Aided by new digital frontiers, advances in sustainability and a forward-looking optimism to socializing, McKinsey’s The State of Fashion 2022 found that the fashion industry is ready for a rebound in 2022.
The study, the sixth in a series and conducted in collaboration with the Business of Fashion (BoF), found that the impact from the pandemic in 2020 meant that the fashion industry posted a negative economic profit for the first time in at least a decade, an all-time high of industry consolidation in 2020 and 2021.
A record 69 percent of fashion companies destroyed value (generated negative economic profit) in 2021, reaching new lows of negative economic profits and dragging down overall industry performance.
Encouragingly, McKinsey found fashion’s recovery is poised to be V-shaped, as performance in the first half of 2021 points to a possible return to positive economic profit by 2022.
Fashion is expected to see an “uneven recovery.” In 2022, the industry’s growth will likely be driven by China and the U.S., while Europe lags and is expected to need a return from international tourism to recover fully.
In 2020, McKinsey found the midmarket continued to be squeezed in 2020 with discounts and luxury items comparatively outperforming the broader market in the same time year.
Among geographies, countries with the strongest healthcare systems and economic resilience fared better. China was a standout performer in 2021, as its economy recovered faster than other countries.
Among product categories, 2020 was a breakout year for sportswear, with a 42 percent positive economic profit in the McKinsey Global Fashion Index (MGFI) coming from sportswear companies with strong growth from China. China-based companies contributed 16 percent of positive economic profit in 2020 compared to 9 percent in 2017, primarily driven by Anta Sports and Li Ning. Outside China, the largest value creators were found in North America, including Nike, Lululemon and Dicks Sporting Goods.
McKinsey brought back its annual list of “Super Winners” after suspending the list in 2020 due to distortions created by the pandemic and found the list dominated by sportswear brands, luxury players and home-grown Chinese companies, all of which outperformed the broader market.
The “Super Winners” rankings were deduced by calculating the average economic profit over 2019 and 2020 to mitigate pandemic-induced distortions. Over that period, the top five performers by economic profit were Nike, Inditex, Kering, LVMH (including Tiffany), and Hermes.
McKinsey wrote in its study, “The luxury players in this group continue to benefit from demand for bags, luxury jewelry and ready-to-wear from wealthy customers whose earnings were less impacted by the pandemic and whose funds saved on travel and entertainment were reallocated toward luxury goods.”
Pandemic-driven changes in behavior also “accelerated existing strengths in sportswear, athleisure and outdoor brands as consumers sought comfortable work-from-home and home workout attire,” according to McKinsey.
Sportswear giants Nike, Adidas, Anta Sports, and Lululemon remain on its “Super Winners” list this year, with Anta Sports moving up the ranks and posting more significant economic profit than in its 2020 report, benefitting from Chinese breakout growth and domestic spend on local brands. In addition, all new entrants to its list this year, namely JD Sports, Deckers, and Moncler, come from the sports and outdoors category. Other manufacturers benefitted from strength in underwear, nightwear and casualwear business during the period.
Looking ahead, recovery is at the top of executives’ minds for the coming year, with 75 percent of luxury-segment executives, 61 percent of midmarket executives and 50 percent of value executives expecting better trading conditions.
Executives in the study predicted that supply chain pressures, the rise of domestic luxury spending amid muted international travel and the continuing evolution of digital channels would have the most significant impact on their businesses in 2022.
McKinsey identified ten themes it expects will be critical for the business of fashion in 2022:
- Uneven Recovery: Recovery from COVID-19-related economic shocks will be uneven across consumer markets and sourcing regions, as countries with strong healthcare systems and economic resilience outperform. In this patchy environment, fashion players with international footprints will need to carefully look at investment decisions, reassessing local conditions regularly while mitigating market-specific risks.
- Logistics Gridlock: The fashion industry relies on global supply chains experiencing unprecedented pressure and disruption. With logistical logjams, rising shipping costs and shortages of many kinds adding new layers of complexity, companies must rethink their sourcing strategies while implementing new supply chain management best practices and building flexibility to keep products flowing with customer demand in 2022.
- Wardrobe Reboot: After focusing on loungewear and sportswear for nearly two years, consumers will reallocate wallet share to other categories as pent-up demand for newness coincides with more social freedoms. To anticipate these nuanced and sometimes paradoxical preferences, brands should lean on data to drive product development and adjust inventory mix to resonate with consumers changing lifestyles.
- Domestic Luxuries: Travel has traditionally been a driver of luxury spending, but international tourism is not expected to fully recover until between 2023 and 2024. To capture the shift in shopping patterns set to shape the year ahead, luxury players should connect with domestic consumers, rebalance their global retail footprint and duty-free networks and invest in local e-commerce.
- Metaverse Mindset: As consumers spend more time online and the hype around the metaverse continues to cascade into virtual goods, fashion leaders will unlock new ways of engaging with high-value younger consumers. To capture untapped value streams, they should explore the potential of nonfungible tokens, gaming and virtual fashion, offering new routes to creativity, community-building and commerce.
- Social Shopping: Social commerce is experiencing a surge in engagement from brands, consumers and investors as new functionality and growing user comfort with the channel offers an opportunity for seamless shopping experiences from discovery to checkout. Though use cases differ across global markets, brands should double-down on tailored in-app purchases and test opportunities in technologies such as livestreaming and augmented reality try-on.
- Circular Textiles: One of the most important levers that the fashion industry could pull to reduce its environmental impact is closed-loop recycling, a system rolling out at scale, promising to limit the extractive production of virgin raw materials decrease textile waste. As these technologies mature, companies will need to embed them into the design phase of product development while adopting largescale collection and sorting processes.
- Product Passports: In a bid to boost authentication, transparency and sustainability, brands are using a portfolio of technologies to store and share product information with consumers and partners. To get the most from these digital ‘product passports,’ which can help brands tackle counterfeiting, differentiate themselves and build loyalty by enhancing consumer trust, businesses must create common standards and engage with pilot projects at scale.
- Cyber Resilience: As the digitization of business of fashion reaches new heights, companies face more cyber-attacks and risks related to improper handling of data. Brands need to defend and invest more to make digital security a priority.
- Talent Crunch: Companies that rely on brand appeal or the allure of fashion to attract and retain talent will need to raise their game as employees from upper management to the retail front line reconsider their priorities. Companies must refresh their talent strategies for an increasingly flexible, diverse and digitized workplace.
To read the complete study, go here.
Lead Image from Louis Vuitton Men’s FW21 campaign, created by the late Virgil Abloh. To watch the multi-disciplinary artistic performance, go here.
