Strong growth in the global fashion market is predicted for 2019 by McKinsey and Company. It forecasts growth between 3.5% and 4.5%, slightly below 2018 levels, which are expected to range between 4% to 5% for the $2.5 trillion global fashion industry in 2017. This forecast is based upon a survey of 300 fashion industry executives and co-published by The Business of Fashion (BoF) in the State of Fashion 2019 report.
While fashion industry players can be reassured by that optimistic forecast, and as much as I hope their rosy prediction is right, I believe they may be reading the tea leaves wrong.
Over 40% of the executives surveyed believe that fashion business conditions will worsen in 2019. Just how much worse the study doesn’t reveal, but 58% of those surveyed expect fashion’s mid-market to become worse in 2019.
And while the report states that the value sector will be the one that performs best in 2019, predicted to grow between 5% to 6%, only 27% of those surveyed said value fashion would become better, and a majority 54% expect it to do worse.
On the other hand, premium/luxury fashion is eyed by 56% of the fashion executives to do better in 2019, yet BoF-McKinsey are more conservative about its growth than the value sector, with premium/luxury forecast to grow 4.5% to 5.5% this year.
Given the fact that a majority of those surveyed expect both mid-market and value fashion sectors to do worse in 2019, and this is where the bulk of consumer spending is – my educated guess accounting for around 75% to 80% of global sales, with luxury in the 20% to 25% range – it is hard to justify the strong 3.5% to 4.5% growth projection for 2019. Rather I’d dial it back by half.
Advantage of the fashion establishment
One finding in the BoF-McKinsey study I don’t dispute is that the top 20 publicly-listed companies are “increasingly dominating the industry in terms of value creation.”
Those 20 “super winners,” led by Inditex (owner of Zara), Nike and LVMH, account for 97% of total industry value created, compared to 70% in 2010. The super winners also take the lion’s share of industry profits.
Other super winners by their calculation include Hermes, Richemont, Kering, Pandora, Luxottica, Michael Kors and Burberry in premium/luxury; Adidas, LBrands, U.K. retailer Next, VF Corp, Gap and Hanes Brands in mid-market; and TJX, H&M, Ross, Fast Retailing(Uniqlo) in value.
To the super winners go the spoils. “Looking at drivers of long-term success, we find that profitability and capital efficiency are key,” the report states, and adds, “Size continues to matter. There is a demonstrable advantage to scale.”
They further note that no online retailer has been able to break into this elite group of fashion super winners. In other words, stores remain the best way to make a connection with fashion customers.
The analysis of the 20 super winners concludes, “The most likely route to success, based on recent experience, is to invest either in brand strength or in operational efficiency to produce faster or at a lower cost.”
All eyes on North America
North America is the market that offers fashion brands the most opportunity in 2019, in the estimation of the 300 fashion executives surveyed.
Nearly two-thirds (64%) expect it to become better this year, as compared with 44% who think the same for Europe and 30% for Asia. For the later two markets, a majority (51% for Asia) or near majority (47% for Europe) expect business conditions to worsen in 2019.
Tempering the fashion executives assessment of opportunities in Europe and Asia, they name economic uncertainty and political turmoil, threat of trade wars, the pending Brexit and that after ten years, a recession is overdue.
But regards growth in the U.S. fashion business, I say, “Not so fast.” Looking at personal consumption data compiled by the Bureau of Economic Analysis (BEA), clothing and footwear expenditures were the weakest of all major categories in terms of growth during 2017.
While personal consumption rose 4.3% overall year-over-year in 2017, clothing and footwear expenditures only increased 1.8%, from $373 billion to $379.7 billion. By contrast furnishings and household durables were up 4.7% and recreational goods and vehicles rose 5.8%. This category includes computers, smart phones and other technology, sporting equipment, sports and recreational vehicles, books and musical instruments.
While 2018 is shaping up to be a strong one for the fashion sector, with BEA’s third-quarter personal consumption estimates projecting a ~3.5% increase, fashion growth has languished since 2013, never reaching higher than 2.3% year-over-year in 2015.
It remains doubtful that the fashion industry will be able to achieve another year of 3.5% or higher growth in America during 2019. Economic uncertainty and political turmoil are ravaging the U.S. consumer confidence, just like they are in Europe and Asia.
My assessment of 2018’s strong fashion performance is that consumers were buying up things they will need while the good times roll, in anticipation of darker days ahead. And by all accounts fashion brands gave them a big hand up this year through rampant discounting that escalated in the fourth quarter.
Getting ahead in fashion in 2019
Having analyzed the BoF-McKinsey survey, where 70% of respondents are concerned about the overall global macroeconomic outlook for 2019, I offer these strategies for success this coming year.
Fashion remains a personal business. As much as fashion executives pivot toward digital for growth — mobile obsessed, platforms first, start-up thinking and AI are techno-trends fashion executives said had the most impact on business in 2018 — fashion retail remains a personal, face-to-face business.
In store is where fashion brands make their mark, serve customers best and build engagement and loyalty with them. This is why so many digitally-native fashion brands are now investing in physical stores, a trend that will continue in 2019.
While right-sizing the number of physical locations will remain a priority for many brands in 2019 (Gap is said to be closing hundreds of its namesake stores this year), fashion retailers need to invest more in the physical locations that remain.
That means enhancing the real-world shopping experiences with more comfortable and accessible surroundings; lighting, mirrors and changing rooms that make the clothing and customers look good; less merchandise crowding out best sellers through better curation at the local level; and investing, training and developing the in-store sales staff on which the personal relationship with customers depends.
Think circular, not linear. Fashion executives surveyed have their eyes on pre-owned, refurbished, repaired and rental fashion. Some 44% see this trend will have a greater impact on the fashion industry in 2019. BoF-McKinsey predict more rental-native brands will emerge to serve the rental or subscription models.
Fashion brands are only beginning to assess the implications of this trend and how to respond proactively. For example, nearly 40 brands, including J. Crew, Levi’s and Club Monaco, are supplying fashion to Rent the Runway as a way to gain access to the rental economy. The company expects that between 15% to 25% of its inventory will come through such brand partnerships. And Express now offers its own monthly fashion rental service. For luxury fashion, a rent-to-own model might offer opportunities.
Another brand exploring circular fashion is Stella McCartney with The RealReal. Through this partnership, consigners of Stella McCartney fashions receive a $100 store credit to shop new at Stella McCartney boutiques or online.
Responding to the recognition that the fashion industry is one of the world’s worst polluters, McCartney said, “Moving from reducing our negative environmental impact by making a positive impact requires all of us to change our mindset and leverage solutions that will make fashion circular and eliminate waste.”
Excess fashion inventory creates tremendous waste that must be gotten rid. The Ellen MacArthur Foundation claims the equivalent of one garbage truck of textiles is landfilled or burned every second.
Consumers demand that the industry address this excess in responsible ways. Not like Burberry which shocked consumers when they learned it burned $37.5 million worth of product rather than selling it at a discount in the name of protecting its brand image.
Consumers are thinking circular about their own closets as well. One out of every three women shopped second hand last year, according to a report by ThredUp, totaling 44 million customers compared with 35 million in 2016.
Millennials are the most active purchasers of new clothing, as well as consumers who by nature and inclination are most concerned about waste and negative environmental impacts of the fashion industry. It is time for the industry to stop thinking linearly by pumping out more and more product and start thinking circularly, like Richemont which acquired Watchfinder that sells pre-owned watches.
Combine value and luxury fashion for millennials with money. Within the 73 million strong millennial cohort in the U.S., aged 23 to 38 years in 2019, the best prospects for fashion retail are the high-income HENRYs (high-earners-not-rich-yet). With incomes between $100k and $250k, HENRYs are millennials that have more money, the need for new clothing for work and play and an appetite to stay ahead of the pack when it comes to personal style.
As the BoF-McKinsey study identifies value and premium/luxury as fashion’s best growth prospects for 2019, millennial HENRYs are drawn to more premium/luxury brands that offer a strong value proposition with an authentic voice and meaningful point of difference.
They are finding that in what the study describes as “challenger brands,” which are disrupting the established order “where incumbent players have rested on their laurels.”
It is brands like I.AM.GIA, Reformation and Everlane which have captured millennial’s imaginations and engagement in social media far more that traditional legacy brands, like Dior or Louis Vuitton. These disruptive brands offer styles that fit HENRYs’ preferences with prices that match their wallets.
Disrupt yourself. Self-disruption is the number one trend identified by fashion executives that will shape the fashion industry in 2019. Fashion brands will look to bring fresh perspectives and ideas to their business models, supply chains, channels of distribution, brand image and products offered.
For example, more brands are adopting drop strategies to release smaller collections more frequently instead of conforming to the traditional seasonal fashion calendar. This creates consumer anticipation for new offerings and a sense of rarity that dispels the elitist concept of exclusivity and replaces it with elusiveness.
Specifically, the BoF-McKinsey study said fashion brands “need to take an active stance on social issues, satisfy consumer demands for ultra-transparency and sustainability, and, most important, have the courage to ‘self-disrupt’ their own identify and the sources of their old success in order to realise these changes and win new generations of customers.”
To do that, they are advised to copy strategies introduced by the emerging disruptive brands. This will help them become more relevant and responsive to the changing needs of fashion customers who crave newness, citing a British survey which found one in three young women consider an outfit old if they have worn them once or twice.
In conclusion, “For fashion players, 2019 will be a year of awakening ,” the study reports. “The ones who succeed will have to come to terms with the fact that in the new paradigm that is taking shape around them, some of the old rules simply don’t work.”
Fashion brands need to be nimble and quick to keep up with the changes that their customers demand today, not tomorrow.