The State Of Fashion 2021 - Global Management Consulting
The Stateof Fashion20213
The Stateof Fashion2021
CONTENTSExecutive Summary8—910—13GLOBAL ECONOMY16—3301: Living with the VirusJumia: Balancing Speed with Discipline in a Crisis172002: Diminished DemandCovid-19 and the New Era of Luxury232934—5735384104: Seeking JusticeLouis Vuitton: Hardwiring Accountability in a State of Flux454805: Travel InterruptedSelfridges Group: Managing the Pivot to Local Shopping525558—99596307: Opportunistic Investment6708: Deeper PartnershipsShahi Exports: Reforming the Fashion Supply ChainRisk, Resilience and Rebalancing in the Apparel Value Chain70747709: Retail ROIH&M Group: Making Retail More ResilientMapping the Retail Portfolio of the Future81858910: Work Revolution96BEAUTY202106: Less is MoreA More Circular Fashion Industry Will Require a Collective EffortTHE STATE OF BEAUTY 2021FASHIONSYSTEM03: Digital SprintKering: Fast-Tracking a Digital UpgradeAlibaba: Innovating for China’s Advanced EcosystemFASHION SYSTEMCONSUMERSHIFTSCONSUMER SHIFTSGLOBALECONOMYIndustry Outlook100—107MGFIMCKINSEY GLOBAL FASHION INDEX108—115Glossary116End Notes and Infographics1187
The State of Fashion 2021CONTRIBUTORSIMRAN AMEDACHIM BERGANITA BALCHANDANISASKIA HEDRICHAs founder, editor-in-chiefand chief executive of TheBusiness of Fashion, ImranAmed is one of the fashionindustry’s leading writers,thinkers and commentators.Fascinated by the industry’spotent blend of creativity andbusiness, he began BoF as ablog in 2007, which has sincegrown into the pre-eminentglobal fashion industryresource serving a fivemillion-strong communityfrom over 200 countries andterritories. Previously, he wasa consultant at McKinseyin London.Based in Frankfurt, AchimBerg leads McKinsey’s GlobalApparel, Fashion & Luxurygroup and is active in allrelevant sectors includingclothing, textiles, footwear,athletic wear, beauty,accessories and retailersspanning from the value endto luxury. As a global fashionindustry and retail expert,he supports clients on a broadrange of strategic and topmanagement topics, as well ason operations and sourcingrelated issues.Anita Balchandani is aPartner in McKinsey’s Londonoffice, and leads the Apparel,Fashion & Luxury group inEMEA. Her expertise extendsacross fashion, health andbeauty, specialty retail ande-commerce. She focuseson supporting clients indeveloping their strategicresponses to the disruptionsshaping the retail industryand in delivering customerand brand-led growthtransformations.As global senior expert inMcKinsey’s Apparel, Fashion& Luxury group, SaskiaHedrich works with fashioncompanies around theworld on strategy, sourcingoptimisation, merchandising transformation, andsustainability topics — alltopics she is also publishingabout regularly. Additionally,she is involved in developingstrategies for nationalgarment industries acrossAfrica, Asia and LatinAmerica.FELIX RÖLKENSROBB YOUNGJAKOB EKELØF JENSENALTHEA PENGFelix Rölkens is part of theleadership of McKinsey’sApparel, Fashion & Luxurygroup and works withapparel, sportswear and pureplay fashion e-commercecompanies in Europe andNorth America, on a widerange of topics includingstrategy, operating modeland merchandisingtransformations.As global markets editor ofThe Business of Fashion,Robb Young oversees contentfrom Asia-Pacific, the MiddleEast, Latin America, Africa,the CIS and Eastern Europe.He is an expert on emergingand frontier markets, whosecareer as a fashion editor,business journalist, authorand strategic consultanthas seen him lead industryprojects around the world.Jakob Ekeløf Jensen is aconsultant in McKinsey’sLondon office, specialisingin Apparel, Fashion & Luxury.He works with fashion andluxury companies as wellas investors in the industryacross Europe, on topics suchas e-commerce, strategy,value creation, operatingmodel and M&A.Althea Peng is a Partner inMcKinsey’s San Franciscooffice, and leads the Apparel,Fashion & Luxury group forthe Americas. In this dynamicindustry, she partners withglobal apparel and retailcompanies to drive largescale transformations forprofitability and to build newcapabilities for growth.8
ACKNOWLEDGEMENTSThe authors would like to thank all members of The Business of Fashion and the McKinsey community for their contribution to theresearch and participation in the BoF-McKinsey State of Fashion Survey, and the many industry experts who generously shared theirperspectives during interviews. In particular, we would like to thank: Adam Freede, Albert Chan, Alexander Pavlov, Anant Ahuja, AnneLine Hansen, Anne Pitcher, Charlotte Elstob, Dickson Szeto, Doug Stephens, Elsa Berry, Grégory Boutté, Helena Helmersson, JoshGardner, Juan Carlos Escribano, Juliet Anammah, Michael Burke, Mike Hu, Nelli Kim, Philip Guarino, Rania Masri, Robert Burke,Sharifa Murdock and Thiago Alonso de Oliveira.The wider BoF team has also played an instrumental role in creating this report — in particular Amanda Dargan, Anna Rawling,Anouk Vlahovic, Casey Hall, Chelsea Carpenter, Hannah Crump, Kate Vartan, Lauren Sherman, Niamh Coombes, Nick Blunden,Rachel Deeley, Sarah Brown, Sarah Kent, Tamison O’Connor, Venetia van Hoorn Alkema, Victoria Berezhna, Vikram Alexei Kansaraand Zoe Suen.The authors would in particular like to thank Sonja Penttilä and Sarah André from McKinsey’s Helsinki and London offices respectivelyfor their critical roles in delivering this report. We also acknowledge the following McKinsey colleagues for their special contributionsto the report creation and in-depth articles: Adhiraj Chand, Aimee Kim, Alex Sukharevsky, Andres Avila, Anita Liao, Antonio Gonzalo,Cherry Chen, Claire Gu, Clarisse Magnin, Colin Henry, Colleen Baum, Daniel Zipser, Danielle Bozarth, Ellie Baker, Emanuele Pedrotti,Emily Gerstell, Ekaterina Abramicheva, Ewa Sikora, Fernanda Hoefel, Franck Laizet, Gillian Wright, Hanna Grabenhofer, HannahYankelevich, Jihye Lee, John Hooks, Julia Dageförde, Karl-Hendrik Magnus, Karthikeyan Swaminathan, Libbi Lee, Lisa Renaud, MarieStrawczynski, Mekala Krishnan, Miriam Lobis, Nakul Verma, Neha Onteeru, Nicola Montenegri, Patricio Ibanez, Peter Stumpner,Raphael Buck, Rebeca Vega, Rebecca Zhang, Ryan Shultz, Sajal Kohli, Sakina Mehenni, Sophie Marchessou, Susan Lund, ThomasTochtermann, Tom Skiles, Ulric Jerome, Valerie Van der Voort, Vorah Shin. We’d also like to thank David Wigan and Jonathan Turtonfor their editorial support, and Adriana Clemens for external relations and communications.In addition, the authors would like to thank Joanna Zawadzka and Lucinda Scholey for their creative input and direction into this Stateof Fashion report, Martin Nicolausson for the cover illustration and Getty Images for supplying imagery to bring the findings to life.9
EXECUTIVE SUMMARYThe State of Fashion 2021In Search ofPromise inPerilous TimesFor the fashion industry, 2020 was the yearin which everything changed. As the coronaviruspandemic sent shockwaves around the world, theindustry suffered its worst year on record withalmost three quarters of listed companies losingmoney. Consumer behaviour shifted, supply chainswere disrupted and the year approached its endwith many regions in the grip of a second wave ofinfections. A turbulent and worrying year has leftus all looking for silver linings — both in life and inbusiness — knowing full well that we will need tomake the most of them in the year ahead.Indeed, according to McKinsey GlobalFashion Index analysis, fashion companies will postapproximately a 90 percent decline in economicprofit in 2020, after a 4 percent rise in 2019. Giventhe ongoing uncertainty, our predictions forindustry performance next year are focused ontwo scenarios.The first, more optimistic “EarlierRecovery” scenario envisages that global fashionsales will decline by between 0 and 5 percent in2021 compared to 2019. This would be predicatedon successful virus containment in multiple10geographies and a relatively rapid transition toeconomic recovery. In this scenario, the industrywould return to 2019 levels of activity by the thirdquarter of 2022.Our second, “Later Recovery” scenariowould see sales growth decline by 10 to 15 percentover the coming year compared with 2019. In thiscase, the virus would continue to wreak havocdespite widespread containment measures andfashion sales would only revert to 2019 levels in thefourth quarter of 2023.In either scenario, we expect tough tradingconditions to persist next year, in some geographiesat least, and for high levels of bankruptcies, storeclosures and job cuts to continue. At the same time,the pandemic will accelerate trends that werein motion prior to the crisis, as shopping shiftsto digital and consumers continue to championfairness and social justice.Given the extreme jeopardy facing theindustry, there is no simple, standardised playbookfor the coming year. Instead, fashion companiesmust tailor their strategies to fit their individualpriorities, market exposure and capabilities.
In other words, deploy your “silver liningsstrategy” that takes advantage of bright spots in theproverbial storm. The key principles for managingchange will be flexibility and agility, alongsideoperational resilience — a critical capability inan uncertain environment. To inform decisionmaking, we expect data and analytics to play anincreasingly important role, helping companiesto track shifts in demand across geographies,categories, channels and value segments.The pandemic will acceleratetrends that were in motion priorto the crisis, as shopping shiftsto digital and consumers continueto champion fairness andsocial justice.Consumer behaviour has undoubtedlyshifted over the past year, as people sheltered fromthe virus in their homes, travel was restricted andstores were closed around the world. However, asdigital consumption continues its dominance andgrowth in 2021, companies must develop moreengaging and social experiences to encourageconsumers to connect. At the same time, weanticipate executive teams to increasingly focuson ensuring that digital channels add measurablevalue to the bottom line, given tight budgets and theneed for productivity and efficiency. With tourismin the doldrums for some time to come, brandsneed to unlock new pockets of demand and tailorassortments to attract more local customers. Asthey become more conscious of worker welfareissues and the human impact of factory closures,company leaders must uphold the highest ethicalbusiness practices and overhaul business modelsthat are exploitative of people and the planet.Looking forward, the industry should setits sights higher, aiming for a “better normal”across stores, partnerships and assortments.In a disrupted environment, decision-makers mustbe bold. They must develop novel strategies for theirassortments or product offering, focused on profitability, value, simplicity and downsized collections,rather than discounting and volumes. They alsoshould create a more nuanced assessment of storeROI to manage the crisis in physical retail whileimplementing a truly omnichannel perspectiveon store operations.The pandemic will continue to put supplychains under pressure and executives shouldbe prepared for further shocks in 2021. Brandsshould secure high-quality and reliable productioncapacity and make the long-overdue shift to ademand-focused model to operate in this fluidenvironment. Leveraging volume commitmentsand strategic alignment with key suppliers willhelp some suppliers’ financial stability and,in the process, improve the credibility of brands’ethical commitments.While there is little doubt that the yearahead will be an arduous one for some fashionindustry players, it will also be a yearof opportunity for others. Market valuations,a forward-looking measure of expected companysuccess, show that a brighter future lies aheadfor companies that are heavily indexed in digitalchannels and the Asia-Pacific region.We believe 2021 will bring continuingopportunities in both the value and luxurysegments, where the former benefits fromconsumers trading down in uncertain times,and the latter benefits from a strong recovery inmarkets like China. Whatever their positioning,stronger players will have an opportunity to seizemarket share from their peers and, in some cases,acquire their rivals at a bargain price. In this highlytempestuous and increasingly competitive marketenvironment, players across the board will need toreflect carefully (but swiftly) on their next moves.Not every silver lining that emerged from the crisiswill lead to a business opportunity and those thatdo will certainly not last forever.11
INDUSTRY OUTLOOKThe State of Fashion 2021Navigating Fashion’sRocky Road toRecoveryThe past year will go down in history as oneof the most challenging for the fashion industryon record, marked by declining sales, shiftingcustomer behaviour and disrupted supply chains.On top of a humanitarian crisis affecting the livesof billions of people, Covid-19 is the catalyst fora deepening economic crisis. Like many othersectors, the fashion industry finds itself in the midstof unprecedented adversity, with revenues andmargins under pressure. Yet the shifting landscapeis also creating pockets of momentum and, despitethe ongoing, widespread impact of the pandemic,some fashion companies are developing new waysto compete.The pandemic has compounded the demandfor all things digital, which in turn has enabledinnovation, efficiency and new ways for businessesto scale up. The shift is permanent, and willcontinue to create opportunities to build slicker,smarter operating models and differentiatedcustomer propositions that are more personalised to each customer. Equally, the crisis hasemphasised the need to move to more sustainableand responsible ways of working in all areas ofthe value chain. As the number of fashion playersresponding to this need continues to grow, it willprove to be a long-term boon to companies, workers,customers and the planet.12Although more than half of business leadersin our BoF-McKinsey State of Fashion 2021 Surveyalso expressed concerns about things other thanthe Covid-19 health and economic crisis for the yearahead, the pandemic recovery timeline did weighheavily on their minds. We should acknowledgethat the mood of fashion business leaders mayhave evolved in the weeks that transpired since thesurvey, especially as the pandemic worsens againin the fourth quarter of 2020 — with governmentresponses including more severe social distancingmeasures in Europe, the threat of new lockdownsacross numerous regions and mass-testing in someChinese provinces. Nevertheless,the collective sentiment of fashion executivesgleaned from our survey does constitute acompelling yardstick against which to measurebusiness leaders’ predictions and expectations forthe year ahead.Naturally, business leaders across the boardhope for the effects of Covid-19 to dissipate andfor the global economy to recover as quickly aspossible. McKinsey Fashion Scenarios analysis forthe industry over the next year anticipates that,in an Earlier Recovery scenario, the virus will beeffectively controlled, thanks to a strong publichealth response (based on information availableSeptember 2020).1 In this scenario, government
Exhibit 1:Fashion executives are divided on the outlook for the industry in 2021% OF FASHION EXECUTIVE RESPONDENTS, EXPECTATIONS FOR THE CONDITION OF THE FASHION INDUSTRY IN 2021RELATIVE TO 2020WorseBY 222336BY GEOGRAPHY47Europe2341North America3536Asia30242044SOURCE: BOF – MCKINSEY STATE OF FASHION 2021 SURVEYExhibit 2:Fashion executives expect Covid-19 and the economic crisis to be the biggestchallenge in 2021 and digital to be the biggest opportunityTOP THREE ANSWERS, % OF RESPONDENTS WHO MENTIONED THE WORDCovid-19 andthe economiccrisis45DigitalChangingconsumerdemand andbehaviourPhysical retailand storefootfall187Biggest challenge for the fashion industry30Marketshare gain8Sustainability10Biggest opportunity for the fashion industrySOURCE: BOF – MCKINSEY STATE OF FASHION 2021 SURVEY13
The State of Fashion 2021INDUSTRY OUTLOOKinterventions will partially offset economicimpact and global travel will pick up along with thepossibility of larger social gatherings. The globalgrowth outlook for fashion sales in this scenariodetermines that recovery would be achieved by thethird quarter of 2022, with China leading the waywith 5 to 10 percent sales growth in 2021 comparedto 2019. Europe, on the other hand, would expect tocontinue to see lower sales in 2021 as internationaltourists stay at home, with sales down 2 to 7 percentcompared to 2019. With footfall remaining low,pre-Covid levels of activity in Europe are unlikelyto return before the third quarter of 2022. Thisscenario includes a similar trajectory for the US,with sales down 7 to 12 percent in 2021 compared to2019, and recovery to pre-Covid sales only expectedby the first quarter of 2023.The primary driver of growth in the comingyear will continue to be digital channels, reflectingthe fact that people in many countries remainreluctant to gather in crowded environments. TheEarlier Recovery scenario anticipates dynamicdigital growth across geographies in 2021 comparedto 2019, with more than 30 percent online growthin Europe and the US and over 20 percent growth inthe already highly digitised Chinese market.2The primary driver of growth inthe coming year will continue tobe digital channels, reflecting thefact that people in many countriesremain reluctant to gather incrowded environments.However, less favourable recovery scenariosmust also be considered if there is a delay to awidely available vaccine. In this case, the viruswould persist in some regions and new waves oflockdowns could take hold, accompanied by onlypartially effective government responses andongoing travel restrictions, further embeddingthe consumer behaviour developed during thepandemic. If this more pessimistic Later Recovery14scenario were to materialise, a deeper dip in salesin 2021 and slower global economic recovery wouldbe anticipated. In this case, the US would see salesdecline by 22 to 27 percent in 2021 compared to2019, and pre-Covid performance in the countrywould not return until after 2025. Althoughsignificantly impacted, Europe would fare slightlybetter than the US overall in this scenario, withsales down 14 to 19 percent compared to 2019.However, the European luxury segment wouldsuffer a considerable hit. If new lockdowns wereto be implemented and travel restrictions persist,luxury sales in Europe could drop up to 40 percentand only recover to their pre-crisis level by the thirdquarter of 2023.There are, of course, a multitude of intermediate scenarios in between the two ends ofthe spectrum, each containing a combinationof positive and negative effects set against thebackdrop of an industry striving to recover itsequilibrium. However, in all cases, we anticipatesignificant variation between geographies, with asmuch as a two- to four-year lag between fast- andslow-recovering markets.On top of subdued sales, we expect industryplayers will see deep and long-lasting changesto both consumer demand and ways of working.Among potential short-term challenges, brands willneed to manage a category shift towards casualwearand the continuing pressure on luxury, as well asshorter production cycles and cash constraints thatlead to a slowdown in investments.Set against this backdrop, the strategicoutlook among business leaders is uneven,reflecting the diverse trends the industry facedeven before the pandemic. Across all valuesegments, a larger proportion of executives in theBoF-McKinsey State of Fashion 2021 Survey arepessimistic rather than optimistic about the yearahead, but 32 percent of respondents still expectthe industry to evolve positively next year.3 In linewith pre-crisis attitudes, 31 percent of executivesin the luxury segment and 36 percent in the valuesegment have a positive outlook for 2021, while only
22 percent of executives in th
FASHION SYSTEM 58—99 06: Less is More 59 A More Circular Fashion Industry Will Require a Collective Effort 63 07: Opportunistic Investment 67 08: Deeper Partnerships 70 Shahi Exports: Reforming the Fashion Supply Chain 74 Risk, Resilience and Rebalancing in the Apparel Value Chain 77 09: Retail ROI 81 H&M Group: Making Retail More Resilient 85
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