The year of 2020 will go down in the history books as the year fashion nearly died or as Michael Burke, chief executive of Louis Vuitton, said in the ”State of Fashion 2021” report by McKinsey and Company and the Business of Fashion (BOF), “It killed the last remnants of the past, of the [late] 20th century.”
Through November, retail sales in clothing and fashion accessories stores declined 28.5% year-over-year, the steepest drop in all of retail, even worse that the 19.4% decline in the hard-hit restaurant sector. Department stores, heavily dependent on fashion, garnered a 17.5% loss in revenues.
The McKinsey/BOF report translates that sales decline into an industry-wide fall in profits of 93% in 2020, meaning companies will go into 2021 in a significantly weaker position than they faced in 2020 when they were buoyed by a 4% rise in profits in 2019.
The bloodletting isn’t going to end in 2021. Sales are predicted to drop between 7% to 12% in the U.S. in 2021 compared with 2019. Europe will do a little better, dropping between 2% and 7%, while China will grow between 5% to 10%.
That is assuming the vaccine leads to a rapid slowdown in virus transmission and governments can keep their respective economies from dipping into a full-blown recession. Otherwise, the models predict a 22% to 27% drop in 2021 compared to 2019 in the U.S., with full pre-Covid recovery not expected till 2025.
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Among the trends the McKinsey/BOF report identifies as driving the downward spiral and key to reversing it are:
- Diminished demand: Reduced consumer spending power and rising income inequality call on companies to “double down” on out-performing categories, like casualization, which boosted stock prices 7% for sportswear companies through October; value/discount, which drove a 5% uptick for these brands; and digitalization, that gave internet fashion retailers a 76% increase in stock valuation.
- Less is more: This impacts both fashion companies and consumers. Fashion brands need to shift to a “profitability mindset,” since it’s proven that introducing more products doesn’t translate into more profits. As a result, data-driven assortment planning is a top priority for 58% of the fashion executives surveyed. For consumers, this year has focused their attention on what they really need versus what they may want and needs have replaced desire as the driver for new fashion purchases.
- Opportunistic investment: The pandemic has caused “performance polarization” in the fashion industry with the best-performing companies widening their lead against the poor-performers. This will result in more companies heading to bankruptcy court and more mergers and acquisitions as the strong players can pick up brands on the cheap while growing market share and adding new capabilities.
- Retail return-on-investment: Noting that physical retail has been on a “downward spiral” for years, the report envisions many more store closings as retailers must “rethink” their retail footprints in order to improve store-level ROI while embedding digital e-commerce “seamlessly” into operations.
How to save fashion brands
Looking to the future, Saint Joseph’s University Professor Michael Solomon Ph.D. and co-author of the book, Why Fashion Brands Die and How to Save Them, sees many more fashion brands ending up in the dust-bin if they don’t adapt quickly to the industry disruptions that were brewing for many years but were greatly exacerbated by Covid.
Resiliency in the face of changing trends is a core competency that all fashion brands must have, since change is hardwired into the fashion ecosystem. “It’s a pendulum swing from one side to another because there is no such thing as ‘permanent’ in fashion,” Solomon says.
Solomon offers six ways fashion brands can reverse the latest pendulum swing from death and dying to growth and prosperity:
Focus on your best customers
With more bankruptcies, store closure and job cuts inevitable, fashion brands must refocus on who their true customers are, not who they hope they might be.
“The key to salvation for these companies is to focus on their 20% best customers, rather than the 80% others,” Solomon advises. “One of the biggest mistakes brands make is believing their own press and focusing their attention on attracting new customers, rather than cultivating their loyal customers.”
As a consequence, fashion brands have become more transactional, rather than doing the hard work of building brand relationships. “It’s the brand relationships that are really going to matter,” he continues. “Customers will remember the brands that really stood by them.”
Facing the market contraction that is coming, Solomon says fashion brands that have proven their value to their core customers will see the spend per customer and the lifetime value of a customer grow, even as the absolute number of customers declines.
Demand will shift to quality and lasting value
While casualization and leisurewear has been the growth driver short term, customers are going to swing back to investment dressing with fewer but better pieces once they emerge from their confinement.
“Yes, people are still going to buy sweat and yoga pants afterwards, but I see a return to elegance for those who have been fortunate not to lose their jobs and have amassed more money since they can’t spend it on other things,” Solomon says. “The hardcore fashionistas are chomping at the bit to get out there and to start buying fashion again.”
This pent-up demand will be released in purchases of true quality with an eye toward long-term investment and wearability. It will become part of the celebration of freedom that everyone is waiting for.
“Once they have somewhere to go again, they are going to want to do it in style,” he relates.
Sustainability must be part of the mix
After digital, the fashion executives surveyed by McKinsey/BOF identify sustainability as the biggest opportunity for the fashion industry.
“Optimism about digital and sustainability chimes with the widely held view that, despite the disruption of the pandemic, these trends will accelerate and, in turn, lead to a reset of the fashion industry,” the report states.
But Solomon sees a trap in many companies’ sustainability initiatives. “Everyone is racing for sustainability, but it can mean many different things. I’ve read studies that claim upwards of 90% of all green claims are inaccurate or downright untrue. It threatens to poison the well.”
And while sustainable fashion is something customers say they want, he doubts that consumers will actually spend more to pay for it.
To balance the rising demand for sustainability and offset the extra costs associated with it, Solomon advises brands to first seek to satisfy a minimum standard of sustainability, rather than reach for a maximum one.
“It’s the number one thing that everyone in the fashion industry is chasing. For the customers, ultimately it reflects their flight to quality. Part of that is the garment isn’t going to rip, but also it has to pass the litmus test for some level of sustainability,” he believes.
Fashion resale challenges the entire supply chain
Another part of fashion’s sustainability discussion must include the resale market.
Buying and selling secondhand fashion has come out of the closet. A 2020 survey by ThredUp among 3,500 American women found secondhand fashion the top channel where they expect to spend more money over the next twelve months.
Forty-four percent of those surveyed plan to spend more money in secondhand outlets, with Amazon Fashion (37%) and off-price (34%) also poised to attract more customers. By contrast, department stores will be the biggest losers, with 66% saying they plan to buy less there.
In luxury the growth in resale goes hand in glove with consumers’ flight to quality, since luxury goods are typically gently-used and their enhanced quality adds to their usable life span.
Online luxury consignment reseller, Tradesy credits its dramatic growth to traditional luxury customers getting in on the circular fashion economy.
“The adoption of resale by those traditional luxury retail customers has really accelerated,” CEO Tracy DiNunzio shared with Bloomberg. “They continue to be extremely active, equal to or more than our typical buyer profile.”
This is disrupting the traditional value chain in fashion. “It’s blurring the traditional boundaries between producers, sellers and consumers,” Solomon observes. “Consumers are becoming producers, like on Etsy, or sellers, like through resale marketplaces.”
“It’s transforming the entire value chain, and it’s particularly a threat to luxury brands,” he continues. “I don’t think people on the street have really figured this out. When a company like Macy’s
Sizing needs to be expanded and simplified
The McKinsey/BOF report stresses the need for fashion companies to simplify their processes. “They must develop novel strategies for their assortments or product offering, focused on profitability, value, simplicity and downsized collections, rather than discounting and volume.”
A critical service they could lend to their customers is to simplify the complexity of sizing. Brands cling to their exclusive sizing standards as a way to build loyalty to the brand. But the fact that a size 10 measures differently from brand to brand creates huge inefficiencies within the value chain, especially as more fashion purchases are made online without the ability to try something on.
“Brands pay a big economic price when someone has to order the same thing in three different sizes to find one that fits, only to return two of them. That is just wasteful,” Solomon says.
And brand sizing comes in too narrow a range. A 2016 study published in the Journal of Fashion Design, Technology and Education, found that the average American woman is a size 16-18, which corresponds to Women’s Plus 20W.
These women may not reflect the “ideal” body image that fashion designs for, but the fact that so many women need that size, it’s time the industry fully embrace “body positivity” with expanded sizing in fashion-forward clothing.
On the horizon, Solomon sees body scanning technology will help the industry overcome its current limitations and aid customers in getting just the right fit. But he says the industry has fought it “tooth and nail,” because they want to keep their existing proprietary sizing.
Elevating the status of the ‘shop girl’ and ‘boy’
The “digital sprint” that McKinsey/BOF identifies has resulted in e-commerce’s share of fashion sales growing from 16% to 29% in only eight months during the pandemic, effectively “jumping forward six year’s of growth.”
Nobody expects the shift to online fashion retail to slow, rather it is likely to accelerate since Amazon is now serious about its fashion ambitions. But this will put added strain on brick-and-mortar fashion retailers.
Solomon foresees that brick-and-mortar shopping will become a “luxury” only a few can afford. “The average person is going to have less access rather than more, as they will be confined to doing it online,” he says.
And he adds this will be a boon to affluent shoppers. “The people who can afford to shop post-Covid are going to have a better experience than before because it will be more individualize and less hectic. People who buy these products want to be ‘oohed and aahed’ by the salespeople.”
This will bring about a renewed importance of the salesperson. “The biggest paradox in retailing is that a customer’s main impression of a company is formed by their interaction with the lowest-paid person in the company,” he laments.
Fashion retailers need to elevate the status of their shopfloor employees, expanding their job responsibilities and training and increasing their pay along with it.
“Everybody talks about curation in the store. There is a lot of value interacting with a salesperson in the store who can curate the selection and customize it for customers,” Solomon says.
Imaging a ‘better normal’ for fashion
In closing, the McKinsey/BOF report calls on the fashion industry to look forward to a “better normal” and to set company sights higher across stores, partnerships and assortments. Without bold thinking and radical solutions, 2021 will be a year of even greater challenges than 2020.
“While there is little doubt that the year ahead will be an arduous one for some fashion industry players, it will also be a year of opportunity for others,” the report states. “In this highly tempestuous and increasingly competitive market environment, players across the board will need to reflect carefully (but swiftly) on their next moves. Not every silver lining that emerged from the crisis will lead to a business opportunity and those that do will certainly not last forever.”