The second is the rise of oil
to the thousands of dollars. prices, especially given that India
produces negligible amounts
“Every time you look at India through the of its own oil and is largely
dependent on oil imports. This
Chinese lens you will not see [the opportunity] is [worsened by] a rupee-dollar
correctly. India is a whole different ball game. exchange rate which has eroded
In India, it is not about the traditionally rich by close to six to seven percent
since the beginning of 2018.
Indians — they shop all over the world. It is From a consumer [spending]
about the 999 others who are the customers point of view, it’s not always easy.
You can either pass on the impact
of tomorrow.” in volume shrink or you can
have… deeper and more frequent
BoF: Indeed. One of the BoF: What we hear about discount on the product — both
biggest challenges for fashion most are the middle classes of which erode the margin.
in India has been the lack of swelling resulting in a The [other issue] is… the price
retail infrastructure. Is this massive boost in more value equation, which is getting
changing? Could 2019 be a affordable fashion segments. substantially reset [due to the
watershed year? Is it premature for us to commoditisation of our sector
expect the Indian middle by] the likes of Amazon and
DM: Absolutely, I think in the
classes to make a big impres- Flipkart. After the US, India is
same way that 2008 was. In 2008,
sion in lower end brands? seen as possibly the next [market
the Emporio Mall started but
the challenge with the Emporio DM: There are some categories where this will happen], so that’s
was that unfortunately it was the where marketers and brands a worry.
same year the terrorist attacks already reaped what we call the
happened in Oberoi and the Taj democratic dividend of the rich BoF: Let’s talk more about
Hotel in Bombay. It took away middle class. In a lot of these that. There is so much
some of the wind from the sails categories, individual players dynamism happening
but nonetheless the Emporio have worked very hard to create in Indian e-commerce
marked a bit of a turning point. the [right] price-value equation. market; how bullish are you
I think 2019 is going to be similar, Fashion spending and trading up about e-commerce as an
we are going to see a very big in the category should become opportunity for a business
change. Quest Mall in Calcutta a habit and it is, but I think the like yours, which is skewed
is doing well; Palladium Mall fashion industry overall has not more toward luxury?
in Chennai, early days, but you done enough.
can see the traction is building; DM: Very bullish. We’ve created
in Saket [an upmarket suburb very clever software where
BoF: Despite the upbeat
of Delhi], the DLF mall is going all our stores’ inventories are
climate, India is still not
through a complete overhaul parallelly given digital exposure.
an easy place to do business.
[and then you have the new Last year a significant portion of
What sort of pain-points
Mumbai malls so] we are going our brick-and-mortar sales [were
worry you most?
to see quite a bit of activity. driven by] online. It also doesn’t
DM: One of the biggest worries, [impair] the price-value equation
BoF: Which categories or which could become a substantial because it is one inventory, one
segments do you think will pain-point, is the forex situation. image and one price. For a place
reap the most benefits? The economics of the Donald like India, which has pockets of
29
Executive Interview
30
03. TRADE 2.0
Fashion is inherently sensitive to the policies Still, while the US and China are
and politics that shape cross-border trade. raising tariffs against each other, China is at the
Recent talk of trade shifts between the US and same time trying to make some imports cheaper.
some of its key trading partners has brought the A Chinese government decision to cut import
issue to the fore. At the same time the axes of duties led LVMH to reduce prices by 3-5 percent
global trade are shifting, amid a surge in commerce in July on some items sold in China.22 In September
between emerging economies in the Global South. 2018, China announced it would reduce tariffs for
The dynamics may lead to a rethink of sourcing textiles and construction materials from 11.5 to 8.4
and pricing strategies in the year ahead. percent. Any reduction of tariffs usually must be
offered to all countries equally under World Trade
As 2018 ends, fashion companies find
Organization rules, but China said US goods would
themselves in a cross current of trade-related
still be subject to retaliatory tariffs.
news flow. A sharp rise in trade tensions between
the US and other large economies seems set to Despite some of the positive develop-
increase costs for some players and increase the ments in trade, the dominant theme over 2017
risk of disruption. At the same time, new trade has been tightening of trade conditions between
agreements promise better trading conditions in specific partners. For the G20 economies, there
certain instances. were $74 billion of restrictive measures in May
2018, compared with $47 billion in May 2017, a
In the US, the fashion industry accounts
rise of 58 percent. Trade-facilitating measures,
for 6 percent of imports but pays 51 percent of
which include eliminating or reducing tariffs and
tariff receipts, so the tariffs issue is critically
simplifying customs procedures, meanwhile, fell
important.20 In addition, with new tariffs coming
from $163 billion to just $83 billion, a 49 percent
into force on goods from China (including leather
drop.23 Consumers are also noticing more gloomy
clothing, woven fabrics and wool yarn), there is a
trade sentiments: Google searches for the words
direct feed-through to the consumer. Companies
“trade war,” “trade tensions” or “tariffs” are at the
such as Samsonite and Gap, which have large
highest level for at least five years, after growing
manufacturing operations in China, have said they
by a factor of 10 this year.24 The IMF, meanwhile,
plan to raise their consumer prices.21
31
Global Economy
predicts rising tariffs and the ensuing escalation Against this backdrop in Europe,
of trade tensions could reduce global economic the US fashion sector is also facing trade-related
growth by 0.5 percent by 2020. risks. According to the United States Fashion
Industry Association’s 2018 Fashion Industry
Perhaps unsurprisingly, executives are
Benchmarking Study, “protectionist trade policy
becoming concerned, and increasingly cite trade
agenda” in the US is the number one business
relations as a major worry for the coming year.
challenge. Before 2017, it never ranked higher
McKinsey’s Economic Conditions Snapshot in
than eight. The US has announced tariff hikes
September was the second in a row in which trade
on $200 billion of goods from China including
policy was cited as a threat to global economic
clothing. To highlight the proactive stance taken
growth. 62 percent of respondents said it was
by some fashion players, American Apparel &
their number one concern, up from 56 percent in
Footwear Association (AAFA) at the end of May
March 2018.
published a letter signed by 60 US labels (including
Abercrombie & Fitch, Kate Spade, Levi Strauss,
63 percent of clothing designers
Macy’s, Nike and Under Armour), arguing against
and 55 percent of UK-based luxury increased taxation of Chinese textile and
goods makers are involved in apparel imports.
exports and around 10,000 EU
The State of Fashion 2019
32
03. Trade 2.0
time to come, as described in our article “Global and production quality, for example through
Value Chains in Apparel: The New China Effect” near-shoring or even on-shoring. Still, tough
on page 34. commercial decisions will be required in the
face of tariffs in key consumer markets. Luxury
While concern over trade tensions is
players, especially those that derive most of their
rising, there are also positive dynamics, with new
income from China or the US, may be required
agreements being put in place and new trade routes
to choose between raising prices or managing
being developed. The EU has recently entered into
squeezed margins.
new agreements including clothing and apparel
with Canada, Mexico, Japan, Singapore, Vietnam
and several countries from Eastern Europe.
In September 2018, Canada agreed to join the
United States and Mexico in a trade deal that
will replace the North American Free Trade Exhibit 7:
Agreement.30 Belief that changes in trade policy will
In addition, South-South trade is on pose potential risks to global economic
the rise, amid expectations it will increase from growth
around 25 percent of global trade at present to % of respondents
around 30 percent in 2030.31 Already, significant
new relationships are emerging. China’s expansive 62
One Belt, One Road initiative, which involves large 56
investments in the development of trade routes in
the region, has the potential to play a large role in
this development.
Finally, the Comprehensive and 25
Progressive Agreement for Trans-Pacific
Partnership (CPTPP) and Regional Comprehensive
Economic Partnership (RCEP) will enable more
free trade between Asia and South America and
within Asia. RCEP members export around $405
billion of textiles a year (more than half of the Q4 2017 Q1 2018 Q3 2018
33
In-Depth
“Made in China.” Labels bearing these three words Fabric and Apparel: The First Truly Global
are tucked discreetly inside billions of articles Value Chains
of clothing hanging in Western closets, a sight
The history of trade and the history of the textile
so common that it became a symbol for globali-
industry is one and the same. The merchants who
sation itself. Many of the consumers who wear
plied the ancient Silk Road were an early model
these garments every day think of China simply
of the modern supply chain, bringing luxurious
as the low-cost factory to the world — but those
Chinese silks to Western Europe, where tailors
assumptions are outdated.
The State of Fashion 2019
34
03. Trade 2.0
(MFA), a system of quotas that limited bilateral Across the advanced world, sourcing shifted to
imports of specific types of textiles and apparel. China to take advantage of low labour costs.
While it preserved some production in high-wage This was particularly true for labels and retailers
countries, the system also prevented any single selling low-cost, low-margin items. These labels
developing country from dominating the textiles looked for the right combination of the lowest costs
export market. and the fastest turnaround times — and in most
cases, they found the most competitive suppliers
The main beneficiaries of the MFA were developing
in China. As a result of this shift, consumers have
countries (such as Bangladesh) that might not
come to expect low prices and accept clothing as
otherwise have been able to compete with more
a more disposable product. US consumers, for
productive low-wage countries such as China and
example, have seen the real price of apparel fall by
India. Facing caps on its ability to export finished
44 percent since 1995.34
garments to advanced economies, China instead
grew its textile industry by expanding up and down The map of global production was dramatically
the supply chain. redrawn after 2005, with China clearly at the
centre. In 1995, the United States was the world’s
As hundreds of millions of people leading apparel maker, turning out 13 percent of
have joined the middle class in the world’s textile output — a share that put it just
ahead of China, which produced 12 percent. By
the developing world, particularly
2017, China’s share had ballooned to 47 percent,
in China, they are flexing their while the US share had shrunk to just three
newfound spending power by percent. Similar trends can be seen in other
expressing their own tastes advanced economies; Italy, for example, saw its
share of global production drop from eight to three
through fashion. China is no longer
percent over the same period, and Japan’s dropped
simply the factory to the world. from 11 percent to just one percent.
It is the world’s fastest-growing
consumer market, accounting for
The World’s Fastest-Growing Market
more than 18 percent of all final for Fashion
goods consumed. After the great shake-up of the late 1990s and
early 2000s, it comes as a surprise to see that trade
The Rush to Manufacture in China intensity in fabric and apparel (that is, the ratio
Restrictions imposed by the MFA began of trade to overall global production) has actually
to be phased out in 1995, with textile quotas declined. By 2017, the ratio of exports to output was
gradually pared back and then removed altogether one-quarter lower than it was in 2000.
in 2005. The share of production remaining in Now, the apparel industry is in the midst of being
advanced economies shrivelled along with it, reshaped once again — this time, by the power of
and the entire global textile industry began to new consumers. As hundreds of millions of people
reconfigure. The result was not a broad-based have joined the middle class in the developing
increase in production across much of the world, particularly in China, they are flexing their
developing world, but a rush directly to China. newfound spending power by expressing their
In fact, some developing economies (including own tastes through fashion. China is no longer
several in Africa) lost much of their share to China simply the factory to the world. It is the world’s
and saw their apparel manufacturing industries all fastest-growing consumer market, accounting for
but wiped out.33 more than 18 percent of all final goods consumed.
Consider, for example, the explosive growth of
35
In-Depth
China’s annual “Singles Day” — a one-day burst labour-intensive production to its inland provinces,
of e-commerce that hit an estimated $25 billion where labour costs are much lower. Recently
in sales last year, topping 2016 sales by almost 40 however, even inland wages are rising faster than
percent and surpassing Black Friday and Cyber the rest of the developed world, and Chinese manu-
Monday in the United States combined.35 facturing is becoming less competitive.
More of what gets made in China is now sold in As China’s exports have plateaued, other developing
China instead of being exported. In 2005, China nations with lower wages are stepping in. Apparel
exported 71 percent of the finished apparel goods exports from Bangladesh, Vietnam and Ethiopia
it produced; by 2017, that share was down to have been growing by double digits annually since
just 47 percent. This reflects increasing levels of 2010. Turkey is also a major producer of clothing
consumption in China relative to the world and that is exported to Europe. In a 2017 McKinsey
also echoes the results of a recent McKinsey & survey, 62 percent of chief purchasing officers at
Company survey, which suggested that three-quar- US and EU apparel companies said they were
ters of Chinese consumers reported preferring or planning to diversify their sourcing away from
somewhat preferring local brands of apparel and China in the near- to medium-term. Bangladesh,
footwear over foreign brands.36 Ethiopia, Myanmar and Vietnam emerged as
the top countries where respondents expect to
This pattern is also beginning to play out in
increase sourcing.37
other emerging economies where incomes and
prosperity are similarly rising, albeit on a smaller While a shift away from China is possible, it has not
The State of Fashion 2019
scale. In absolute terms, world trade in finished materialised on a significant scale as of yet. Capital-
and intermediate textiles steadily increased from intensive cultivation of raw materials and weaving
roughly $365 billion in 1995 to $860 billion in 2014. in particular is most likely to remain in place,
Since then, it has dipped back to $740 billion — not since moving these industries would be costly and
because the market for fashion is shrinking, but disruptive. Those parts of the value chain with
because the traditional producers of textiles and the lowest switching costs and the highest labour
apparel are able to consume a greater share of their intensity (typically the CMT stages) could move
output than ever before. more easily. But while other developing countries
do offer lower wages than China, the gap today is
Rising Wages and a Move up the Value Chain not nearly as large as the wage differentials that
existed between China and advanced economies
As China reaches a new stage of industrial two decades ago when apparel manufacturing
maturity, it is continuing to develop its own began to relocate en masse. Via the Belt and Road
domestic supply chains to meet rising domestic Initiative, China is using FDI, trade flows and infra-
consumer demand. It is able to do this successfully structure investment to build deeper connections
because it has capabilities and capacity in every with other producers and export markets across the
stage of textile production, from the cultivation developing world. In Ethiopia, for instance, China
of raw materials through fabric weaving, dyeing, has invested more than $10 billion in transporta-
finishing and sewing final garments. tion and logistics infrastructure.38
Over the past decade, wages have climbed rapidly In addition to laying out a planned shift to Western
in China’s more prosperous coastal regions, and and Central China, the nation’s thirteenth five-year
a new generation has become less inclined than plan (covering the period from 2016 to 2020) calls
their parents to aspire to work in clothing factories. for an upgrade of the textile industry. Its goals
In response, China encouraged the development include making production more technologi-
of inland textile suppliers, in effect using labour cally sophisticated and more environmentally
arbitrage within its own borders by shifting more sustainable, offering higher-quality Chinese brands
36
03. Trade 2.0
to the world and improving quality.39 This may personalisation at the same time. Most garment and
involve shifting some production capacity away shoe manufacturing is not highly automated, but
from apparel and into more complex, synthetic these technologies are maturing and overcoming
products such as automotive fabrics, disposables, some of their early limitations. Automation
cutting-edge protective wear and medical textiles. technologies should ensure that China remains a
In short, China does not see its future in the powerhouse of global apparel production even as its
lowest-margin parts of the value chain, acting as wages rise. In fact, some Chinese apparel makers
the factory to the world. It is moving up the ladder are moving to automate quickly — not necessarily
to more valuable production and broadening to save on labour but in pursuit of speed. The robust
its focus beyond exporting finished goods to growth of China’s consumer market should not only
advanced economies. help to anchor its apparel industry but should also
provide the incentives needed to invest in
New Technologies and the Need for Speed high-tech manufacturing.
In addition to the China effect, other factors A limited slice of production could even return to
are reshaping the apparel industry’s global advanced economies, although in a very different
footprint, including the need to respond with form than the labour-intensive textile factories
agility to changing customer demand and the rise that closed in the 1990s and early 2000s. Adidas’
of new technologies. widely known “Speedfactories” offer a glimpse
into what the future could hold. Nike has pursued
Speed in production is critical to every fashion a similar strategy with the introduction of its
label and retailer — not just the purveyors of fast Flyknit athletic shoes. Because they have two sewn
fashion. The metabolism of fast fashion has gotten pieces rather than the 37 pieces in its traditional
even faster in the age of social media and big data. running shoes, Flyknits can be made with a fully
Taking this model to the extreme, some influencers automated process, from the weaving of the fabric
(such as China’s Becky Li, who shapes consumer to the assembly of the shoe. As a result, Flyknits
demand among her millions of followers on WeChat are mostly produced in Mexico, which has higher
and Weibo) are teaming with manufacturers to labour costs than Vietnam and Indonesia (where
start their own fast-fashion lines. Even traditional Nike’s traditional running shoes are made), but is
labels are trying to cut down lead times before closer in proximity to the United States.41 Amazon
introducing new seasonal offerings, so they can recently patented a system for robo-cutting fabrics
get a better read on sales figures from the current into customised orders, an innovation it could
season and tweak their line-ups accordingly, potentially offer as a service to the multitude of
reducing unsold goods or designs that flop. apparel companies that operate on its platform.42
Taking full advantage of these insights requires These new models could be harbingers of a
rapid turnaround times in manufacturing and continuing reduction in the apparel trade and a
distribution, and it favours keeping the supply growing emphasis on localisation. The value chain
chain together and locating apparel manufacturing appears headed toward a high-tech, fast-moving
closer to the consumer to avoid shipping delays. future — and its global footprint could be even
In the survey of US and EU purchasing managers, more fluid.
54 percent said that proximity to customers is The authors work at the McKinsey Global Institute, whose
mission is to help leaders in the commercial, public and social
becoming more important, and another 22 percent
sectors develop a deeper understanding of the evolution of the
said it may be more important in the coming years.40 global economy.
37
Consumer
Caution Ahead
Shifts
The State of Fashion 2019
38
04. END OF OWNERSHIP
In fashion, the shift to new ownership models is in Britain found that one in three young women
driven by growing consumer desire for variety, consider clothes “old” after wearing them once
sustainability and affordability and sources or twice.45 One in seven consider it a fashion
suggest that the resale market, for instance, faux-pas to be photographed in an outfit twice.
could be bigger than fast fashion within ten years.43 Simply put, young people today crave newness,
In recognition of this consumer shift, start-ups and these cohorts are much more likely to
will not be the only players making their mark in embrace churn in their wardrobes. At the same
these segments — established fashion brands will time younger generations are more interested
accelerate the pace with which they embrace new in sustainable clothing than older consumers.
ownership models to further their relevance Rental, resale and refurbishment models lengthen
to consumers. the product lifecycle while offering the newness
consumers desire.
In more and more categories, consumers
are choosing to rent rather than own goods Meanwhile, luxury brands are raising
outright. Think of Spotify supplanting CD sales prices, significantly. Prices of fine watches and
and downloads, Netflix replacing video stores jewellery have nearly doubled since 2005.46
and ZipCar standing in for car ownership among Tracking global prices of Louis Vuitton’s Speedy
many young urbanites. This is a fundamental 30 handbag suggests an increase of approxi-
evolution in consumer behaviour and we expect it mately 19 percent per year since 2016.47 So, even
will have an impact in the fashion business in the consumers with six-figure incomes are looking
years ahead. to discounts and alternative models of acquisition
for relief.
This trend is partly driven by the
young generation’s hunger for newness, while
One in seven consider it a fashion
Oscar Wong/Getty Images
39
Consumer Shifts
These demands are catalysing the Additionally, because of the circular nature of this
successes of rental and pre-owned models. We partnership, it bolsters the corporate and social
expect that the ability of these players to satisfy a responsibility of the fashion brand.
heightened desire for newness and an increased
Other luxury players, such as Richemont,
unattainability will bring them into the spotlight
have purchased resale or rental businesses
in 2019.
outright, to take control of how their products and
Luxury consumers can circumvent the brands are marketed on the secondary market.
price increases of the Speedy 30 bag, for example,
Some players have ventured into refur-
through The RealReal, which was founded in
bishment, taking advantage of its sustainability
2011 and, as of May 2018, enjoys a $450 million
benefits. Eileen Fisher, through its programme
valuation.48 It sells luxury brands, in gently used
“Renew,” takes back gently-worn products, and
form, via a consignment model. The RealReal’s
either refurbishes them or uses the materials
hook: top fashion brands, up to 90 percent off. It
to create new products all together. Patagonia
recently raised $115 million in a Series G funding
pioneered an in-house repair and resale model
round and plans to expand its brick and mortar
by buying back their own products and selling
presence in the US.49
those used items at a discount price. On its website,
The State of Fashion 2019
40
04. End of Ownership
Exhibit 8:
Expectations on consumer appetite for
new ownership models
% of respondents
44 22 41 28
Pre-owned Rental
41
Executive Interview
Jennifer Hyman
Co-Founder and Chief Executive
of Rent the Runway
The State of Fashion 2019
The chief executive of Rent the Runway BoF: How would you
characterise the state of the
reveals the reason why industry leaders fashion rental market today?
keep underestimating the fashion rental JH: The fashion rental market
globally today is a lot bigger than
market, how she got free real estate and it’s given credit for [because] if
you look at the GMV [gross mer-
why this market works for consumers chandise value] of the amount
of product that is exchanged
who refuse to be ‘ripped off.’ through platforms like Rent
the Runway, and platforms like
42
04. End of Ownership
merchandise value that passes $5 million a year using the same customer. Not only do we work
through — we’re talking tens of product, with the same inventory. with them on wholesale; we’re
billions of dollars’ worth of goods, Now, the value that she might be working with them on innova-
that’s number one. deriving from it is different. One tion. We’re working on custom
collections, on extended sizing,
“I think that there are going to be a few very on using data to help inform
what they produce in the first
large, very dominant players in this market. place. We help them use rental
as a monetisation channel for
It could be a winner-takes-all market or it different components of their
could be just two or three businesses emerge inventory, so [in reality], there’s
five or six ways that we work with
as the global winners [but] it’s not an easy designers to build their business-
es. What designers have really
business to copy.” seen is that the customer base
that Rent the Runway is bringing
Number two is that there’s woman is subscribing because to them is new and different than
a larger movement from she never in a million years their other partners; that we are
consumers all over the world would have been able to afford bringing a new customer who’s
buying clothing for multiple what is being offered via the trying the brand for the very first
use, to clothing for single-use subscription; [another] woman time. We’re part of that process
items. Thirty years ago, 70 plus might be using it because it of helping that customer fall in
percent of all fashion purchases just saves her time or it’s more love with the brand.
in the United States were done at efficient for her, or she needs a
department stores. Now only 28 new outfit for every day at work. BoF: How did you know that
percent of all fashion purchases physical retail had to be part
are done at department stores. BoF: How has your of the experience? How have
The primary locations of con- relationship with designers you developed it?
sumption, not only in the US changed?
JH: The Neiman Marcus partner-
but all over the world, are via
JH: The way we work with the ship was fundamentally, for us,
channels like Amazon, Walmart,
industry has changed dramati- about free real estate. We would
H&M, Target, Zara where you
cally over the past ten years. rather have our own physical
go in and you’re buying cheap
We used to have to beg people space that has more square
clothes where the intention is
to work with us, and now they footage where we can control the
to only wear those clothes once
are coming to us and are really hours and the experience. When
or twice.
excited about diversifying all we started our retail strategy
the ways that they work with many years ago, we didn’t have a
BoF: Who is your customer
us. Designers were under the subscription business so we had
today and how has that
impression that they were concepted the store in a different
changed over the years?
competing against other way; it would be a place to build
JH: Our customer base today designers. If I was Diane von awareness of Rent the Runway,
represents 76 percent of all zip Furstenberg, I might think give people the ability to try
codes in the United States. Given that I’m competing against things on before they rented it so
the segregation that exists in the Tory Burch or Alice + Olivia. that they weren’t fearful about fit.
United States, it means we’re Now designers understand Now that we’ve seen the incred-
catering to almost everyone. that they’re competing against ible growth of the subscription
We have subscribers who have Amazon and they’re competing business, we’ve seen how a
household incomes of $60,000 against Zara. physical footprint can provide
a year, we also have subscribers With our top 100 brands, we’re even more convenience and
with household incomes of over their number one or number two magic to the customer base
43
Executive Interview
44
05. GETTING WOKE
Brands are responding by integrating social and The other half are less dogmatic, tailoring their
environmental themes into their products and decision to the situation at hand.
services. The benefits of these policies are clear,
Still, the dynamics behind the numbers
but as the causes that some brands champion
are compelling. Over the past three years a
Consumer Shifts
venture into controversial territory there are risks
third of consumers worldwide have expanded
and consequences for those that fail to get it right.
the scope of their purchasing decisions to
Nine in ten Generation Z consumers incorporate principled values and views. A new
believe companies have a responsibility to address global ethos is emerging, and billions of people
environmental and social issues.53 The inclusion are using consumption as a means to express their
of the latter is a departure from the views of the deeply-held beliefs.
previous generation of millennials, which had a
Signs of this evolving agenda can be
greener focus. The change is reflected in the higher
found beyond consumer sentiment too. Fashion
profile of social issues, and campaigns such as
companies are showing signs of getting “woke”57
#metoo, #blacklivesmatter and #timesup, all of
(a phrase defined as “alert to injustice in society,”
which have entered the mainstream lexicon over
popularised on social media). For example, based
the past couple of years.
on a “data scrape” of over 2,000 fashion retailers,
The views of Gen Z and millennial the appearance of the word “feminist”
consumers are critical. Together, these cohorts on homepages and newsletters increased by a
represent around $350 billion of spending power factor of more than five from 2016 to 2018.58
in the US alone (~$150 billion spent by Gen Z54 and
Many brands and retailers including Nike
~$200 billion by millennials)55 and Gen Z alone
and Levi Strauss are on board, and both companies
will account for 40 percent of global consumers by
have taken a clear stance on social issues in recent
2020. But concern over environmental and social
months — Nike supporting Colin Kaepernick,
issues is not restricted to younger consumers.
the face of the NFL’s “anthem protests,” and
Some two-thirds of consumers worldwide say they
Levi’s fronting a campaign against gun violence.
would switch, avoid or boycott brands based on
Gucci has also supported that cause, supporting
their stance on controversial issues.56 Half of these
a student-led march calling for more gun control.
regard themselves as activists, driven by passion.
45
Consumer Shifts
And American designer Jeremy Scott appeared at numbers of B-Corporations, which are certified
his New York Fashion Week show with a T-shirt to have considered the impact of their decisions
urging, “Tell your senator no on Kavanaugh,” in on people, society and the planet. Companies
reference to the then-embattled US Supreme Court including Danone, Ben & Jerry’s and Patagonia
justice, undergoing confirmation hearings.59 are B-certified. In the fashion, apparel and beauty
sector the number of B-corps had risen to nearly
Not all causes that fashion 200 as of April 2018, compared with just seven
in 2010. Athleta promises that 40 percent of its
brands advocate are universally
products are made of recycled and sustainable
popular, and these can come materials, while Eileen Fisher and Allbirds have
with significant risks. Besides made similar commitments. The latter donates
returned used shoes to charity. We would not be
potential controversy from
surprised if at least one $500 million-plus fashion
supporting divisive causes, brands company became a B-corp in 2019.
may also risk being perceived as Notably, environmentally- and social-
hypocritical if they do not carefully ly-focused companies are considered by younger
The State of Fashion 2019
46
05. Getting Woke
actions. In 2018, Primark was severely criticised some customers, the calculation, of course, is that
and called “unethical” for releasing a line of Pride- the loyalty rewarded by its remaining customers
themed T-shirts which were produced in Turkey, a matters more.
country which is ranked third-worst in Europe for
LGBTQ+ equality.63 Nike recently faced pressure
from civil society groups to ensure fair wages are
paid to workers of suppliers in emerging markets.64 Exhibit 9:
Another reason that brand alignment Total fashion, apparel and beauty
with causes can backfire is that discerning B-Corps
consumers can easily spot the difference between
Absolute number of corporations
gimmicks and a genuine purpose that aligns with
the values of the organisation. Companies can
expect consumers to closely examine the level of
continuity across campaigns and the nature of
197
their strategic and operational decisions, as well
as their tone. 200 186
47
Executive Interview
48
05. Getting Woke
a platform, not only to convey BoF: What was the reaction are the dynamics at play that
our creativity and product, grow from your community? makes this an appropriate
our business and improve our CC: It was not like we were thing for a luxury fashion
market share, but also to use the waiting for feedback; we felt brand like Balenciaga to do?
platform to raise awareness? This convinced that we should do CC: The fact the brand belongs
was very much our mindset in the this and we were extremely to [a group like] Kering, express-
first place. determined to do this. There ing commitment towards sus-
It is how we work together with was an authenticity about it. tainability and some values as a
[Balenciaga’s artistic director] Second, the show exposure and group I think makes a difference.
Demna [Gvasalia]. It’s having visibility about the World Food Nobody’s forced [to do anything]
him at the helm of the creative, Programme is not something that but there’s an environment and
artistic direction of the brand was hidden. It was clear and loud; there’s a context [that is support-
but also being part of what we it was on the runway and it says, ive]. Second, [with] social media
want to do with the brand, its Balenciaga supports the World and the fact that there’s now a
values and its future. Fashion Food Programme. It’s a good direct contact to customers and
cannot lock itself in the so-called example of having commitment the Balenciaga community, it’s
ivory tower anymore. We need blended and integrated with time to not only push product
to be conscious of the world and the aesthetic as opposed to have but also to push the values and
reflect what’s happening. Demna commitment being something to explain the creative process
embodies this new genera- that we do aside or something we in a better way. I would call it
tion of designers who want to do in the shadows. storytelling, in a way. What has
express this. I think this is quite I hear store managers and sales changed is the fact that there
important. It started in a very assistants telling me that some are now leaders in the luxury
genuine way. industry such as Kering that
are taking a commitment
“Fashion cannot lock itself in the so-called towards values.
ivory tower anymore. We need to be conscious I also feel it’s about the direct
relationship we have with
of the world and reflect what’s happening. our community, where we
can express ourselves. We’re
Demna embodies this new generation of extremely exposed and visible
designers who want to express this.” and we could make a difference.
It’s part of our responsibility.
customers have [told] them that I feel this has always been part
BoF: Why did you make the it’s the first time in their life of fashion, to push the norm,
decision to support the World they’ve made a donation. If we to change things.
Food Programme? can influence how people dress When you think of wearing a
CC: It was linked to the creative but also in a way, try also to logo of a brand, is that an
process of Demna. It’s not [ just] [make them] think, I think it’s expression of a status symbol? I
selecting a cause; it’s also making great. This initiative has brought personally don’t think so. I think
sure it makes sense and it ties us a lot of comments, likes and what matters for our audience is
back to what he has in mind transactions. At the end of the day, to make sure that when you wear
as a creative vision. The show this is how you engage with the a Balenciaga logo it means you
was about accumulation, it community, to engage with the belong to the community, you
was layering of pieces. It was a brand, not only via transactions. embrace the aesthetic and you
sense of opulence and I think he share the values. The creativity of
wanted to [contrast] that [with] BoF: Why do you think the brand becomes very relevant
the World Food Programme, it’s brands are taking a more and important for customers.
to feed that tension between vocal stance now than they To put your name on a T-shirt is
accumulation and giving back. might’ve done before? What simply not enough. You need to
49
Executive Interview
make sure that you engage with pushing the norm. The models Second, the way we have worked
people in the right way so they Cristóbal Balenciaga were using sneakers at Balenciaga from a
share and they belong. were called monsters; people design, a product development
didn’t like how they looked. He standpoint and from a communi-
BoF: Balenciaga, since the used some very inexpensive cation standpoint was the same
arrival of Demna, has been product like fishermen garments as if it was an amazing couture
a disruptive force in the and elevated them to a couture dress or a perfectly-cut tailored
industry. How do you keep level. The guy was a disrupter at jacket. If we look at the Triple S
the core of the brand and the time. for example, it’s the combination
what makes it this historical, Now that we see the pictures in of three different soles that are
beautiful heritage brand black and white and we see all not stuck together. They’re just
while disrupting it enough this beauty and the power of his assembled together. The amount
to make it exciting, fresh creations, 100 years after we feel of work to create that shoe for
and new? this is elegance and beauty. me is at couture level, meaning
CC: The brand is 101 years old At the time it was extreme. It was the shoe is clearly pushing the
and Cristóbal Balenciaga himself difficult, it was controversial and norms. Balenciaga was pushing
was a leader, not a follower. not everybody was into it. The the norms whilst creating mega
I think we have inherited his reviews were just really tough on volumes, whilst proposing things
spirit. It makes total sense for him. What I’m trying to say here that were unique and new and
Balenciaga to be today a brand is Balenciaga the brand has a forward. I think there’s a lot of
that is not a follower; a brand that spirit of being a leader. Instead of DNA in that shoe.
is a leader, pushing the norm, a disruption I would call it leader- So, why are sneakers replacing
The State of Fashion 2019
brand that is doing a very unique ship and innovation. Leadership: handbags? The products we sell
casting, a brand that is pushing not because we are at the today need to be meaningful,
the norms of fashion, of volumes, forefront, but leadership because let’s say I call them smart, like
of proportions on everything we do things in a very unique and a smartphone for example. The
we do. A brand that is trying to very Balenciaga way. Innovation: shoe, it’s the equivalent of a
rethink how we do retail and our because we look at the brand, the smartphone. The sneaker itself is
stores, a brand that is rethinking creative side of it, how we engage extremely meaningful for people.
how we act on social media, our with people and how we manage You can work, it’s very versatile,
tone of voice, who we hire, our the brand in an inventive way it goes from day to night, it goes
community, what we do. as well. for the weekend, it goes for work.
We are called disruptive. Demna It’s about the casualisation of the
is sometimes called disruptive. BoF: Your best-selling place to work and how people
I feel this is very Balenciaga. It’s sneakers have been a big part dress to go to work. Sneakers
very much us and when you talk of Balenciaga’s success story. have become their own category.
to people internally they all feel Can you help us understand It’s not a trend; it’s a relevant
we are just simply acting normal the luxury sneaker category for brands. I don’t want
and we just do the right things. phenomenon better, since you to make a statement. Are shoes
guys were really some of the the new bags? Maybe. There’s a
Sometimes I’m asked, ‘How do lot of space for bags, but what
pioneers who brought this
you do to get the millennials I can say is that that shoes are
into the mainstream?
shopping at Balenciaga?’ We also a great alternative to stilettos
simply never ever talk about CC: Sneakers started at
Balenciaga for two reasons. and sneakers have found a great
how to appeal or sell to millen- market share simply because
nials. We simply never have a The first one is because it was
a creative vision, something they blend nicely with the way
discussion on how to break the we live.
rules, how to make some noise, Demna wanted to do because
how to be disruptive. The brand he was true to what he felt was
right for the brand and with This interview has been edited and
itself has inherited the spirit condensed.
of a leader, someone who was his aesthetic.
50
06. NOW OR NEVER
The consumer psyche is changing fast. Technology fragmented than it is on digital-native platforms,
leaders such as Amazon, Uber, Netflix and with customers often struggling to shop based
Deliveroo have raised customer expectations in on their ideas, desires or inspirations.
terms of speed and convenience. Through its Prime
One reason is that the way consumers
offering, Amazon has created an expectation that
get inspired has changed. In the old world, they
delivery should be next day, or even same day.
would often get ideas for purchases directly from
Customers now expect to get a taxi, watch a film or
brands (intermediated by magazines) or from
receive a meal almost instantaneously, and to make
in-store assistants. Now consumers turn to a
a choice based on an easy-to-assess interface or app.
much wider range of inspirations, from social
This resulting need for immediacy media, celebrities and influencers, to spotting an
shows up in various customer experiences. Some attractive look on the street. According to a 2017
61 percent of respondents to one UK survey are millennial survey, consumers are more likely
not willing to wait more than 45 minutes for a to find inspiration from external sources
takeaway food delivery to arrive. Around one in (e.g., influencers, friends, TV) than directly from
five say they will wait just 5-10 minutes for a taxi the brand or retailer (i.e., store website, in-store
ordered via an app.65 This changing sentiment is staff). Some 41 percent of respondents say they rely
revealed by shifting patterns of internet searches. on influencers and bloggers, compared with just
Google search interest for businesses and the like 20 percent who put their faith in store employees.67
that are “open now” has tripled in the past two
The increasingly diverse nature of
years. Searches for “store hours” have dropped.66
inspiration can be a source of confusion for some,
This demonstrates a subtle but fundamental
because it removes the direct connection between
change in mindset.
the idea and the item. Instead, consumers must
If tech companies have taken a lead on now seek out the product they are looking for based
streamlining the customer decision journey, on their best guess of the right brand, description,
fashion companies have largely failed to season or retailer. This represents a significant
follow. Across the industry, the process is more pain-point in the customer decision journey.
51
Consumer Shifts
From a brand perspective, more fragmentation better job at curation and discovery,” says Stitch
and degrees of separation create roadblocks in Fix chief operating officer Mike Smith. “There’s
converting inspired consumers into purchasers. going to be a higher burden placed on the retailer
and the brand instead of the customer doing all
The key pain point comes at the stage
the work.”
after the consumer has had an idea, but before
they have identified where they can purchase
According to a 2017 millennial
the product. As a result, the instant gratification
impulse is frustrated. The consumer moves on survey, consumers are more likely
and the sales opportunity evaporates. Drilling to find inspiration from external
down into the causes, this pain point is at least
sources (e.g., influencers, friends,
partly caused by an inability to identify and find
the product. Word-based searches do not lead to TV) than directly from the brand
the right place and often consumers wouldn’t know or retailer.
the right terminology for the product they search.
The challenges are particularly onerous when In fashion, some emerging technologies
the customer does not know the name of the are similarly aiding in product identification.
The State of Fashion 2019
52
06. Now or Never
search and purchase,”74 and works with leading in improving mobile conversion rates, stream-
retailers, such as Myntra.75 lining the check-out process, improving search
and optimising the user experience. Offensively,
Larger fashion players and retailers
we expect brands and retailers to increasingly
are also catching the wave, either developing
collaborate with technology companies to develop
tools in-house or partnering with technology
proprietary tools such as visual search engines.
companies. Asos, for example, has developed a
We predict that once one solution becomes a clear
“Style Match” search tool and the company expects
winner (such as Shazam in music), there will be a
visual search to help drive sales growth of 30-35
step-change increase in consumer adoption.
percent.76 Chief executive Nick Beighton remarks,
“One of the things we are solving for customers is,
‘What do I wear this morning? What do I wear to
do whatever I want to do today, to feel confident
Exhibit 10:
about whatever I’m doing?’ Visual search is one of
the ways to take away that friction.” As conversion rates are significantly
lower for mobile than desktop, retailers
Forever 21 partnered with Donde Search will work to improve the customer
to create Discover Your Style, a visual search journey
tool which can locate items from features such as
Fashion average sales conversion rates, desktop and mobile,
silhouette and colour. A pilot increased average %
purchase value by 20 percent. Finally, eBay has
launched an app allowing users to find items
based on photos. The company says AI is driving
more than $1 billion per quarter in incremental 3.2
sales. Amazon is using artificial intelligence to
help people shop. Its “Echo Look” functionality is
able to learn about an individual’s style and make
recommendations based on what it sees.
It is interesting to note that, while many 0.9
players are racing to innovate in this space, it
appears that no single player has captured mass
customer adoption — yet. We think 2019 is the year
we will see clear signals of how these tools will
Desktop Mobile
integrate into the day-to-day shopping experience
for the average fashion consumer, and which ones
will succeed.
Source: McKinsey & Company
53
Executive Interview
Jeff Gennette
Chairman & Chief Executive of Macy’s
reinvent the store experience across JG: Consumers are their own
curator now. They’re armed
America by removing pain-points with more information that is
informing a more competent
and friction. point of view about how they
put themselves together and how
54
06. Now or Never
our disposal before. A store Then, the last thing is going from We spent a lot of time over the
needs to be broader than just a a ‘house of brands’ to a ‘branded last five years shedding a lot of
place of transaction. It needs house’. Customers aren’t buying those extraneous stores. We
to be a place where people monolithically by brand any ended up with a remaining
gather and if you don’t bring more. As a retailer, you’d better portfolio that is balanced well
in experience, education and have your own ethos about across all the major markets in
entertainment, you’re not going what you stand for — that’s your the country. We look at those
to do as well. When you create particular competitive mode. flagships and aspire for those
community within a store and It better be something that a to be just these heart-pounding,
you bring customers together customer gives you credibility all-five-senses tourist attractions,
they stay, they linger — and for and that you can credibly like what we’re doing in Herald
they buy things but they come do, and you can do it with the Square. That’s our vision for
together in another way. least friction possible. This idea what a flagship could be.
Then the next category of stores
“A store needs to be broader than just a is our regional flagships and
there’s about 250 of them in the
place of transaction. It needs to be a place States that will stand the test of
where people gather and if you don’t bring in time. They’re the A malls that are
evaluated by Green Street. All of
experience and education and entertainment, our mall developers are investing
you’re not going to do as well.” heavily. What they’re doing in
those malls is they’re actually
taking a lot of apparel and
We’re also looking at VR, and that what you stand for [is more accessories out of those malls
how it bolts onto a strategy and important than] the sum of all and re-mixing their tenant mix.
drives customer advocacy. the parts of what you used to They’re putting in a lot more
We played with VR to say, ‘Okay, carry in your brand. food and beverage and they’re
let’s put it into our furniture putting in more entertainment.
business.’ We had this issue BoF: What has changed in They’re putting in mixed use
with furniture, which is one of the way you think about the [and] community centres.
our signature businesses, where function and purpose of a Then the third bucket is tertiary
we could only sell the whole retail store? If everyone can malls. The mall developers are
assortment in no less than about buy everything online, what not investing in them; they’re
20,000 square feet. Now with is it that really gets someone milking them for cash. But
VR we can do it in 5,000 square into a store now? they’re neighbourhood stores for
feet. It’s opened up our ability us and so we’ve got customers
to get furniture into a lot more JG: This took us a long time to
that want to pick up their basics.
of our buildings. It’s massively figure out. We had too many
They really want to use their
increasing the basket size of that stores through many acquisi-
fulfilment options; they want to
purchase [and] it’s massively tions over the years, [so] when
buy something online; they want
reducing the return rate. Using you look at a store of our size,
to have it shipped to the store.
technology to solve a stubborn we were almost virtually all
We can operate them much more
problem and solve where a mall-based. We had to look at
efficiently to make them better
customer is needful of more our portfolio and shed those
experiences.
inspiration is how we’re looking units that didn’t make sense to
the [local] community, either We have new economic models
at technology. I think this conflu-
because the mall developer like what you’re used to in
ence of experience and technolo-
wasn’t investing, or the mall was Selfridges, where 50 percent of
gy with any retailer today would
extraneous because we had a what is in that building is leased.
be the second biggest thing that I
more powerful location nearby. It’s about 5 percent in the States,
would comment on.
55
Executive Interview
so I can start playing with that them. There’s six businesses ‘buy online, pick up in store’,
line, the economic model, to in the entire store that need [considering what] we carry right
say, “Look, I’ve got space. You’ve really [hand-to-hand] attention now — about ten items online
got a brand and I’ve got traffic. at all times. Those businesses to one item in a store in terms of
I’ve got a devoted customer that, are businesses where Macy’s the SKUs. We believe, in terms
frankly, [if ] I put your brand remains relevant, so we’re in the of ‘endless aisle,’ that we can take
in there and I give you space game with market share [for big that SKU assortment higher.
for it and start leasing more of ticket segments] like furniture, In the past, you had to have that
that for something that’s added mattresses, as well as men’s one item that you were ordering
into the customer experience.” clothing, dresses, fine jewellery, online in that store in order for a
We’re looking at services…like women’s shoes and the entire customer to pick it up and so we
travel, watch repair, post offices, beauty floor. were constrained by whatever
pharmacy [and] what we’re doing When you start looking at [other] the customer was ordering
with optical. businesses like most casual online. [So] we added a thing
sportswear, kids, handbags, called ‘buy online, ship to store’.
BoF: In a way, that’s more if you have the brands and you The customer is loving the fulfil-
of a real-estate model, right? have the right values, you can do ment options that most retailers,
It’s almost like a mall within it without human capital. That’s who are omni-channel, are
a mall, is that correct? where you can be much more [moving towards]. You have lots
efficient. If you look at what’s of options once it hits that store.
JG: Yes. For instance at
going on in off-price right now You could have it delivered to the
Selfridges: when you go into that
The State of Fashion 2019
56
06. Now or Never
57
In-Depth
When it comes to the use of technology in fashion secure application-hosting infrastructure can be
retailing, there are two truths universally acknowl- set up in a matter of hours. In addition to the big
edged. First, that technology is very important. public cloud players themselves, companies such
Second, that it is very difficult — time-consuming, as Twilio, Stripe, HooYu, ProductAI, Wooti and
expensive and risky. Shipright (among many others) have built services
that can be integrated into new experiences using
The first is true. The second is not.
APIs [application programme interfaces]. APIs
Already, fashion is seeing a constant stream allow services to be used in ways that are suited
of innovation, with technology creating new to machines, rather than people. The cost of using
experiences for customers. Asos, for example, APIs has reduced significantly, making it much
is using visual search to let customers purchase simpler for companies to “plug in” capabilities and
items that they’ve seen, even if they don’t know swap them out for a different service when desired.
The State of Fashion 2019
the brand or the name of the item. Asos customers APIs are also becoming easier to use. Historically,
can also talk not to a sales assistant, but to Google API design emphasised dependability and security;
Assistant. Zara is shipping products to customers however, as they have grown in popularity,
straight from their stores. Zozo is producing designers have begun to make pragmatic trade-offs
custom-fit garments on a mass scale. Innovations of between technical concerns and ease-of-adop-
this sort often begin as a novelty in the market but tion to appeal to developers. Finally, open-source
can quickly set new customer expectations. Once libraries, freely shared by companies such as
customers experience Amazon Prime delivery, Netflix, Google, Airbnb, Microsoft, Facebook and
for example, or shop using apps on mobile devices, others, have now become mainstream, leading to a
it becomes harder and harder to lure them back dramatic reduction in the time it takes to develop
into stores or to force them to use old-fashioned custom applications.
websites and wait a week for delivery. While
Most companies will build new capabilities using
experiences such as these would have seemed
existing systems, many of which may not have
daunting to create only a few years ago, with
extensive, high quality APIs, or be built to support
developments both in technology and in the way
the volume of traffic arising from public use (as
in which technology is delivered, it need not be
compared to internal use). To create new customer
daunting anymore.
experiences and modernise their IT systems,
Two related factors enable companies to deliver a company in this situation will need to implement
experiences such as these. The first is growth in APIs where they are missing and look to pragmat-
simple services, platforms, and components which ically modernise at least some of their systems to
can be used to deliver sophisticated new capabil- support higher levels of use. Unlike when Amazon.
ities. The second is the ongoing upgrade of legacy com set out on its journey to modernise its systems
IT systems, and the range of technologies that can back in 2001, there are now established approaches,
support modernising the core of a business. technologies and tools that can support this.
The growth in public cloud space has led to an But, what does all of this mean for a business? If
increase in the availability of both software- you’re like most businesses in the fashion industry
as-a-service (SaaS) and platform-as-a-service. your e-commerce sites have a traditional interface
Using public cloud platforms, highly scalable, and you are struggling to evolve your business in
58
06. Now or Never
line with technology advances. True omni-chan- skills that can take a pragmatic, progressive
nel capabilities are likely absent, customer approach that continuously transforms the
experiences are mostly not personalised, and if technology of the business.
there are digital recommendations then these will
Customers’ expectations are always rising, and
tend to produce poor results. Behind the channels,
sometimes companies struggle to keep up. But by
there is often a lack of real-time information on
taking the time to invest in new technology and
the performance of the business, for example not
capabilities, companies can rapidly create valuable
having real-time awareness of local stock levels.
new customer experiences, manage them cost-ef-
Producing experiences of the kind that Asos or Zara
fectively and continue evolving them to keep pace
are offering would mean a major software delivery
with a rapidly changing world.
project, requiring significant time and resources to
bring it to market. The authors are part of Digital McKinsey, which brings
together all of McKinsey’s technology and digital capabilities in
Using the approaches outlined here, combining one cohesive organisation.
best-of-breed technology with lean product
development approaches, similar experiences can
be brought to market in just a few weeks. So, what
An example of how existing software
should a business do to make this happen? Firstly, it
and platform services can be integrated to
needs to approach this not as delivering individual transform the customer experience:
projects, but as building a real capability that can
deliver and own digital experiences. This means
putting together cross-functional teams
and empowering them. Realistically, a
cross-functional scrum team should be
able to create a market-ready solution
using technologies such as these in just a
few weeks, and then continuously improve
it multiple times a day. A typical team
would consist of approximately ten people,
including roles such as a product owner,
user experience (UX) and user interface
(UI) designers, web developers, mobile
developers, systems engineers and data
scientists. The team should be co-located,
empowered to make rapid decisions, and
funded as a mini-business with their own
P&L so that they can set direction by the
business metrics that matter. Importantly,
an enduring capability should be built to
do this within the business, rather than
outsourcing it as a one-off project.
The technical building blocks already
exist; a company does not need to build the
integrated solution from scratch. These
existing capabilities can be rapidly stitched
together using SaaS capabilities. Some
custom building will still be required,
but this can focus on those distinctive
aspects that make the end service novel
and focused. Tackling the legacy of existing
systems will require top-notch architectural Source: Digital McKinsey
59
07. RADICAL TRANSPARENCY
The fashion industry suffers from a rising trust borders.” We expect the critical dimensions in
The State of Fashion 2019
deficit. Recent high-profile data breaches at a which fashion players will be most scrutinised
number of online fashion companies, and in other include: creative integrity, sustainable supply
industries, have left consumers wondering whether chains, value for money, treatment of workers,
they should share information with brands and data protection and authenticity.
retailers. As a result, they are demanding to know
From a creative standpoint, brands need
much more about a range of issues, from where and
to show they bring something to the table that is
how items are made to the design provenance and
based on their own intellectual property. Copycats
the item’s quality.
are increasingly called out on social media. For
As Mike Smith, chief operating officer of example, @DietPrada, an Instagram account that
Stitch Fix, asserts, “If you don’t have trust, you boldly names brands that have lifted styles from
don’t win the customer over time.” Yet surveys other designers, has over 830,000 followers at the
suggest that trust in businesses fell in 40 percent time of printing. Cases of cultural appropriation
of countries in 2017, with more than two in five — described by The Economist as instances where
consumers saying they didn’t know which brands a “‘dominant culture’ wearing or using things
to trust. It makes sense that as trust has eroded, from a ‘minority culture’ is inherently disre-
consumers have become more active in scrutinis- spectful because the objects are taken out of their
ing the brands they do business with. native context”78 — have gained instant notoriety
on social media. Consumers are increasingly
Millennials are at the vanguard, with 52
demanding that the products produced by fashion
percent agreeing that they always research for
brands are original, reflecting their own desire for
background information before buying, compared
their fashion choices to be reflections of their sense
with 45 percent of Gen Z consumers and 41
of style, self-image and values.
percent of baby boomers. Reviews and articles are
common sources of information.77 “Social media Transparency has become an important
has enabled a certain transparency,” says Farfetch issue further upstream in the supply chain, with
chief strategy officer Stephanie Phair. “You can consumers increasingly concerned about issues
no longer control your luxury messaging within including fair labour, sustainable resourcing and
60
07. Radical Transparency
the environment. Consumers want to support apparel company Everlane offers its customers
brands that are doing good in the world, with 66 insight into all these costs, alongside information
percent willing to pay more for sustainable goods. on the factory that produced the products.83
Some 42 percent of millennials say they want to
Given consumer demands for greater
know what goes into products and how they are
transparency through the value chain, we see three
made before they buy, compared with 37 percent
key dynamics in the coming period. First, players
of Gen Z.79
will rigorously audit their business practices to
identify potential areas that may erode consumer
Brands are responding by trying
trust. The lens for this analysis could be,
to become more transparent, in “What would my customers think if this was on
many cases specifying costs of the front page of a newspaper?” Brands will invest
to address any problem areas. As a result, more
materials, labour, transport, duties
players will highlight their best practices to create
and mark-up. a competitive edge. Some will use new technolo-
gies such as blockchain, in which each node of the
In response, several brands have network sees the whole history of transactions, to
already moved towards “radical transparency” boost transparency in the supply chain. We also
in manufacturing, hoping to regain the trust expect more rigorous reporting of social and envi-
of disillusioned customers. This might include ronmental impact. Finally, brands are likely to be
information about product origins or the environ- more transparent in the event of a crisis. They will
mental impact of manufacturing. One mass market respond more quickly, admit when they are at fault
player example is H&M-owned Arket, which lists more often and be willing to apologise.
where each product is made, showing pictures
from the manufacturing floor.80 Designer Martine
Jarlgaard, meanwhile, has launched a pilot to track
clothing from raw material to consumer using
blockchain.81 The retailer Reformation applies its Exhibit 11:
“RefScale” methodology to measure the envi- Fashion executives anticipate
ronmental impact of every garment it sells, and consumers’ need for transparency
discloses the results to customers. RefScale tracks
pounds of carbon dioxide and gallons of water used
in production.82 Other supply chain tracking tech-
nologies include analysing dust samples and using
AI to trace the geographic history of a product.
Survey respondents that
Another increasing concern among cited “consumer needs
65%
consumers is value for money. This reflects for trust in product
authenticity and creative
increased product saturation, proliferation of originality” in their top 5
product information and reviews and the rising trends for 2019; ranked
2nd out of a possible 12.
ability to compare prices. Brands are responding
by trying to become more transparent, in many
cases specifying costs of materials, labour,
transport, duties and mark-up. San-Francisco
Source: BoF-McKinsey State of Fashion Survey
61
The State of Fashion 2019
They say it takes years to earn trust but only an today the retailer can trace the origins of a single
instant to lose it. With trust in very short supply beef patty with such detail that it can name the
among today’s consumers, some companies are breed, age and even the name of each individual
going to extraordinary lengths to claw it back. cow. Individual identities using a series of letters
As one of the most traditionally opaque industries and digits based on a DNA profile taken at the
out there, fashion faces an especially challenging abattoir that can, in turn, be traced back to the
future in this regard, but instead of grappling to farm of origin.
invent new ways to beat the trust deficit, it could By partnering with Dublin-based tech firm
look to other industries for inspiration and Indentigen, M&S uses a genetic sampling
best practice. technique that analyses the molecular signature
The kind of radical transparency that some fashion found in the smoke emitted when a tiny sample of
players will embrace tomorrow is being played the meat comes into contact with a laser. The move
out in the supermarkets today. Arguably, nowhere has been viewed by some as a benchmark when
is traceability more important than in the food it comes to radical transparency, as consumers
industry and since Europe’s horsemeat scandal increasingly demand to know the provenance of
of 2013 — which exposed a sector where some their food.
products advertised as 100 percent beef contained
undeclared meat from other animals including pig “An apparel company might think
and horse — more and more consumers are asking
whether we really know what we’re putting on
that they only have 1,000 to 2,000
our plates. suppliers, but the reality is they
The more complex that global supply chains have 20,000 to 50,000 when you
become, the more vulnerable they are to fraud
and error. Sensing that customers were still very
count all the sub-suppliers.”
distrustful of the supermarket giants, Marks &
Spencer (M&S) recently introduced complete But beyond groceries, the question of precisely
traceability of all its beef products. One motivation where our goods come from remains as pertinent
for M&S would have been to implement a system as ever — and one that the fashion industry has not
Chris Ratcliffe/Bloomberg via Getty Images
to prevent it from meeting the fate of one of its yet been able to solve at scale.
rivals, Tesco, which in the dark days after the “[What] only a few leading brands are doing is
horsemeat scandal saw hundreds of millions of [offering] full traceability [of their supply chain].
dollars wiped off its value. That means that in theory, you can scan a barcode
Initially M&S’ upgrade was met with scepticism on a shirt and know the actual supply chain for
but, as it turns out, the firm’s high-tech investment that particular garment,” says Leonardo Bonanni,
is gradually improving consumer trust. It took founder and chief executive of Sourcemap, which
years of R&D and operational restructuring, but helps brands trace the journey of their products.
63
In-Depth
“It’s been well established in food, pharmaceuti- Gobbetti to address the issue with a plan that
cals and other industries for years. We need to get would see a complete turnaround. “We are now in
there with apparel.” a position to [stop] destroying finished products,
which we think, frankly, is just not modern,” he
Long Legacy of Bad Habits told BoF in September.
In the not too distant fashion past, a lack of trans- It is clear there has been a shift in the way
parency in a company’s supply chain could actually consumers view transparency. In today’s world of
be seen as a competitive advantage. Businesses post-truth politics and “fake news,” consumers’
wanted to keep insight into their suppliers and distrust of governments and media has extended
manufacturers as opaque as possible. After all, to every aspect of their lives, from food to medicine
if nobody knew where the products were coming and fashion. Surveys suggest that trust in
from, or how they were being made, it was harder businesses fell in 40 percent of countries in 2017,
for competitors to create identical apparel. with more than two in five consumers saying they
didn’t know which brands to trust.
“The idea of mystique is one that is so engrained
into the fashion culture of total exclusivity [that] The fashion industry, in particular, has been
brands hid what they’re doing from everybody,” suffering from a rising trust deficit. After more
The State of Fashion 2019
says Tamsin Blanchard, a veteran journalist than 1,100 people died in a garment factory
focused on sustainability and ecological issues collapse in Bangladesh five years ago, pressure has
in fashion. mounted on Western retailers to be transparent
about their supply chain. Other horror stories
of garment sweatshops, abuses, child labour
“Apparel is one of the most and deadly industrial disasters have put brands
volatile and fast-changing supply under scrutiny by shoppers who are increasingly
chains that I know of.” demanding to know if their products were made
ethically and sustainably.
For Neliana Fuenmayor, founder and chief Yet transparency remains a major challenge
executive of A Transparent Company, which for the global fashion industry, one that was
advises brands on sustainable innovation, the worth $2.5 trillion in 2017, according to the
luxury end of fashion is especially problematic, McKinsey FashionScope, which relies on very
“[Consumers] don’t question luxury because if it fragmented supply chains often spread across
has that high price ticket [then] you want to think multiple countries.
it’s been done in the best way possible.” Following the Rana Plaza disaster in Bangladesh,
However, news in summer 2018 that Burberry it took weeks for retailers to figure out why their
had burned $37.6 million worth of unsold clothes labels had been found among the ruins in the first
and accessories, instead of selling it off cheaply, place and which purchasing deals had been made
to protect its brand, shocked consumers. It’s with those suppliers. As a great number of retailers
a practice notably not exclusive to the British do not own their own manufacturing facilities or
fashion brand but the secretive nature of the use a system of agents and subcontractors known
industry makes it difficult to accurately quantify as “indirect sourcing,” it makes it difficult for
the scale of the problem. companies to monitor conditions across their
supply chain.
The public outrage and negative media attention
prompted Burberry chief executive Marco
64
07. Radical Transparency
65
In-Depth
The State of Fashion 2019
important questions: what is a shopper supposed for why radical transparency is challenging,”
to do with that information? Fuenmayor continues. “If you’re a brand choosing
“I think it’s a bit tokenistic,” says Rachael which supplier to make a product, you’re trying
Stott, senior creative researcher at The Future to push down the price as much as possible.
Laboratory. “If you’re given the name of a factory That’s where the secretive part comes in because
or the provenance of a garment, it’s too vague suppliers might offer certain brands a better
to really help [the consumer] at that point of price than their competitors and so it becomes a
purchase. I still have to go away and research these grey area.”
factories and names. There’s no guarantee for me
as a consumer that what I’m buying is ethical.” Using Technology to Improve Disclosure
But as impossible as full transparency may seem,
“We see transparency as one of it’s clear that the pendulum has swung too far in
the means for our industry to the other direction for far too long. “In the future,
not being transparent raises a red flag. Consumers
drive positive change through will question… what are you hiding?” Fuenmayor
increased openness.” continues. “What is luxury today? Is it a logo or is
it a product that I know has not cost someone’s life
There’s also the debate of how much a factory has or the environment? We have to understand that
to be in compliance. Several experts agree that no we have more power as consumers, because we’re
company is perfect, so should consumers hesitate paying with our wallets every day when we choose
to buy a T-shirt or pair of jeans if 80 percent of a a brand or service.”
factory is up to standards? Is anything less than “Increasingly there are vegan customers who want
100 percent acceptable? Sourcemap’s Bonanni to know what materials are in [their clothes, for
points out that there are currently no uniform instance] and not just what they’re eating,” says
standard on what constitutes as an ethical or Blanchard. She argues, however, that transparency
sustainable factory. “There are different levels is especially important for fashion because, “food,
of transparency but we need a standard in the you eat it, then it’s gone, whereas with fashion, you
industry, so that the consumer understands,” wear it and it’s still going to be there. It’s either
agrees Fuenmayor. going to be in your wardrobe or in a landfill.”
Another challenge with rising levels of transpar- Radical transparency doesn’t only apply to
ency is it can lead to the over-sharing of company production; it can be applied to pricing too. One
affairs and potential conflicts with the need to of the early pioneers of this was Bruno Pieters,
protect trade secrets, information and privacy. who started his own label Honest By in 2012 after
In the workplace, for example, business owners stepping down from a leading role at Hugo Boss.
have a responsibility to their employees to disclose So meticulous was the Belgian maverick that
problems that might lead to employee dismissals, shoppers could not only trace the manufacturer
but discussing every loss, financial struggle or and composition of the garment, fabrics and lining
employee salary could lead to unrest, loss of but also that of the zippers, buttons, thread and
confidence and detrimental competition among even the safety pin holding the hang tag to the
employees. The same applies to fashion. item’s care label.
“Fashion companies are very careful with how they Whenever he could persuade textile suppliers to
share information [and] that’s one of the blockers reveal details about origins and sources, Pieters
67
In-Depth
created a painstaking “pedigree” that traced the the food chain — producers, suppliers, retailers or
fabric through the supply chain of raw materials, consumers — can access so-called “tamper-proof”
yarn spinners, weavers, printers and dyers. data about their product at any stage in its supply
More surprising was — disclosed on the product chain life cycle.
detail pages of the brand website — an itemised The fashion industry, however, seems more
break-down of the garment’s cost to the very last reticent. Martine Jarlgaard’s pilot programme
penny, including his wholesale and retail mark-up to track clothing from raw material to consumer
percentages. When news broke in October 2018 using blockchain is a start. However, it will take
suggesting that Honest By might be closing down, much bigger developments from blockchain
some saw it as a sign of how hard it is to sustain specialists like VeChain, whose chief executive
a business in fashion without compromising Sunny Lu is the former chief information officer
on transparency. of Louis Vuitton China, to move the needle.
Transparency is also important in terms of Meanwhile, De Beers, the world’s biggest diamond
disclosing how companies operate. Fitness producer by the value of its gems, said it planned to
technology firm Fitbit, for example, has access launch the first industry-wide blockchain this year,
to extremely valuable customer data, which may to track gems each time they change hands from
The State of Fashion 2019
leave people feeling uneasy. It hopes to quell the moment they are dug up from the ground.
these concerns by being completely open about The technology could be used to verify the authen-
which data points they collect and how they share ticity of diamonds and ensure they are not from
it. Meanwhile, charity services like BitGive and conflict zones where gems could be used to
AidCoin use technology to provide greater trans- finance violence.
parency to donors by sharing real-time financial
and project information. “Fashion companies are very
What’s clear is that while technology has played a careful with how they share
part in generating much of today’s mistrust, it can
also be leveraged to restore trust and confidence. information [and] that’s one
Blockchain, for one, has the potential to fix this. of the blockers for why radical
The underlying technology driving cryptocurren- transparency is challenging.”
cies such as Bitcoin, blockchain is a decentralised
and distributed digital system of records that If something similar were adopted by fashion
cannot be altered once they have been added. brands, retailers could garner greater trust
The global blockchain technology market was through the product lifecycle, as it could tell
estimated by Statista to be worth $339.5 million in consumers not just where an item was made,
2017, and is forecast to grow to $2.3 billion by 2021. but also who it was made by, the conditions
This technology is already being slowly they worked in, how much they were paid, the
implemented in a number of industries. Swiss composition of the garment, where the fabric was
tech firm Ambrosus offers blockchain for the food grown and what chemicals had been used.
industry, making it accessible to both emerging While critics of blockchain claim that it has several
start-ups and billion-dollar brands. The firm uses “Achilles heels” including problems as diverse
high-tech sensors and blockchain technology to as scalability, securing privacy and its power
record the entire history of food and pharmaceu- source, observers like Scott from The Future
tical products. By using a smartphone, anyone in Laboratory are more enthusiastic. “Blockchain
68
07. Radical Transparency
powers transparency and allows brands to not only “In the long term we’re heading towards brands
communicate their values, but also hold all of their having to ingrain the idea of transparency into
supply chain partners and producers accountable their DNA. With every new product they bring out,
for each step,” she says. they’ll have to ensure that they can give all the
information they can on sourcing and production,”
Clear Standards and User-Generated Insight said Blanchard. “This is going to be the future of
how people shop, as more consumers are educated
While full transparency remains an elusive and about the industry and will put their money in the
somewhat controversial concept, many see the brands they feel they can put their trust in.”
immediate goal as understanding better what other
steps a company can take to implement aspects of
Blockchain powers transparency
radical transparency into their operations.
Collaboration, says Fuenmayor, is the way forward and allows brands to not only
— and it starts from within. “There has to be a communicate their values, but
corporate culture shift within the company so that
sustainability and transparency can be achieved
also hold all of their supply
across all departments.” The problem, she says, is chain partners and producers
that “companies are split into departments and accountable for each step.
that causes fragmentation and silos. We need to
move from a centralised system to a more decen- Forward-looking fashion leaders now believe
tralised one.” that we are headed toward a future where trust
Fuenmayor adds that “giving power” to employees becomes an exceptionally powerful currency and,
to “make decisions” was an important step. Scott extending the metaphor further, transparency
agrees, suggesting that the solution could go as far then becomes as indispensable to upholding trust
upstream in the supply chain as giving autonomy as the modern banking system is for managing
to garment workers. “It’s about putting power our money.
in their hands [and could mean] letting them “We mustn’t forget that transparency [itself] is not
upload their own conditions onto a cloud-based the goal. Transparency is just one step towards the
platform, so companies can track labour patterns aim, which is sustainability,” reminds Bonanni.
a bit more honestly and authentically,” she said. “Positive change is what we should look for in the
“When brands want to control their supply chain near future, which is not just for companies to be
and do quality control visits, a lot of [what they see transparent, but to commit to standards across
through audits] is staged and not a realistic view of improving the supply chain.”
what’s happening.”
Meanwhile, in industries such as beauty, some The author works in the editorial division of The Business
manufacturers have embraced a switch to “clean of Fashion
label” ingredients or use of ethical certification
logos, such as Fairtrade or non-GMO, to indicate
that ingredients have been sustainably sourced
based on explicit and established standards.
69
The State of Fashion 2019
70
System
Fashion
08. SELF DISRUPT
Fashion brands, and luxury houses in particular, Clothing brand Reformation, for example,
are often successful because of their heritage. has 1.1 million Instagram followers, as of printing
While this continues to be a key advantage, it is no this report, and makes 80 percent of sales online.
longer enough. In this year’s BoF-McKinsey State It pushes its green credentials and has a roster of
of Fashion Survey, self-disruption is top of mind celebrity endorsers, including Emily Ratajkowski,
for 2019, with 79 percent of executives placing it in Selena Gomez and Rihanna. Another disruptor
the top five trends impacting the industry. brand I.AM.GIA (which has created an Instagram
It-girl persona called Gia) has a similar profile,
There are two key forces driving
with over six hundred thousand Instagram
self-disruption: younger consumers’ preference
followers and a strong celebrity following.
for novelty and advancements in both digital
Both companies are growing sales at high
technology and social media.
double-digit rates.
According to the McKinsey Millennial
If performance were measured by social
Survey, younger generations are more willing to
media growth alone, the big incumbent fashion
set themselves apart through brands and they
players would already be in trouble. Brands such
are also more likely to follow up-and-coming
as H&M, Dior and Zara grew their Instagram
brands.84 The latter will typically challenge fashion
fan base by less than 30 percent in the year to
conventions through either branding, commu-
September. Many disruptors saw their Instagram
nication or distribution. At the same time, social
following expand by more than 130 percent over
media has dramatically levelled the playing field,
Lisi Niesner/Bloomberg via Getty Images
71
Fashion System
Established brands recognise that imitating the “drop” approach commonly used
challenger brands are often more nimble and by streetwear labels to release smaller and more
effective at reaching young audiences. In response, frequent collections that create rarity value
the former are now turning to a series of levers to and elevate anticipation. Moncler’s launch of its
“self-disrupt.” “Genius Project” is an example, with Hiroshi
Fujiwara’s first drop driving a 43 percent month-
Some established brands are on-month increase in earned media value (EMV)
embracing disruption by launching in June 2018 according to Tribe Dynamics.87
More recently, Burberry announced is launch of
accelerators and incubators to “B Series,” a new series of monthly product
test new approaches in a more releases on the 17th of each month.
controlled environment. Established luxury brands are also
increasingly embracing digital channels as a
The primary lever is to conduct brand primary, at times exclusive, route to market.
makeovers, overhauling their approach to create Following the early disruptors Warby Parker and
the impressions of having their finger on the pulse Everlane, Comme des Garçons will launch its first
The State of Fashion 2019
by refreshing their image. Burberry, for example, direct-to-consumer (D2C) only brand later in 2018
developed a new logo and monogram under to expand its customer base.88 We expect more
Riccardo Tisci. After appointing Hedi Slimane as established brands to follow suit.
creative director, Celine debuted a new logo on
Some established brands are embracing
Instagram and took a notable pivot away from the
disruption by launching accelerators and
signature aesthetic to which consumers had grown
incubators to test new approaches in a more
accustomed and loyal.
controlled environment. These are more
More heritage brands are turning to flexible and less risky than mergers and acqui-
streetwear brands to create a cooler image and sitions, enabling experimentation and offering
have reflected that ethos in their talent strategies. the opportunity to accelerate business model
Louis Vuitton in 2018 appointed Virgil Abloh, innovation where necessary.
known for his disruptive streetwear brand
Off-White, as its creative director. The origin of In an increasingly fickle fashion
this type of self-disruption can be traced back to
environment, market leaders will
the flurry of collaborations between high fashion
and streetwear players in 2017, through which a also need to take more risks to
new kind of experimentation became the norm. stay ahead.
This tendency to collaborate and flex a brand’s
identity has now reached critical mass, and we
Kering’s second wave of Plug and Play,
expect it to persist in the future.
an accelerator focused on sustainability, is
Other forms of disruption we see in one example. Another is LVMH, which in 2018
fashion include exclusivity, faster fashion and launched its La Maison des Start-Ups accelerator
new channels. Numerous established brands programme at its Station F campus in Paris,
are rethinking their business models to reflect promising to offer work stations and support for 50
these evolutions. For instance, some are moving start-ups each year.89 These initiatives help major
away from the traditional fashion calendar and players support innovators and absorb or adapt
72
08. Self-Disrupt
73
In Depth
Conventional wisdom says that success in preferences, digital marketing and retailer
business is all about growth, and that in the long requirements for differentiation and margin.
run Goliaths beat Davids. However, while scale
Millennial Preferences. Because they have
continues to be an important driver of long-run
become the largest consumer segment worldwide,
value creation (see also our section on “Winners
millennials’ strong preferences are ignored by
and Losers” in McKinsey Global Fashion Index),
brands at their peril. Millennials crave the new,
these days it does not in itself guarantee consumer
The State of Fashion 2019
74
08. Self-Disrupt
Retailer Requirements. It’s not just consumers made without animal products) and respond to
who love small brands. Because they are new market trends (e.g., free-from, athleisure
threatened by e-marketplaces and discounters that or even athluxury). Moreover, digital technolo-
exert strong pressure on price, mass retailers are gies have made it easier for small brands to build
turning to small brands for differentiation awareness and sell to customers, helping them
and margin. capture a disproportionate share of growth.
Second, small brands are not just froth. Some
“It’s the smaller brands that small brands will grow into sizable brands, as Kind
have been better at genuine Bars (revenue of $727 million,)96 Halo Top ($347
million,)97 and Fever Tree ($220 million)98 are
innovation — and that’s what
doing. Other brands will be short-lived. Still others
consumers want.” might cater successfully to a niche and thrive as
small brands but never grow into mass brands.
Grocers in the UK, for example, have little wiggle This mixed outlook calls for larger companies
room on price as the top 2,000 items generate having enough small brands in their portfolios to
some 40 percent of sales, and retailers charge replace those that languish with new brands that
comparable prices. Enter small brands. As a UK can compensate for the lost sales.
grocer said, “It’s the smaller brands that have been
better at genuine innovation – and that’s what Global Beauty Players Are Leading
consumers want.” The Charge
Small brands offer the differentiation that builds Fashion can learn lessons from the beauty
traffic (in the store, not just online), and they industry, which is a trailblazer in this regard.
boost margin because they tend to be premium Over the last decade, legacy brands such as MAC
and rarely promote. In the US, 44 percent of and Lancôme (at the prestige end of the market)
small-brand sales are premium, versus 34 percent or L’Oréal and Revlon (at the mass end) have
for other brands, helping to boost average selling collectively struggled to achieve 5 percent growth;
prices. Similarly, only 27 percent of small-brand challengers such as Benefit, Becca and Urban
sales happen on promotion, versus 44 percent of Decay have together grown at 16 percent and
large-brand sales.94 As a result, US retailers are now have a 10 percent share of the global
giving small brands double their fair share of cosmetics market.99
new listings.
Successful small beauty companies do four things
The Future of Small well. First, they offer high-quality, innovative
products with stories that appeal to millennials.
What learnings can be captured from observing Second, they have an omni-channel presence —
the explosion of small in the consumer sector? sometimes including subscriptions. Third, they
First, small is here to stay. Small brands fit the focus on differentiating capabilities in branding,
preferences of millennials, who will increasingly marketing and sales — often outsourcing manufac-
constitute the market, and the culture they have turing, distribution and even innovation.
created. For example, millennials love craft beer,
which they see as offering more flavour, differenti- And fourth, they claim a disproportionate share
ation, and authenticity — the category grew from of social media. For example, Anastasia Beverly
6 percent of total US beer volume in 2009 to 14 Hills has nearly 18 million Instagram followers,
percent in 2017.95 thanks to more than 60 posts a week and working
with over 600 influencers. It aims to have a new
Small brands are better able to target specific post every three hours at peak times. This digital
market niches (e.g., vegans who require clothes
75
In Depth
strategy generated earned media value of $90 The retail mix is shifting as well. At Nordstrom,
million in May 2017 alone. Its level of engagement for example, small brands classified as “young”
— an average of 68,000 interactions per post — or “hot” are taking shelf space from “heritage,”
is equal to the combined interactions of the next “established” and “proven” brands. The small
top five brands (Tarte, Benefit, NYX, MAC and challengers make up 13 percent of the overall mix
Too Faced). Social media firepower of this order — but account for 31 percent of brand additions
translates into business success: Anastasia has made in 2018.102 The playbook adopted by small
used this Instagram presence as a springboard beauty companies is directly adoptable by small
for explosive growth — from retail sales of just fashion companies, particularly the emphasis on
$2 millionin 2012 to current annual net revenue omnichannel and social media excellence.
estimated at $340 million.100 US swimwear brand Solid and Striped appears
to have been made for the social media age, with
Digital technologies have made about 265,000 Instagram followers (at the time
of publishing), and products donned by influencers
it easier for small brands to build
and celebrities alike. At the time of publication
awareness and sell to customers, of this report, they are the most stocked brand in
helping them capture a swimwear, for retailers such as MatchesFashion
and Revolve.103 Small players are also ideally
disproportionate share of growth.
suited to win by putting values at the core of their
narratives (see “Getting Woke,” page 45), so that
The State of Fashion 2019
76
09. DIGITAL LANDGRAB
In last year’s State of Fashion report, with ~8 percent at traditional retailers, according
we emphasised the importance of platforms as to the analysis from McKinsey’s Global Fashion
entry point of choice for consumers into their Index. Three of sixteen publicly listed e-commerce
shopping journey. Their growing dominance players with revenues of more than $100 million
through superior convenience, growing segment made a loss. In one example, Yoox Net-a-Porter
coverage and the launch of private labels continues posted a profit margin of -5.2 percent in 2017
to be a theme this year for both fashion pure while growing at 35.6 percent year on year.
players and multicategory platforms. For example, A series of private e-commerce players are also
Amazon is on course to become the leading apparel operating unprofitably, with Farfetch (pre-IPO),
retailer in the US, with over 8 percent estimated for example, reporting an EBITDA margin
total share, and Flipkart has 40 percent share of approximately -14 percent in 2017, despite
of online fashion sales in India.104,105 However, significant revenue growth of 74 percent.106
potential for profitable growth fuelled by user While investors in leading players have often
acquisition is starting to saturate due to market shown patience for profitability, weak performance
maturity and increased competition. The next has been reflected in the valuations of some small
horizon in platform evolution is business model to mid-sized private players. Fab.com, once valued
diversification through proprietary technology and at $900 million, was reportedly sold to PCH in
knowledge to enrich the offering to consumers and 2015 for between $15 and 30 million.107 In 2018,
brands. The race is underway. Rue La La reportedly acquired Gilt Groupe
for under $100 million, far below its one-time
Evolution presents platforms with an
valuation of $1 billion.108
opportunity to generate higher margins while
growing scale, as opposed to the recent experience In the context of such cautionary tales,
of fast growth without significant profitability. large e-commerce players are strategically adding
E-commerce players consistently post lower profits new services. They are venturing in areas where
than their physical counterparts, with average they have a competitive advantage, for example
EBITDA margins of ~4 percent in 2017, compared Farfetch and Zalando with white-labelling,
77
Fashion System
or where they spot a structural opportunity, as in brands,” Zalando co-founder David Schneider told
Alibaba’s XPressBees logistics company. BoF in September. Non-core services are expected
They are also investing heavily in technology to contribute around 10 percent of Zalando profits
across the value chain, aiming to boost efficiency in five years’ time, compared with 2 percent at
and streamline the customer experience. Alibaba’s present, and will add at least 250 basis points
expansion is effectively powering the digitisation to EBIT margins in the long term, according to
of a country’s entire retail sector. This is reflected analyst reports.110
in investments in various payment solutions
Finally, Farfetch’s longstanding
(Paytm, Kakaopay), logistics (XpressBees), and
flagship example is its Black&White offering,
quantum computing cloud services (SenseTime).
an e-commerce white-label solution for luxury
Among other recent initiatives, Flipkart’s AI for
fashion brands. This allows Farfetch to leverage
India initiative reflects its internal use of machine
its technology capability beyond its core offering.
learning and other advanced technologies to
More recently, the company launched its Dream
monitor products and spending. The initiative
Assembly technology accelerator in April 2018
aims to encourage data science and promises
and acquired Curiosity in July to expand its social
hundreds of millions of dollars of investment
media efforts in China. “One [area] that I find
to build new AI solutions.109 In other examples
The State of Fashion 2019
78
09. Digital Landgrab
large platform business model based on logistics, “One [area] that I find interesting
speed and search.”
is around conversational
Looking ahead to 2019, we are likely to see
commerce and really thinking
an accelerated emergence of ecosystems of related
and overlapping businesses. There will likely be an that customers are increasingly
intensified race for pole position, with the largest going to have a one-to-one
players battling to become the go-to platform for
relationship with their shopping
consumers and brands. The “holy grail” of the
industry will be integration of value-add services through text message and
that remove friction in the consumer and supplier through one-to-one requests.”
journey through effective use of data analytics at
scale. This could lead to a continued wave of M&A
activity in a race to find the best complementary
offerings for existing platforms. There is also a
rising chance of some kind of shake-out for vertical Exhibit 13:
pure players, catalysed by reduced valuations and Valuations of online retail players are
the failures of some smaller companies. Where significantly higher than traditional retail
generalist e-commerce platforms remain focused
2017 average market capitalisation to EBITDA multiples
on retail margins rather than ancillary services,
without occupying a niche, the demise is likely to
come sooner rather than later. 20.0
11.1
Based on averages of publicly listed fashion retailers with $100m+ annual revenue.
79
Executive Interview
Nick Beighton
Chief Executive of Asos
The chief executive of Asos talks about BoF: Few sectors of the
The State of Fashion 2019
80
09. Digital Landgrab
a picture, with voice, with direct BoF: What about ancillary things.’ That’s exactly what we’re
message, through WhatsApp, services? In the context aiming to do. When you think
through an email if you want to, of retail margins, a lot about beauty and grooming with
and the digital brand responds of the big online players Asos — we call it Face and Body
to you.’ are diversifying into now — this won’t be somewhere
Other big [factors to watch] complementary services you get your functional require-
will be the impact, certainly that are not core to the retail ments for cosmetics. This will be
European and UK, on disposable function. Is this something where you get excitement and
incomes, post-Brexit. Depending that you foresee as part of the engagement that is content-rich,
where we end up [with Brexit], Asos ecosystem of the future? brand-rich and also Asos prod-
there’s going to be an impact on NB: I don’t yet, actually. uct-rich through great delivery
supply chains and there [could The Asos margin has been 4 experiences and great digital
be] friction and costs associated percent for four years, and we set experiences. This is something
with all of that. it at four percent EBIT margin that hasn’t yet been done.
to allow us to invest in customers,
BoF: In the past, you’ve said products and innovation and BoF: When you first took on
that mobile is the future to be experimental, so, I don’t your leadership role, you said
and that you’re going to go necessarily see retail margins that Asos won’t be growing
wherever mobile goes. Were falling in my world. Now, I do up with your customers, and
you referring to the kind of believe other businesses that that you want the brand
‘conversational interfaces’ have set themselves higher EBIT to remain ‘forever young.’
that you just mentioned? margin targets, they’re going to How do you do this but
have to respond, because, if, on avoid alienating your older
NB: Yes, that’s exactly what average, a clothing retailer has customers?
was in my mind. Seven years a 15 percent EBIT margin, and
ago, we started our mobile NB: Focus is important to us,
I’m prepared to operate on four,
journey. Today we’ve got the and our experience is delivered
there’s 11 percent that I can
best part of 80 percent of our by a mostly twenty-something
invest in growth drivers, so I do
traffic in the UK coming from audience. Our 18.4 million active
think there’ll be some pressure
a mobile device, and the other customers are mostly twen-
on EBIT margins, or other
major territories are catching ty-somethings. Thirty percent
brands will just have to choose
up quickly. Using your mobile of our customers have been
not to go for growth. It’s certainly
device to shop and interact over 30 [since the beginning,]
not our model, though, so I don’t
with your favourite brands in a but our tone of voice, product,
see ancillary services in terms of
different way is going to be the price, experience, content, it’s
Asos, but I see other platforms
next new challenge, which is the all driven for twenty-some-
and brands doing that.
‘conversational interface.’ The thing engagement. That doesn’t
friction of swiping around with mean we’re not interested in
your thumb on a mobile device is BoF: You’ve been investing over-30s anymore, it just means
just as much friction as tapping big in beauty. How do you we recognise that some of our
around a keyboard. Twenty- manage to differentiate products and experiences may
somethings are looking at their yourselves from other players lose relevance as you progress
mobiles between 150 and 200 in the beauty space? through your life. If this wasn’t
times a day. It’s a high frequency, e-commerce, we would be
NB: Well, let me tell you the
high velocity channel and… an looking at a different proposition
words of a significant chief exec
easier and more intuitive way for a different demographic.
of a large beauty business who
for customers to interact with But because this is e-commerce…
turned around to his board and
e-commerce [but] there is we will stay twenty-something;
said, ‘Asos can redesign the role
still friction. we will stay ‘forever young.’
of beauty for 20-somethings in
the same way they’ve redesigned
the role of fashion for 20-some-
81
Executive Interview
BoF: A number of your online customer experience, in terms those live right now. [But it’s got
peers have been venturing of recommendations, different to be] something that’s engaging,
into physical retail for a ways of doing search, different intuitive and helps customers
number of years. What is ways of engaging with our resolve that simple problem.
your take on that and will it ecosystem, and two, improving
feed into Asos’s future in the the cost of handling all our BoF: What about the pain-
years to come? customer queries and all our points for customers between
NB: It’s not our mission, products through our entire end- discovery and purchase?
currently. We have 85,000 to-end business. Is your visual search function
major SKUs on our ecosystem, part of the solution to
that’s 500,000 SKUs at a minor BoF: What do you think overcome that friction?
level. Our proposition is about are the most important NB: There is friction [and] visual
content, about technology, it’s technological advances in search is one of those things that
about product. A digital mani- the year to come? will help it. You go to dinner with
festation of that is very clear, but your boyfriend or girlfriends,
NB: Without a shadow of a
physical manifestations of that take a few snaps of your outfit,
doubt, something that improves
are less clear, so, I don’t envisage upload, and go, ‘Has Asos got
size [and] fit, for customers and
a physical store any time in the
The State of Fashion 2019
Design and production are typically a long and customer demand. There is an accompanying
cumbersome process, sometimes requiring “supermarket” model, by which inventory is only
nearly a year to plan and move products to replenished once consumed.
market.111 Technology, analytics and nearshoring From an economic perspective there are
are part of the solution, enabling companies to positives and negatives to on-demand production.
respond quickly to source and develop products, On the plus side, it requires lower capital
squeeze production timelines and streamline investment, and leads to smaller inventories and
distribution. Start-ups are at the vanguard of this, more flexibility and agility. Shorter-turnaround
but some mainstream players are also stepping up cycles can reduce demand uncertainty and
and delivering. contribute to a more sustainable small-batch
The power of social media means trends production cycle. However, production costs are
are now more often established by consumers, generally higher, due to the smaller batch sizes, as
as opposed to retailers and editors. In an era of are transport costs if production is nearshore or
fast-changing preferences, being able to respond offshore. Nonetheless, companies including Zara,
to shifting demand, and tailor production Boohoo and Asos have embraced the model.112
accordingly, makes a lot of sense. Fashion is seeing The switch to “pull” can be boosted by
the start of a seismic shift where products are moving production closer toward nearshoring
“pulled” into the market based on actual demand and onshoring, enabling same day production
rather than “pushed” based on best-guesses and and next day delivery. This is a far cry from the
forecasts. The change is significant. Previously, past, when lead times from design to retail were
procurement, production and distribution were counted in weeks rather than hours. According to
predicated on designer and buyer predictions a study by Goldman Sachs, there is a direct inverse
of future consumer demand. Products were correlation between supply chain lead times
produced and marketed in traditional “seasons.” and like-for-like sales growth. Equally, industry
Under the “pull” dynamic, procurement, executives expect nearshoring to grow. According
production and distribution are based on to recent survey results published by McKinsey,
83
Fashion System
60 percent of apparel procurement executives players are also contributing. Companies such as
expect that over 20 percent of their sourcing Softwear and Sewbo have revolutionised garment
volume will be from nearshore by 2025.113 production machinery, using robotics to fully
automate sewing. Sharecloth, a New York based
A related enabler is automation, which
software company, contributes to on-demand by
for some products will offset the cost disadvan-
digitising styles and enabling retailers to place
tage of procuring closer to home. While apparel
orders before products are ever manufactured.115
manufacturing automation may still be subscale,
technologies being developed show its massive Adidas is one of a group of large brands
potential. Stand-outs include digital and laser that are showing signs of leveraging speed to shift
printing for finishing (allowing for nearshoring towards on-demand. Aside from its Arkansas
for final touches combined with automation or operation, it operates “Speedfactories” in Atlanta
low-cost sourcing of the basic garment), knit-in- and Germany that together are expected to
novations (e.g. 3D knitting), semi-automated produce around a million pairs of running shoes a
sewing and automated logistics.114 These can help year by 2020, using digital design to enable mass
companies reduce labour intensity, do more custo- customisation.116 Superdry launched “Superdry
misation, improve reliability and cut Preview,” limited-edition collections that will go
The State of Fashion 2019
84
10. On Demand
60 percent of apparel
procurement executives expect
that over 20 percent of their 60
33
sourcing volume will be from
nearshore by 2025.
2018 2025
In the coming year we expect to see
continued investment in speed (both through
Source: McKinsey & Company
capability building and M&A) via more onshoring
and nearshoring, virtual sampling, microfactories
(rapid prototyping) and automation. Reduced
lead times will be key drivers of competitive
advantage. Small-scale players will likely lead the
way, while larger brands pilot in selected markets.
We expect rising take up of on-demand will lead
to a spike in personalisation, and a new generation
of customised clothing start-ups, creating a new
definition of “made-to-measure.” In the technology
space, automation intellectual property will
continue to develop, with patent approvals likely to
be a critical success factor in the years ahead.
85
In-Depth
Is Apparel Manufacturing
Coming Home?
To meet customers’ needs, apparel companies need to focus
on nearshoring, automation and sustainability.
by Johanna Andersson, Achim Berg, Saskia Hedrich and Karl-Hendrik Magnus
Two decades ago, US and European mass-market apparel production modes, and public outcry
apparel brands and retailers rushed to shift around overstock liquidation is becoming louder
production to Asia to gain a cost advantage. Since (about three percent of unsold apparel is liqui-
then, they have doubled down on this low-cost dated).122 Some 78 percent of sourcing managers
strategy, moving production from China to even responding to our survey believe that sustain-
more cost-efficient frontier markets. Apparel ability will also be a somewhat or highly likely
The State of Fashion 2019
players that have successfully done this, while still key purchasing factor for mass-market apparel
ensuring high quality, speed and compliance have consumers by 2025.
traditionally been able to deliver products that
Mass-market apparel brands and retailers cannot
consumers want, at competitive prices.
win in the next decade without transforming to
Now, however, a perfect storm of factors is a demand-focused model. Apparel companies
changing this calculus by making it critical for are optimising and digitising their processes
companies to bring new styles to market more and rethinking inbound logistics. One new
quickly and switch out lines mid-season. strategy is to optimise the apparel production
Internet shopping and stagnation in key markets model, including elements such as nearshoring,
have made competition fiercer than ever and automating new delivery models around custo-
consumer demand more volatile and difficult to misation, and shifts toward sustainable, circular
predict. Mass-market apparel brands and retailers value chains.
are competing with pure-play online start-ups,
the most successful of which can replicate popular Nearshoring Opportunities and Challenges
styles and get them to customers within weeks.
Furthermore, apparel companies’ marketing In addition to concerns about the ecological
departments have lost much of their clout in footprint of offshore sourcing, rising wages for
trendsetting, with today’s hottest trends now factory workers across Asia mean production in
determined by individual influencers the Far East is no longer as cost-efficient as it used
and consumers. to be. For instance, labour costs in China in 2005
were one-tenth of those in the US; today, they are
The pressure for smaller batch sizes and about one-third. In some nearshore markets, the
on-demand replenishment is driven partly by gap between nearshore and offshore labour costs
profitability, but also by a desire for sustainability. has disappeared: today, for example, Mexico offers
Consumers are becoming increasingly aware of lower average manufacturing labour costs than
the environmental impact of traditional linear China. In nearshore countries for the Western
86
10. On Demand
European market, manufacturing labour costs on increasing the net product margin and on
are still higher than those in China, but the gap is avoiding wastage.
shrinking: whereas hourly manufacturing labour
Despite its attractiveness, the apparel manufac-
costs in Turkey were more than five times higher
turing industry in nearshore countries in the
than those in China in 2005, in 2017 the gap was
Americas, Turkey, Eastern Europe or North Africa
only 1.6 times.
still lags the Asian manufacturing powerhouses.
The current import volume from the five biggest
Digital technologies have made nearshoring markets to the US, for example, does
it easier for small brands to build not even account for half of the US imports from
China. The industry is more fragmented and
awareness and sell to customers, quality and labour productivity in some nearshore
helping them capture a countries is more volatile.
disproportionate share of growth. Nearshoring also creates a new set of trade-offs
and challenges with regards to industry structure,
productivity, operating model, sustainability
And that’s before transportation is taken into
and supply. The biggest challenge currently is
account. Today, even from a mere landed-cost price
sourcing raw materials, fabrics and ingredients
perspective, nearshoring can be economically
for mass-market apparel. Only a co-located value
viable in certain cases due to savings in freight
chain can offer the full speed and flexibility
costs and customs duties. For instance, a US
promised — without it, the longer lead times just
apparel company that moves production of basic
shift further up the value chain. However, the
jeans from either Bangladesh or China to Mexico
current bulk of production and consumption of the
can maintain or even slightly increase its margin,
main fibre types is still centred in Asia, especially
even without higher full-price sell-through.
China. In nearshore countries for the US and
For Europe, as another example, reshoring from
European apparel markets, existing capacity is
China to Turkey can reduce landed-cost prices for
limited. Local yarn and fabric supply in Europe,
denim by 3 percent. Nearshoring works where full
for example, is better suited to upmarket clothes
onshoring doesn’t: bringing production back to the
than to mass-market. Overall, 63 percent of
US or to Germany will not yet result in breaking
respondents believe that fabric production will
even. From a landed-cost perspective it
likely move toward nearshore locations by 2025
is becoming more attractive for production to
to support regional supply chains. To attract
move closer, but not to come all the way home.
manufacturers to invest in building the capacity,
But the real prize is shorter lead times. By reducing apparel brands and retailers will need to act as
time-to-market, companies can produce more true partners and commit to order volumes.
closely in line with demand, reducing overstocks The discussion of regional supply chains is
and increasing full-price sell-through. gaining additional traction in light of innovations
For example, increasing full price sell-through by in sustainability and closed-loop recycling,
5 percent as a result of shifting to demand-focused such as re:newcell. Approximately 80 percent of
processes not only makes nearshoring in Mexico respondents from our dedicated survey believe
even more attractive, but also takes US onshoring that closed-loop recycling will scale up in
to break-even. In this paradigm, sourcing consid- the future.123
erations move from a focus on cost alone to a focus
87
In-Depth
The Potential for Automation To date, the apparel industry lags other sectors
when it comes to automation. Neither automation
Nearshoring and automation go hand-in-hand.
nor advanced manufacturing have been a priority
Nearshoring — and, in some cases, onshoring —
for apparel buyers. One reason is that they have
will make even more economic sense as technology
relied on relatively low labour costs in the core
develops, because automation will increase labour
Asian and other low-cost sourcing markets.
productivity and offset higher labour costs in
Automation also presents technical challenges,
near- and onshore production. Mass-market
especially in sewing: only recently have fully-auto-
apparel brands and retail buyers will consider
mated solutions for sewing become market-ready.
automation capabilities when deciding where to
But now, as on-demand production gains
manufacture products in the future, in addition
importance and technologies develop, automation
to the commercial importance of shorter lead
is becoming more relevant for US and European
times and cost efficiencies mentioned above. Local
mass-market apparel players, especially combined
governments and garment industries in nearshore
with near- and onshoring. Recent advances in
and onshore locations will also need to build the
technology span the whole gamut from sewing to
skills and capabilities needed for advanced manu-
gluing, knitting and finishing to warehousing and
facturing among their workforces.
intralogistics.
The State of Fashion 2019
Exhibit 15:
Automation of sewing will be the biggest driver
of labour reduction
88
10. On Demand
Our research shows a clear message: for certain onshoring. More complex silhouettes will be
products, automation will not only make semi-automated within a decade.
nearshoring more attractive for US and European
mass-market apparel brands and retailers, but it Sustainability
will also make onshoring to the US economically
viable in the future. Nearshoring and automation have environmental
and social benefits, in addition to the commercial
The overall impact is considerable: assuming all benefits described above. By bringing production
key technologies currently in development are closer to home and investing in advanced manu-
implemented in the future, about 40 to 70 percent facturing, companies in the apparel sector will
of labour time can be reduced through automation. become more sustainable and less wasteful by
From a pure cost perspective, automation levels reducing overproduction and decreasing the
the playing field and makes Mexico cost-com- ecological footprint from reduction of transport.
petitive with Bangladesh. Even onshoring from Taken together, nearshoring and automation could
China to the US achieves breakeven from a pure enable a circular value chain.
cost perspective if the optimistic 70 percent
labour time reduction can be achieved. For How to Get Started
European markets, the economic viability of
near- or onshoring also improves with automation. Looking at the trajectory of both consumer
Onshoring to a higher labour cost country such preferences and the development and adoption
as Germany, however, does not break even in any of automation technologies, mass apparel
of the scenarios. When additional commercial brands and retailers should embark on the
benefits arising from increased speed and journey toward a demand-focused value chain
flexibility are added to the mix, the case for imple- now or risk losing touch with their consumers.
menting advanced manufacturing technologies in To position themselves for success, they need to
near- and onshoring markets is even stronger. take four actions: define their future sourcing and
production strategy, nurture new skills and
The next decade will be critical for the adoption capabilities, build an ecosystem of partnerships
of automation. Executives are bullish about the and dig in to accelerate the learning curve.
future of automation. In our survey, 82 percent of
respondents believe that simple garments will be
fully automated, leading to an 80 percent labour Strategy. Knowing where they want to go and
reduction by 2025. Seventy percent think that it how to get there will be crucial for mass-market
is highly or somewhat likely that more complex apparel brands and retailers. Nearshoring and
garments, such as dresses and jackets, will be automation will not make financial sense for every
significantly automated (resulting in a 40-percent single product. Decisions on the future production
labour reduction.) footprint of each product type should be based on
two main criteria: the feasibility of nearshoring
Within five years, semi-automated factories and the commercial value of reducing lead times.
could enable nearshoring and selected lighthouse Companies should model different financial
projects of new business models, such as store scenarios to develop a fact base that guides
factories, that could help build customer their strategy.
excitement. Within five to ten years, suppliers
with fully automated factories could enable full
89
In-Depth
Exhibit 16:
Nearshoring and automation will be important Indirectly enabled by a more closely
integrated chain
enablers to reach a circular value chain
Enabled by near-shoring
Enabled by automation
CHAIN
reduces
On-demand
distribution and Automated use of energy, water
retail sales production of high and chemicals
quality
garments
Labour intensity and automation feasibility vary Skills and mindsets. A new, demand-oriented
greatly between different product and design types supply chain requires a very different mindset and
but are mainly driven by the same characteris- skillset — more consumer oriented and more agile.
tics: for instance, number of pieces, finishing and The traditional approach of cost orientation from
intricate details, movement of parts and type of more traditional sourcing optimisation will not
raw materials. Taking these factors into account be sufficient.
when classifying a product helps mass-market
Access to talent will be a major success factor in
apparel brands and retailers establish a high-level
creating the supply chain of the future. The biggest
view of what the future holds when it comes to the
talent gap today is likely in digital or advanced
sourcing and production footprint.
manufacturing and managing intelligent sourcing
decisions in the more complex apparel value chain.
Brands and retailers will need more talent who can
90
Deep Dive10.
6: On Demand
develop or identify winning technologies, making The disruptions ahead are so profound that
the decision on where to build new technolo- mass-market apparel players making big moves
gies themselves versus forming partnerships or and capturing the advantages of nearshoring and
acquiring new capabilities. automation will have a significant first-mover
advantage. The business models they build
Partnerships. In a world where innovation is will drive growth and be difficult for others to
taking place at breakneck speed and where there is replicate. As it turns into a source of competitive
still uncertainty about which technologies will advantage, sourcing and supply chain management
create real value, partnerships will be critical has completed its journey from mere savings
for building a sustainable competitive advantage. generator to focus topic on the chief executive
Apparel brands and retailers will need to forge agenda. Although apparel manufacturing may not
relationships with global mega-suppliers to build be coming home in the near future, some of the
manufacturing capacity and capabilities in new production will at least be moving ever closer —
geographies. They will also need to collaborate and mass-market apparel brands and retailers will
with technology companies to develop innovative want to be prepared.
automation solutions since, currently, neither
apparel brands nor (most) manufacturers are likely
The authors work in McKinsey & Company’s Apparel,
best positioned to develop disruptive technologies. Fashion & Luxury practice.
91
McKinsey
Global
Fashion
Index
The State of Fashion 2019
92
McKinsey Global Fashion Index
The MGFI was introduced two years ago in the The rise of the ‘super winners’
State of Fashion 2017 report to fill a gap in the
The good news for the industry is that 2017 was
coverage and understanding of performance in
a record-breaking year for overall value creation
the global fashion industry. While fragments of
among listed fashion companies, with aggregate
the industry — such as particular segments or
economic profit reaching its highest levels for 10
categories — had been tracked before, the MGFI
years, after a steady decline between 2012 and
provided the first bird’s-eye view of the whole
2016. This was driven by a particularly strong
market. The index tracks financial development
upswing in revenue growth for publicly listed
across six price segments: luxury, affordable
companies, resulting in improvements in capital
luxury, premium/bridge, mid-market, value and
efficiency as invested capital grew at a slower
discount (see glossary). It includes six product
pace than revenues. Investors recognised this
categories: clothing, footwear, athletic wear,
strong performance, driving share valuations to
bags and luggage, watches and jewellery and
an all-time high. And this was not just part of an
other accessories.
overall stock market trend: between 2008 and
The MGFI tracks and forecasts sales and 2017, fashion sector equity returns have beaten
operating profit. As only source in the industry both the S&P 500 and MSCI world indices.
MGFI also analyses historical economic profit —
We observed in past editions of this
a measure of value creation that takes into account
report that fashion is a winner-takes-all industry.
how much each company had to invest to generate
However, after a period of accelerating outper-
its performance (see glossary).
formance, leaders in 2017 gave up some of their
For the first time this year, we took a advantage. The top 20 percent of companies
closer look at the drivers of economic success attracted 128 percent of economic profit in 2017,
in the sector. A deeper analysis of the top compared with 144 percent in 2016. Still, polarisa-
fashion companies will help readers understand tion has clearly not gone away and scale continues
“what makes winners win” and how winners’ to matter. While a subset of companies continues
performance has evolved over the last ten years. to account for the majority of economic profit, the
93
Exhibit 17:
144
100
128
Top 20%
vs. 2016 vs. 2017
%
21 - 80%
18
6
3
-18
Bottom 20%
-34
-47
The State of Fashion 2019
2016 2017
Based on publicly listed companies. Source: McKinsey Global Fashion Index (MGFI)
108
Exhibit 18: 101
97 97
Top 20 fashion 10 Years 93
companies‘ contribution Average: 88 86 86
81
to industry economic 73
profit 2008-2017 70
%
108
101
86
86
93
70
97
97
73
81
2014
2008
2009
2010
2011
2012
2013
2015
2016
2017
Financial Crisis
Based on publicly listed companies. Source: McKinsey Global Fashion Index (MGFI)
94
McKinsey Global Fashion Index
number of “value-destroying” companies (i.e., into the elite group, with only two players in the
companies generating negative economic profit) top 20 percent and none in the absolute top 20.
has almost doubled between 2010 and 2017. Their average top-line growth is four times higher
than that of other fashion players, but this tends
This polarisation has led to an even
to translate only into valuation multiples
smaller group of “super winners.” In fact, over
(twice as high as average) while profitability
the long term taking the top 20 companies as a
still lags behind.
sub-group, there was a widening disparity with the
remaining companies encompassed in the top 20 Looking at drivers of long-term success,
percent. These “super winners” now account for we find that profitability and capital efficiency
97 percent of economic profit, compared with 70 are key: winners all had above-average EBITDA
percent in 2010: this suggests they are increasingly margins and most exhibited below-average invest-
dominating the global value pool. This is a global ed-capital-to-revenue ratios, while the percentage
phenomenon that can be observed across industry of revenue growth was in line with the wider
sectors (beyond fashion), regions and cities, as sample.
outlined in McKinsey Global Institute’s recent
Still, the lesson from 2017 is that size
“Superstars” study.124
continues to matter. There is a demonstrable
By segment, we also continue to see advantage to scale. The one caveat is that if you can’t
polarisation, with luxury and value advancing be big, be nimble: challengers that have identified
and mid-market players falling behind. Companies a niche have also found favour. The strategic
able to differentiate on price point/efficiency implication is that executives must be decisive on
or brand have performed best. Outstanding the source of economic value creation. The most
performers included handbag and luggage likely route to success, based on recent experience,
makers and own-brand multi-category players. is to invest either in brand strength or in operational
Well-known European luxury companies tended efficiency to produce faster or at a lower cost.
to be overrepresented in the top 20, with North
American companies coming in a close second. Sunny intervals but storms ahead
Notably, the top 20 group of companies has
remained stable over time. Twelve of the top Looking ahead to 2019, we see
20 have been a member of the group for the last many opportunities for the fashion industry —
decade. Long-term leaders include, among others, but also many risks. The latter emanate mainly
Nike, LVMH and Inditex, which have more than from the evolving macroeconomic environment
doubled their economic profit over the past ten and the potential for disruption from shifting
years — according to MGFI estimates each racked trading relationships (see trend articles on
up more than $2 billion in economic profit in “Caution Ahead” and “Trade 2.0” for more
2017. The most resilient winners included luxury, background.) It is useful to view the industry’s
sportswear and fast fashion players, reinforcing potential future through four separate lenses, each
the point that brand investment and operational of which offer a perspective on the most important
efficiency are key drivers of sustainable business drivers of growth and key topics covered in this
models. Over time North American department report. The lenses are industry and regional
stores lost out, with none remaining in the top 20, performance, market segment performance,
compared with three 10 years ago — a stark illus- product category performance and overall
tration of the fragility of the traditional retailing operating profit performance.
model. Notably, online players have yet to break
95
Companies consistently in the top
20 from 2008-2017
Exhibit 19:
Discount
Exhibit 20:
4
4%
Economic profit
distribution by segment Luxury
24% 24
Value
Total economic profit by price
20
20%
segment, 2017
% of all public companies
Affordable
4%
luxury
4
11%
Premium/
Bridge
Mid-market
11
36 36%
Due to rounding, numbers presented may not
add up precisely to 100.
Based on publicly listed companies. Source: McKinsey Global Fashion Index (MGFI)
96
McKinsey Global Fashion Index
97
Exhibit 21:
98
McKinsey Global Fashion Index
99
Glossary
100
MEA Platform-as-a-service User interface (UI)
Afghanistan, Algeria, Angola, Bahrain, Benin, Capabilities extend from container The intersection where an information devices
Botswana, Burkina Faso, Burundi, Cameroon, orchestration, code management and and users interact. Most common examples
Cape Verde, Central African Republic, Chad, continuous deployment, to highly sophisticated include interactive aspects of operating systems
Comoros, Congo, Democratic Republic of machine learning platforms that commoditise and interfaces of digital applications.
Congo, Djibouti, Egypt, Equatorial Guinea, much of what is cutting-edge.
Eritrea, Ethiopia, Gabon, Gambia, Ghana, Value segments
Guinea, Guinea-Bissau, Iran, Iraq, Israel, Ivory Price segments in MGFI Segmentation of the fashion markets and
Coast, Jordan, Kazakhstan, Kenya, Kuwait, As definitions of market segments often vary participating companies used in the McKinsey
Kyrgyzstan, Lebanon, Lesotho, Liberia, across sources, all companies in the MGFI Global Fashion Index and the BoF-McKinsey
Libya, Madagascar, Malawi, Maldives, Mali, are categorised based on a Sales Price Index, State of Fashion Survey. The companies are
Mauritania, Mauritius, Morocco, Mozambique, providing a range of prices for a standard basket categorised in 6 segments, which are based
Namibia, Niger, Nigeria, Oman, Pakistan, of products within each segment and home on a price index across a wide basked of goods
Qatar, Réunion, Rwanda, Sao Tomé e Príncipe, market — thereby relying only on a quantitative and geographies. The segments comprise from
Saudi Arabia, Senegal, Seychelles, Sierra measure, whereby companies in each segment lowest to highest price segment: Discount,
Leone, Somalia, South Africa, South Sudan, price their items similarly. Value, Mid-market, Premium/Bridge,
Sudan, Swaziland, Syria, Tajikistan, Tanzania, Affordable Luxury, Luxury.
Togo, Tunisia, Turkmenistan, Uganda, United Public cloud
Arab Emirates, Uzbekistan, Yemen, Zambia, Computing services offered by third-party Visual search
Zimbabwe. providers over the public internet, making Search tool designed to yield information based
them available to anyone who wants to use or on a visual based input, such as a photograph.
Microfactory purchase them.
Small, typically localised production designed Weighted Average Cost of Capital (WACC)
to handle end-to-end fabrication, leveraging Pull based supply chain Calculation of a firms cost of capital in which
a variety of capabilities including 3D printing Supply chain constructed to be responsive to each category of capital (debt and equity) is
and welding. Microfactories are often used for customer demands. Products enter the supply proportionately weighted. It is the minimum
prototyping and small batch production. chain only when customer demands justify it. return that the holders of a company’s debt and
equity expect given the risks associated with
Millennials (Generation Y/Gen Y) Push based supply chain investing in the company.
Demographic cohort born circa 1982–99. Are Supply chain based on forward looking
also commonly referred to as Generation Y (this projections of customer demands. Productions White label
name is based on Generation X, the generation levels are predetermined and “pushed” to the A product or service, sold from a company to
that preceded them). market. a reseller, that is rebranded and packaged to
appear as proprietary to the reseller.
MSCI Selling, general and administrative expenses
Global stock market index of used as a common (SG&A) “Woke”
benchmark for the “global” stock market. An income statement item stating all costs not A phrase defined as “alert to injustice in
directly tied to making a product or service. society,” popularised on social media and
Nearshore often associated with the Black Lives Matter
Sourcing markets that are near a base country, Shoppability movement.
typically sharing a border. Advantages of Ease of turning a desire into a purchase from a
nearshore markets include geographic consumer’s perspective. World Input Output Database (WIOD)
proximity, shared time zones and cultural and To assess how the textiles and apparel value
political linkages. Software-as-a-service chain is changing in our article “Global Value
Software distribution model in which a Chains in Apparel: The New China Effect”, we
NOPLAT third-party provider hosts applications and use the 2016 release of the World Input Output
Net Operating Profit, less Adjusted Taxes makes them available to customers over the Database (WIOD), which we extended back to
(NOPLAT) is the value a company created Internet. 1995 and forward to 2017.
through its core operations net of tax, if the
company had no debt. It is calculated as EBIT South-South trade
multiplied by 1 minus the tax rate. Trade between developing economies, also
known as countries of the Global South.
North America
Canada, Puerto Rico, United States of America. S&P 500
American stock market index consisting of 500
Organisation for Economic Co-operation largest companies by market capitalisation.
and Development (OECD)
An intergovernmental economic organisation Telemetry
with the stated mission to “promote policies that An automated process of collecting information
will improve the economic and social well-being from remote points and transmitting to a
of people around the world.” receiving hub.
101
Endnotes
1 “World Economic Outlook DataMapper - Real 15 “Basic road statistics of India, 2015-16”, McKinsey & Company, September 2018,
GDP growth”, International Monetary Fund, Government of India, http://morth.nic.in/ https://www.mckinsey.com/industries/retail/
https://www.imf.org/external/datamapper/ showfile.asp?lid=3100 our-insights/digitization-the-next-stop-for-
NGDP_RPCH@WEO/OEMDC/ADVEC/ the-apparel-sourcing-caravan
WEOWORLD, “GDP growth (annual %)”, 16 “Our partnerships with global brands”,
The World Bank, https://data.worldbank. Reliance Retail, https://relianceretail.com/ 29 McKinsey & Company analysis based on UN
org/indicator/ny.gdp.mktp.kd.zg, and “Real partner-brands.html Comtrade data
GDP forecast”, Organisation for Economic
17 “Income Inequality and Poverty”, OECD 30 Holland, Steve and David Lawder, “Trump
Co-operation and Development, https://
Centre for Opportunity and Equality, http:// hails Canada, Mexico trade pact as win for U.S.
data.oecd.org/gdp/real-gdp-forecast.
www.oecd.org/els/soc/inequality-and-poverty. workers”, Reuters, 1st October 2018, https://
htm#indicator-chart
htm uk.reuters.com/article/uk-trade-nafta/
2 “Economic Conditions Snapshot, September trump-says-trade-pact-with-canada-mexico-
18 Biswas Soutik, “Why inequality in India will-support-u-s-jobs-idUKKCN1MB28M
2018: McKinsey Global Survey results”,
is at its highest level in 92 years”, BBC, 12th
McKinsey & Company
September 2017, https://www.bbc.co.uk/news/ 31 “World Trade Report 2014”, World Trade
3 Politi, James and Stefania Palma, “IMF world-asia-india-41198638 Organization, 2014, https://www.wto.org/
readies for further danger signals in emerging english/res_e/booksp_e/world_trade_
19 “Corruption Perceptions Index 2017”, report14_e.pdf
markets”, The Financial Times, 11th
Transparency International, 21st February
October 2018, https://www.ft.com/content/
2018, https://www.transparency.org/news/ 32 Gene Tempest, “The president’s new
db4c046a-cd3e-11e8-b276-b9069bde0956
feature/corruption_perceptions_index_2017 clothes,” PBS American Experience online,
4 Sandra Halliday, “Wolford speeds up cost PBS, 16th February, 2017, https://www.pbs.
20 Russel, Michelle, “AAFA again calls for swift org/wgbh/americanexperience/features/
cuts, axes more jobs”, Fashion Network, 16th
resolution to tariff dispute”, Just Style, 22nd presidents-new-clothes/
October 2017, http://in.fashionnetwork.com/
August 2018, https://www.just-style.com/news/
news/Wolford-speeds-up-cost-cuts-axes-more-
aafa-again-calls-for-swift-resolution-to-tariff- 33 Ayoki, Milton (2017): The impact of
jobs,880484.html#.W4Z-FugzaMo
dispute_id134314.aspx multi-fibre agreement phase-out on
The State of Fashion 2019
102
resale_report/2018/2018-resaleReport.pdf 2018, https://www.vogue.co.uk/article/ 73 “Shu, Catherine, Syte.ai’s new API makes
suzynyfw-jeremy-scott-presents-creative-anger visual search accessible to more online
44 Remy, Nathalie, Speelmann, Eveline, and fashion retailers”, TechCrunch, 7th December
Swartz, Steven; “Style that’s suistainable: 60 Singh, Supriya, “Uniqlo opens its doors 2017, https://techcrunch.com/2017/12/07/
A new fast fashion formula”, McKinsey & to job-seeking asylum-seekers at home and syte-ais-new-api-makes-visual-search-
Company October 2016, https://www.mckinsey. abroad”, The Japan Times, 4th January accessible-to-more-online-fashion-retailers/
com/business-functions/sustainability- 2018, https://www.japantimes.co.jp/
and-resource-productivity/our-insights/ news/2018/01/04/national/social-issues/ 74 “ViSenze Unveils Shoppable User Generated
style-thats-sustainable-a-new-fast-fashion- uniqlo-opens-doors-job-seeking-asylum- Content Powered by Computer Vision at
formula seekers-home-abroad/#.W6uvfmhKg2w Shoptalk 2018”, BusinessWire, 19th March
2018, https://www.businesswire.com/news/
45 “Once worn, thrice shy – British women’s 61 Brown, Pamela, Stacey Haas, Sophie home/20180319006120/en/ViSenze-Unveils-
wardrobe habits exposed!”, Barnardo’s, 11th Marchessou, and Cyrielle Villepelet, Shoppable-User-Generated-Content-Powered
June 2015, http://www.barnardos.org.uk/news/ “Shattering the glass runway”, McKinsey
press_releases.htm?ref=105244 & Company, October 2018, https://www. 75 “ViSenze, The Global Leader for AI Powered
mckinsey.com/industries/retail/our-insights/ Visual Shopping, Raises US$10.5 Million
46 “Coutts Passion Index 2017”, Coutts, 6th shattering-the-glass-runway In Series B Funding”, PR Newswire, 15th
September 2017, https://www.coutts.com/ September 2016, https://www.prnewswire.com/
insight-articles/news/2017/coutts-passion- 62 Kochkodin, Brandon, “Buzz From Nike’s news-releases/visenze-the-global-leader-for-ai-
assets-index-2017.html Kaepernick Campaign Now Worth More Than powered-visual-shopping-raises-us105-million-
$163 Million”, Bloomberg, 6th September in-series-b-funding-300327869.html
47 McKinsey analysis based on: Sherman, 2018, https://www.bloomberg.com/news/
Lauren, “The price of transparency”, Business articles/2018-09-06/value-of-nike-s-exposure- 76 Shannon, Sarah, “Fast Fashion
of Fashion, 17th June 2016, https://www. from-kaepernick-ad-up-to-163-million Slow to E-Commerce”, The Business of
businessoffashion.com/articles/intelligence/ Fashion, 17th August 2017, https://www.
the-price-of-transparency; and based on prices 63 Taylor, Steve, “Primark’s Pride Range businessoffashion.com/articles/intelligence/
displayed on Louis Vuitton country web pages Is A Disgrace”, Huffington Post, 24th fast-fashion-slow-to-e-commerce
in August 2018 May 2018, https://www.huffingtonpost.
co.uk/entry/theres-no-pride-in-primark_ 77 “2018 Edelman Trust Barometer Global
48 “The RealReal – What’s in your closet?”, uk_5b068b2fe4b01a19d2c96bc3, and Busby, Report”, Edelman, 2018, https://cms.edelman.
CNBC, 22nd May 2018, https://www. Mattha and Emma Snaith, “Stonewall and com/sites/default/files/2018-01/2018%20
cnbc.com/2018/05/22/the-realreal-2018- Primark criticised for Pride T-shirts made Edelman%20Trust%20Barometer%20
disruptor-50.html in Turkey”, The Guardian, 2nd August 2018, Global%20Report.pdf and “Millennials: Burden,
https://www.theguardian.com/world/2018/ blessing, or both?”, McKinsey & Company,
49 Thomas, Lauren, “Online start-up The
aug/02/stonewall-and-primark-criticised- February 2016, https://www.mckinsey.com/
RealReal to open its second luxury consignment
pride-t-shirts-made-in-turkey-lgbt-rights business-functions/organization/our-insights/
store, as e-commerce brands keep growing”,
millennials-burden-blessing-or-both
CNBC, 31st July 2018, https://www.cnbc. 64 Guilbert, Kieran, “Adidas, Nike urged
com/2018/07/31/therealreal-to-open-its- to ensure fair wages for Asian workers 78 “When respect for diversity is taken
second-luxury-consignment-store.html making World Cup kits”, Reuters, 11th June to crazy extremes”, The Economist, 15th
2018, https://www.reuters.com/article/ May 2018, https://www.economist.com/
50 “Worn Wear – Patagonia’s hub for keeping
us-asia-workers-worldcup-idUSKBN1J727J open-future/2018/05/15/when-respect-for-
stuff in use”, Patagonia, https://wornwear.
diversity-is-taken-to-crazy-extremes
patagonia.com/ 65 “The instant gratification nation”, Fetch,
October 2017, https://marketing.wearefetch. 79 “Decoding the Millennial Marketplace”,
51 Reagan, Courtney, “Express is the latest
com/content/2017/10/Fetch_2017_October_ McKinsey & Company, 23rd August 2016
retailer to launch a clothing rental service”,
Whitepaper_InstantGratification.pdf
CNBC, 3rd October 2018, https://www.cnbc. 80 Bain, Marc, “H&M’s new brand, Arket,
com/2018/10/03/express-is-the-latest-retailer- 66 Solis, Brian, “Impatience Is A Virtue: names the factory that made its clothes.
to-launch-a-clothing-rental-service.html How The On-Demand Economy Is Making But the name isn’t enough”, Quartz, 30th
Mobile Consumers Impatient”, Forbes, 20th August 2017, https://qz.com/1064098/
52 Bezamat, Bia, “Ba&sh’s new NY store offers
November 2017, https://www.forbes.com/sites/ hms-new-brand-arket-is-fashions-
free clothing rentals”, The Currenty Daily,
briansolis/2017/11/20/impatience-is-a-virtue- transparency-conundrum-in-a-nutshell/
16th October 2018, https://thecurrentdaily.
how-the-on-demand-economy-is-making-
com/2018/10/16/bash-free-clothing-rentals/ 81 Arthur, Rachel, “From Farm To Finished
mobile-consumers-impatient
Garment: Blockchain Is Aiding This Fashion
53 Cone Gen Z CSR study: How to
67 “2017 Millennial Shopper Survey - How Collection With Transparency”, Forbes, 10th
Speak Z, 2017, http://www.conecomm.
Social Media Influencers Impact Purchasing May 2017, https://www.forbes.com/sites/
com/2017-cone-gen-z-csr-study-pdf
Decisions”, dealspotr, Winter 2017, https:// rachelarthur/2017/05/10/garment-blockchain-
54 Tabaka, Marla, “Forget Millennial dealspotr.com/reports fashion-transparency/#b8947e674f39
Purchasing Power. Gen Z Is Where It’s At”,
68 McKinsey & Company Digital Opportunity 82 Gerdeman, Dina, “The Benefits of Cost
Inc., https://www.inc.com/marla-tabaka/
Scan of 48 apparel and jewelry retailers covering Transparency”, Forbess, 15th December
forget-millennial-purchasing-power-gen-z-is-
12 months of trading in US, UK, Europe, Asia, 2014, https://www.forbes.com/sites/
where-its-at.html
September 2018 hbsworkingknowledge/2014/12/15/when-
55 Cone Gen Z CSR study: How to retailers-reveal-production-costs-consumers-
69 Smith, Craig, “23 Amazing Shazam Statistics are-more-likely-to-buy/#1fae88c568a1
Speak Z, 2017, http://www.conecomm.
and Facts, Expanded Ramblings, 11th October
com/2017-cone-gen-z-csr-study-pdf
2018, https://expandedramblings.com/index. 83 Emerson, Susannah, “Everlane,
56 Mulligan Nelson, Erin, “Millennials php/shazam-statistics/ Reformation…Why Transparency Matters in
Want To Party With Your Brand But On the Fashion Industry”, Mochni, https://www.
70 O’Hear, Steve, “21Buttons, a social- mochni.com/everlane-reformation-why-
Their Own Terms”, AdAge, 2nd August 2012,
commerce app dedicated to fashion, closes transparency-matters-in-the-fashion-industry/
https://adage.com/article/digitalnext/
$10M Series A”, TechCrunch, 5th October 2017,
millennials-party-brand-terms/236444/
https://techcrunch.com/2017/10/05/21buttons/ 84 “Decoding the Millennial Marketplace”,
57 “Definition of woke in English”, Oxford Living McKinsey & Company, 23rd August 2016
71 “Screenshop – How it works”, Screenshop,
Dictionaries, https://en.oxforddictionaries.
https://screenshopit.com/#howitworks 85 McKinsey & Company analysis based on
com/definition/woke
Instagram data
72 “Live ‘Snap the Look’ results for Marie
58 EDITED analysis in partnership with
Claire during London Fashion Week 2016”, 86 McKinsey & Company analysis based on
McKinsey & Company, 2018
SnapTech, https://www.snaptechnology.co.uk/ Influencerdb.net data
59 Menkes, Suzy, “#SuzyNYFW: Jeremy Scott case-studies/marie-claire
87 Morency, Christopher, “Is Luxury’s Love
Presents Creative Anger”, Vogue, 7th September
103
Endnotes cont.
Affair With ‘Drops’ More Than Marketing?”, 105 Jain, Varun, “Flipkart Fashion looks to names-product-chief-from-Hilfiger,1012811.
The Business of Fashion, 9th August 2018, extend market share with Big Billion Days”, html#.W7tsG2hKg2w
https://www.businessoffashion.com/articles/ The Economic Times, 1st October 2018, https://
professional/is-luxurys-love-affair-with- retail.economictimes.indiatimes.com/news/e- 118 Lee, Tommy, “Amazon goes automated
supreme-style-drops-more-than-marketing- commerce/e-tailing/flipkart-fashion-looks- with on-demand clothing”, Textile Evolution,
moncler-burberry-off-white-celine to-extend-market-share-with-big-billion- 19th April 2017, https://www.tevonews.com/
days/66028974 textile-machinery-news/846-amazon-goes-
88 Wolf, Cam, “Even Comme des Garçons Is automated-with-on-demand-clothing
Launching a Direct-to-Consumer Brand”, GQ, 106 Singh, Prachi, “FarFetch net loss widens
2nd April 2018, https://www.gq.com/story/ but revenues jump 74 percent”, Fashion United, 119 Nussey, Sam, “Uniqlo owner aims to make
comme-des-garcons-new-brand-announcement 15th November 2017, https://fashionunited.uk/ on-demand knitwear with Japan’s Shima Seiki”,
news/business/farfetch-net-loss-widens-but- Reuters, 13th July 2018, https://uk.reuters.
89 “LVMH launches accelerator program revenues-jump-74-percent/2017111526787 com/article/fast-retailing-shima-seiki/
for 50 international startups annually at update-1-uniqlo-owner-aims-to-make-on-
Station F to contribute to innovation in 107 Crockett, Zachary, “Sh*t, I’m F*cked: demand-knitwear-with-japans-shima-seiki-
luxury”, LVMH, 10th April 2018, https:// Jason Goldberg, Founder of Fab”, The Hustle, idUKL4N1U92ZW
www.lvmh.com/news-documents/news/ 17th October 2017, https://thehustle.co/
lvmh-launches-accelerator-program-for-50- jason-goldberg-fab 120 Okutso, Akane, “Uniqlo to debut on-demand
international-startups-annually-at-station-f- knitwear to counter Zozo”, Nikkei Asia Review,
to-contribute-to-innovation-in-luxury/ 108 Kapner, Susan, “Hudson’s Bay Sells Gilt 15th July 2018, https://asia.nikkei.com/
Groupe, Will Close Lord & Taylor Flagship Business/Companies/Uniqlo-to-debut-on-
90 Nielsen Retail Measurement, 2018 Store”, The Wall Street Journal, 5th June demand-knitwear-to-counter-Zozo
2018, https://www.wsj.com/articles/
91 McKinsey Start-up and Investment gilt-groupe-sold-to-rival-rue-la-la-1528154398 121 “The “ZOZOSUIT” developed by Start
Landscape Analysis Today Reaches 1 Million Orders, and the Private
109 “Flipkart unveils its “AI For India” Brand “ZOZO” Aims for 20 Billion Yen for its
92 McKinsey millennial survey program”, India Digital Review, 2018, First-Year Sales”, ZOZ, 1st May 2018, https://
http://indiadigitalreview.com/ corp.zozo.com/en/news/20180501-3849/
93 McKinsey web research and store visits,
The State of Fashion 2019
flipkart-unveils-ai-india-program/
February 2018 122 New textiles economy: Redesigning
110 “Zalando SE – More than just a retailer; fashion’s future, Ellen MacArthur
94 Nielsen Retail Measurement Service, 52
upgrade to Outperform” RBC Capital Market Foundation, November 2017, https://www.
weeks ending April 2017
report, 12th March 2018 ellenmacarthurfoundation.org/assets/
95 GlobalData craft beer share estimates, 2018 downloads/publications/A-New-Textiles-
111 Berg, Achim, Saskia Hedrich and Economy_Full-Report_Updated_1-12-17.pdf
96 “Snack bar company Kind explores Karl-Hendrik Magnus et al., “Is apparel
stake sale”, Reuters, July 2017, https:// manufacturing coming home?”, McKinsey 123 Berg, Achim, Saskia Hedrich and
www.reuters.com/article/us-kind-llc-m-a/ & Company, October 2018, https://www. Karl-Hendrik Magnus et al., “Is apparel
snack-bar-company-kind-explores-stake-sale- mckinsey.com/industries/retail/our-insights/ manufacturing coming home?”, McKinsey
sources-idUSKBN19S214 is-apparel-manufacturing-coming-home & Company, October 2018, https://www.
mckinsey.com/industries/retail/our-insights/
97 “How an ex-lawyer built Halo Top into an 112 Hendriksz, Vivian, “Boohoo, Asos & is-apparel-manufacturing-coming-home
ice cream sensation with $347 million in sales”, Missguided pave the way for ‘Ultrafast
CNBC, November 2018, https://www.cnbc. Fashion’”, Fashion United, 24th May 2017, 124 Manyika, James, Ramaswamy, Sree, Bughin,
com/2018/11/01/halo-top-beat-ben--jerrys- https://fashionunited.uk/news/fashion/ Jacques et al., “Superstars - The dynamics of
brings-in-hundreds-of-millions-in-sales.html boohoo-asos-missguided-pave-the-way-for- firms, sectors, and cities leading the global
ultrafast-fashion/2017052424625 economy”, McKinsey Global Institute, October
98 “Fever-Tree upgrades forecasts as half 2018
year revenue rises 45%”, The Drinks Business, 113 Berg, Achim, Saskia Hedrich and
July 2018, https://www.thedrinksbusiness. Karl-Hendrik Magnus et al., “Is apparel 125 Based on McKinsey trade flow database
com/2018/07/fever-tree-upgrades-forecasts-as- manufacturing coming home?”, McKinsey calculations and McKinsey Fashionscope
half-year-revenue-rises-45/ & Company, October 2018, https://www. market size estimates
mckinsey.com/industries/retail/our-insights/
99 Euromonitor brand share estimates, 2016 is-apparel-manufacturing-coming-home
100 “TPG – Beauty’s Next Big Investor?”, 114 McKinsey & Company analysis based on
WWD, May 2018, https://wwd.com/ expert interviews
beauty-industry-news/beauty-features/
tpg-beauty-next-big-investor-1202669250/ 115 Crouch, Dorothy, “ShareCloth Streamlines
On-Demand Apparel Manufacturing”,
101 McKinsey Start-up and Investment Apparel News, 12th July 2018, https://www.
Landscape Analysis, Pitchbook apparelnews.net/news/2018/jul/12/sharecloth-
streamlines-demand-apparel-manufacturin/
102 EDITED analysis in partnership with
McKinsey 116 Wiener, Anna, “Inside Adidas’ Robot-
Powered, On-Demand Sneaker Factory”, Wired,
103 IBID 29th November 2017, https://www.wired.
com/story/inside-speedfactory-adidas-robot-
104 Thomas, Lauren, “Amazon’s 100 million powered-sneaker-factory/
Prime members will help it become the No. 1
apparel retailer in the US”, CNBC, https://www. 117 Halliday, Sandra, “Superdry launches fast
cnbc.com/2018/04/19/amazon-to-be-the-no- fashion youth line, names product chief from
1-apparel-retailer-in-the-us-morgan-stanley. Hilfiger”, Fashion Network, 12th September
html 2018, https://uk.fashionnetwork.com/news/
Superdry-launches-fast-fashion-youth-line-
104
Infographics
The State of Fashion 2019 infographics: Infographics: Exhibit 14. Aspiration level for shift to
nearshoring
1. Caution ahead Exhibit 1-4. Industry outlook Source: Andersson, Johanna, Achim
Source: BoF-McKinsey State of Fashion Survey, Source: BoF-McKinsey State of Fashion Survey, Berg, Saskia Hedrich and Karl-Hendrik
The Business of Fashion and McKinsey & The Business of Fashion and McKinsey & Magnus et al., “Is apparel manufacturing
Company, September 2018 Company, September 2018 coming home?”, McKinsey & Company,
October 2018, https://www.mckinsey.
2. Indian ascent Exhibit 5. Expected changes in global
com/industries/retail/our-insights/
Source: “Global Smartphone User Penetration economic conditions, in 6 months
is-apparel-manufacturing-coming-home
Forecast by 88 Countries: 2007 – 2022”, Source: Smit, Sven, “Economic Conditions
Strategy Analytics, 2017 Snapshot, September 2018: McKinsey Global Exhibit 15. Automation of sewing will be the
Survey results”, McKinsey & Company, biggest driver of labour reduction
3. Trade 2.0 September 2018, https://www.mckinsey. Source: Estimates by McKinsey & Company and
Source: Smit, Sven, “Economic Conditions com/business-functions/strategy- ITA at RWTH Aachen
Snapshot, September 2018: McKinsey Global and-corporate-finance/our-insights/
Survey results”, McKinsey & Company, economic-conditions-snapshot-september- Exhibit 16. Nearshoring and automation will
September 2018, https://www.mckinsey. 2018-mckinsey-global-survey-results be important enablers to reach a circular
com/business-functions/strategy- value chain
and-corporate-finance/our-insights/ Exhibit 6. Real GDP CAGR Source: Interviews with experts; McKinsey &
economic-conditions-snapshot-september- Source: McKinsey & Company analysis based Company
2018-mckinsey-global-survey-results on Economist Intelligence Unit CountryData,
https://store.eiu.com/product/countrydata Exhibit 17-21. McKinsey Global Fashion
4.End of ownership Index (MGFI)
Source: BoF-McKinsey State of Fashion Survey, Exhibit 7. Belief that changes in trade policy Source: McKinsey Global Fashion Index based
The Business of Fashion and McKinsey & will pose potential risks to global economic on McKinsey Corporate Performance Analytics
Company, September 2018 growth data, McKinsey & Company, 2018
Source: Smit, Sven, “Economic Conditions
5. Getting woke Snapshot, September 2018: McKinsey Global
Source: EDITED analysis in partnership with Survey results”, McKinsey & Company,
McKinsey & Company, September 2018 September 2018, https://www.mckinsey.
com/business-functions/strategy-
6. Now or Never
and-corporate-finance/our-insights/
Source: ”The urban delivery bet: USD 5 billion in
economic-conditions-snapshot-september-
venture capital at risk?”, McKinsey & Company,
2018-mckinsey-global-survey-results
May 2017
Exhibit 8. Expectations on consumer
7. Radical transparency
appetite for new ownership models
Source: BoF-McKinsey State of Fashion Survey,
Source: BoF-McKinsey State of Fashion Survey,
The Business of Fashion and McKinsey &
The Business of Fashion and McKinsey &
Company, September 2018
Company, September 2018
8. Self disrupt
Exhibit 9. Total fashion, apparel and beauty
Source: BoF-McKinsey State of Fashion 2018
B-corps
Survey, The Business of Fashion and McKinsey
Source: B Lab , a non profit organization listing
& Company, 2018
all B-corporations, data provided in August 2018
9. Digital landgrab
Exhibit 10. Mobile continues to lag desktop
Source: McKinsey Global Fashion Index 2018
in sales conversion
based on McKinsey Corporate Performance
Source: McKinsey Digital Opportunity Scan of
Analytics data, McKinsey & Company, 2018
48 apparel, jewelry, retailers in US, UK, Europe,
10. On demand Asia, September 2018
Source: Andersson, Johanna, Achim
Exhibit 11. Fashion executives anticipate
Berg, Saskia Hedrich and Karl-Hendrik
consumers’ need for transparency
Magnus et al., “Is apparel manufacturing
Source: BoF-McKinsey State of Fashion Survey,
coming home?”, McKinsey & Company,
The Business of Fashion and McKinsey &
October 2018, https://www.mckinsey.
Company, September 2018
com/industries/retail/our-insights/
is-apparel-manufacturing-coming-home Exhibit 12. Instagram like – follower ratio
(LFR) Source: McKinsey & Company analysis
based on Instagram data
105
Contacts
christian.layolle@businessoffashion.com johanna.stout@businessoffashion.com
106
For questions on the report or further discussions, please contact a member of McKinsey’s Apparel,
Fashion & Luxury global leadership team: