Due to the coronavirus crisis profits evaporate almost completely in the global fashion industry: McKinsey expects a decrease of 93 per cent this year. Those who were able to grow did so either online or thanks to Asia-Pacific. Also in 2021, digital will still be the superstar.
Only the biggest will become bigger
After a calm year of growth in 2019, in which the profit of the fashion industry rose by four per cent, the pandemic has now completely wiped out the sector: in its new The State of Fashion 2021 report, McKinsey forecasts an overall decline in profits of no less than 93 per cent. About 73 per cent of the large listed fashion companies lost value this year, which means they are contributing to the overall value reduction of the entire market.
Fashion companies that did well in 2020 all share at least one or two characteristics: they excelled digitally and/or focussed on the Asian market. Fashion companies that achieved over a third of their turnover in Asia-Pacific saw their stock market value increase by nine per cent. Online retailers did even better: in August, the share price of online retailers such as Asos, Zalando and Farfetch averaged 35 per cent compared to December 2019. Discounters also visibly benefited from the corona crisis (an increase of 5 per cent), as did providers of sportswear (an increase of 7 per cent).
In all this, it is mainly the big names becoming even bigger: in the first nine months of this year, the twenty largest fashion companies grew their worth by 11 per cent. And that only adds to the polarisation: not surprisingly, investors this year had more confidence in the top twenty than in other companies. By August the “overachievers” had already recovered to such an extent that their share price fell only five per cent below pre-crisis levels. By April, however, their value fell by a quarter.
Digitisation five years ahead
Many of these trends will continue into 2021 – and beyond, McKinsey believes. In China, the consulting agency expects an increase in turnover by five to ten per cent compared to 2019, while the fashion market in Europe continues to shrink. The continent is likely to continue to feel the effects of a reduced number of tourists, resulting in a two to seven per cent drop in turnover in 2021 compared to the pre-covid year 2019.
Researchers do not expect a full recovery before the third quarter of 2022. The United States will follow a similar path, with a seven to twelve per cent decline in sales next year compared to 2019, and only a modest recovery starting in the first quarter of 2023.
Where there is a positive dynamic, digital channels will continue to be the main driver. In just a few months, the progress made regarding digitalisation had the size of what we would normally expect to happen over the course of five years, according to the research report. Worldwide, the fashion industry will experience digital growth of more than twenty per cent in 2021 (even thirty per cent in Europe and the United States) compared to 2020. The growth of platforms is also continuing, especially now that both brands and consumers are becoming increasingly interested in the local aspect.
Questioning the economic system
But consumer behaviour is also changing. For example, how will the fashion businesses deal with the economic consequences of the pandemic, which will also reduce consumer demand next year? Travel will also stagnate at the current low level, for the time being, McKinsey predicts. A new approach in the fashion and beauty markets will certainly be required.
Consumers also move towards fair trade and an ethical value chain, so that the planet and textile workers no longer suffer from tragedies like this year. Internally, fashion labels are learning lessons from what happened in 2020. It is becoming clear that more products, more choice and more stock, does not necessarily lead to more profit. Many designers call for a more simple, unambiguous and demand-driven model and will be heard in the upcoming years.
Shifting the balance of power
Additionally, the further widening of the gap between winners and losers is a trigger for further consolidation. Opportunistic investors see potential to fill the gaps and take over failing companies. In this sense, new and stronger alliances and partnerships are emerging, both between brands and retailers, as well as fashion labels and their suppliers.
What about the stores? McKinsey predicts that the trend of store closures will continue but sees a shift in the balance of power between landlords and retailers. If property owners have less say, rent may drop, and more financially interesting store concepts may reappear. Other employees will work more from home, which will bear new forms of employer loyalty, teamwork and cost control.
