The Strategist

McKinsey and BoF: Digital trends will create huge problems for the fashion industry

03/07/2018 - 11:22

The State of Fashion 2018 report by McKinsey and BoF says that in 2017, the global fashion industry was showing signs of recovery thanks to efforts of major companies. Although general economic uncertainty persists, the main expectation of the market until 2021 is organic growth. The market is embracing technological innovations, but in general, the fashion industry still very narrowly understands the trends of digitalization of society. Although more than 75% of fashion retailers plan to invest in the use of artificial intelligence in 2018-2019, consumers may be outperforming the market in their requests.

Kris Atomic
Kris Atomic
McKinsey & Company and Business of Fashion presented a report on the state of the global fashion industry in 2017. The situation in this sector is one of the most important indicators of economic development, at least in recent decades it has been one of the most important fields of the globalization of culture and the world economy. Along with this, consumption of luxury goods is one of the most important factors of economic growth. The State of Fashion report for the year 2016 found a high level of uncertainty in the industry and extremely negative expectations: the forecast of 68% of respondents in the sector for 2017 suggested deterioration of business conditions and only 19% expected improvement. In 2018, 37% of respondents believe that the situation will improve, and 42% hold the opposite opinion. The growth rate of sales will be weak only in the category of fashionable goods (sportswear, growth of 6-7% against 7.5-8.5%). For the rest of the sectors, sales growth is expected to increase by 0.5-1 pp. Price segments of luxury and discount are expected to show an increase in sales growth; as for other sectors, the rate is expected to be similar to 2017.

From an economic point of view, the fashion industry is a very unusual picture. In 2005-2015, according to McKinsey estimates, 20% of the leading sales companies generated 100% of the industry profits, companies from the second to fourth deciles - 18%, and the worst ones generated the same losses as the last group. In 2016 profits of leaders increased by 1.44 times, and profits of the middle class companies decreased by nine times and almost do not matter to the market (3% of the balance of profits and losses). At the same time, losses of the weakest players increased by 2.6 times and now make up 47% of the total profit. In fact, this means that in 2017 up to 80% of the fashion industry companies continued to work outside economic motivation and paid for the ambitions of the owners. 2018 is unlikely to help them return in the black - large technological luxury groups have won the competition. 

However, 20% of the winners will find the "spring" of 2018 problematic. Of the ten major trends identified by McKinsey, only two are conditionally positive and comfortable for companies. This is the expected reboot of the globalization of economies in the world and the highest demand from Asia. The third general economic factor is positively positive: the growth of unpredictability in economic dynamics becomes normal. Shifts in consumer preferences are more difficult to cope with. It is expected that users will be becoming increasingly more loyal to online trading platforms (Amazon, Tmall, Flipcart, Zalando) in 2018. At the same time, the United States is already much inferior to China from the point of view of promising trading platforms in the sector. The most preferred trends are personalization of consumption and mobile payments (especially in the EU).

Formally, everything is rather good with three trends inside the industry. 75% of companies plan to invest in artificial intelligence (mainly to use it for digital merchandising, but not to improve personalization) in 2018-2019. They also intend to take care of sustainable development and apply technology within the sector from the sphere of digital start-ups. However, McKinsey's remarks that even the leaders of the fashion industry have obvious problems with the definition of real calls and adequate answers to them with digital trends. Meanwhile, the fourth intramarket trend has now become a global problem: sales of off-price and strategy orientation to large discounts are growing in the USA (18% of sales growth), and in the EU (32%), and already in China, where the outlet malls sector is showing a fantastic growth of 74% per year. Obviously, to some extent, outlets are consumer behavior, which assesses the success of the "core" industry below the maximum discount: the low "digital efficiency" of major brands is manifested in this among other things.