The Stateof Fashion
2019

The State of Fashion 2019The Stateof Fashion
2019

2

Contents
10

Industry Outlook

12

Global Economy

18—37
19

Executive Interview: Joann Cheng

22

Trend 2: Indian Ascent24

Executive Interview: Darshan Mehta

28

Trend 3: Trade 2.0

31

Global Value Chains in Apparel: The New China Effect

34

Trend 4: End of Ownership

38—69
39

Executive Interview: Jennifer Hyman

42

Trend 5: Getting Woke

45

Executive Interview: Cédric Charbit

48

Trend 6: Now or Never

51

Executive Interview: Jeff Gennette

54

Digital Innovation Made Simple

58

Trend 7: Radical Transparency

60

Dealing with the Trust Deficit

62

70—91

Trend 8: Self-Disrupt

71

The Explosion of Small

74
77

Executive Interview: Nick Beighton

80

Trend 10: On Demand83

Is Apparel Manufacturing Coming Home?

86

McKinsey Global Fashion Index

92—99

Glossary100

End Notes and Detailed Infographics

102

MGFI

Trend 9: Digital Landgrab

Fashion System

Fashion System

Consumer Shifts

The State of Fashion 2019

Consumer Shifts

Global Economy

Trend 1: Caution Ahead

Executive Summary

Executive Summary

Foreword

The State of Fashion 2019

Thomas Lohr

The State of Fashion 2019 marks the thirdyear of an ongoing partnership between The
Business of Fashion and McKinsey & Company,
bringing analytical rigour and evidence to better
understand the rapidly changing global fashionindustry and providing an authoritative point ofview on the state of fashion in the year to come.
Once again, our team of global experts
has conducted fresh research and analysis to bringclarity and precision to a fragmented and complex
landscape of countries, companies, categories andsegments. Our research establishes a common
understanding of the forces at work in fashion;
sets out how well the industry is performing; andidentifies where the top priorities, both businessand creative are for 2019. Once again, we combine
BoF’s insider knowledge with McKinsey’s global
expertise and analytical rigour, and then survey
more than 270 global fashion executives andinterview many of the industry’s thought leadersand pioneers.

The year ahead is one that will go downin history. Greater China will for the first time incenturies overtake the US as the world’s largest
fashion market. It will be a year of awakening
after the reckoning of 2018 — a time for looking atopportunities, not just challenges. In the US andin the luxury sector it will be a year of optimism;
for Europe and for struggling segments such as
the mid-market, optimism may be in short supply.
Far-sighted companies will make bold moves in
automation and AI, and will disrupt themselves
before others do it for them. Consumers will
make or break brands based on trust. And global
economic and political trends hover over thewhole picture.
In short, it’s going to be a bumpy ride. But
whatever your role — from boardroom executive
to start-up founder to informed consumer — readon, and we’ll cushion the impact and tell you
everything you need to know about the state of
fashion in 2019.

— Imran Amed & Achim BergThe State of Fashion 2019 also includes
the third read-out of our industry benchmark,the McKinsey Global Fashion Index (MGFI).
Its database of over 500 private and publiccompanies allows us to analyse and compare theperformance of individual companies against theirpeers by category, segment or region. Now three
years in, this is an unrivalled resource on which
we continue to build.
7

The State of Fashion 2019

Contributors

Acknowledgements

Imran Amed

Achim Berg

Anita Balchandani

Marco Beltrami

As founder, editor-in-chief and CEO of
The Business of Fashion, Imran Amedis one of the fashion industry’s leading
writers, thinkers and commentators.
Fascinated by the industry’s potent blendof creativity and business, he began BoF
as a blog in 2007, which has since growninto the pre-eminent global fashionindustry resource serving a five-million-strong community from over 190
countries and territories. Previously, he
was a consultant at McKinsey in London.

Based in Frankfurt, Achim Berg leads
McKinsey’s Global Apparel, Fashion& Luxury Practice and is active in all
relevant sectors including clothing,textiles, footwear, athletic wear,
accessories and retailers spanningfrom the value end to luxury. As a global
fashion industry and retail expert,
he supports clients on a broad range ofstrategic and top management topics,
as well as on operations and sourcingrelated issues.

Anita Balchandani is a Partner in
McKinsey’s London office, and leads
the Apparel, Fashion & Luxury Practicein the United Kingdom. Her expertise
extends across fashion, health andbeauty, department stores and specialty
retail in Europe and North America.
She focuses on supporting clients indeveloping their strategic responses
to the disruptions shaping the retailindustry today, especially in areas such as
customer-led digital transformation.

Based in London, Marco Beltrami ispart of McKinsey’s Apparel, Fashion
and Luxury Practice. He has supported
apparel and beauty companies in the UK
and Europe, on topics including strategy,
mergers & acquisitions, and retail
operations.

Dale Kim is a consultant in McKinsey’s
London office, specialising in Apparel,
Fashion and Luxury. He has served global
companies ranging from fine jewellery
to beauty, on topics such as strategy,
operating models and M&A.

Saskia Hedrich

Robb Young

Johanna Andersson co-leads the
Scandinavian Apparel, Fashion andLuxury goods hub and has supported
companies in the sector ranging fromluxury to value around the globe.
Johanna focuses on strategy, growthand digital/omnichannel related topics.

As global senior expert in McKinsey’s
Apparel, Fashion and Luxury Group,
Saskia Hedrich works with fashioncompanies around the world on strategy,
sourcing optimisation, merchandisingtransformation, and sustainability topics— all topics she is also publishing about
regularly. Additionally, she is involved
in developing strategies for national
garment industries across Africa, Asia,and Latin America.

As global markets editor of The Businessof Fashion, Robb Young oversees content
from Asia-Pacific, the Middle East, Latin
America, Africa, the CIS and Eastern
Europe. He is an expert on emerging
and frontier markets, whose career as a
fashion editor, business journalist, authorand strategic consultant has seen him leadindustry projects around the world.

The wider BoF team have also played an instrumental role increating this report — in particular, Vikram Alexei Kansara,
Victoria Berezhna, Nick Blunden, Kati Chitrakorn, Emma Clark,
Amanda Dargan, Michael Edelmann, Casey Hall, Yara Heine,
Chungaiz Mumtaz, Andres Pajon-Leite, Lauren Sherman, Kate
Vartan, Anouk Vlahovic and Yifan Wang.
The authors would like to acknowledge the following McKinsey
colleagues for their special contributions to the report creation andin-depth articles: Colin Britton, Henna Dattani, Jasmine Vogel,
Jessica Moulton, Karl-Hendrik Magnus, Laura Gallagher, Mac Muir,
Neil Robbins, Sara Hudson, Susan Lund, and Tunde Olanrewaju.

Dale Kim

Johanna Andersson

The authors would like to thank all the members of The Businessof Fashion and McKinsey community for their contribution toresearch and participation in our State of Fashion Survey and themany industry experts, who generously shared their perspectives
during interviews. In particular, we would like to thank: Jessi
Baker, Nick Beighton, Alessandro Bogliolo, Tamsin Blanchard,
Leonardo Bonanni, Karin Brinck, Cédric Charbit, Joann Cheng,
Neliana Fuenmayor, Jeffrey Gennette, Jennifer Hyman, Sanjay
Kapoor, Lisa Lang , Yusaku Maezawa, Darshan Mehta, Ananth
Narayanan, Stephanie Phair, Rachel Scott, Mike Smith, Paulvan Zyl
and the McKinsey Senior Advisors Adrienne Lazarus, Ali Horowitz,
Colin Henry and John Hooks.

We also appreciate the support, we have received by other McKinsey
colleagues across the globe: Adhiraj Chand, Adriana Clemens, Anna
Stanley, Aimee Kim, Alex Sukharevsky, Alexander Dobrakovsky,
Althea Peng, Andres Avila, Anita Liao, Ankita Das, Antonio Achille,
Antonio Gonzalo, Benjamin Durand-Servoingt, Claire Gu, Daniel
Zipser, Ewa Sikora, Fernanda Hoefel, Frannie Li, Georgina Buck,
Hans-Martin Stockmeier, Heloisa Callegaro, Jan Mischke, JeanBaptiste Coumau, Jennifer Schmidt, Jihye Lee, Kanika Kalra, Kate
VanAkin, Lan Luan, Laura Boege, Marie Strawczynski, Martine
Drageset, Mekala Krishnan, Nakul Banga, Neha Nangia Ojha, Peter
Stumpner, Purvi Gupta, Pritesh Zala, Raj Shah, Sophie Marchessou,
Silvana Mueller, Susan Nolen Foushee, Tom Skiles, Tomohiko
Funaishi, Yasuhiro Ishida, and Younghoon Kang. We also thankDavid Honigmann and David Wigan for editor support and Katie
Smith from Edited for analytical support.
In addition, the authors would like to thank Joanna Zawadzka forher creative input and direction into this State of Fashion report,
Andreas Samuelsson for our cover illustration and Getty Images for
supplying imagery to bring our findings to life.

Felix Rölkens
Felix Rölkens is part of McKinsey’s
Apparel, Fashion & Luxury Groupand works with apparel, sportswear,
and pure play fashion e-commercecompanies in Europe and North America,
on a wide range of topics including
strategy, operating model and merchandising transformations.

89Executive Summary

The State of Fashion 2019

After a year of reckoning — time for an
urgent awakening
For fashion players, 2019 will be a year of
awakening. The ones who will succeed will haveto come to terms with the fact that in the newparadigm that is taking shape around them, someof the old rules simply don’t work. Regardless of
size and segment, players now need to be nimble,
think digital-first and achieve ever-faster speed
to market. They need to take an active stanceon social issues, satisfy consumer demands forultra-transparency and sustainability, and, mostimportantly, have the courage to “self-disrupt”
their own identity and the sources of their old
success in order to realise these changes and win
new generations of customers.

For fashion players,
2019 will be a year of
awakening. The ones whowill succeed will have tocome to terms with the factthat in the new paradigm
that is taking shape aroundthem, some of the old rules
simply don’t work.
10
11

They also need to invest in enhancing
their productivity and resilience, as the outlook
is increasingly uncertain. External shocks to thesystem continue to lurk around the corner,and growth cannot be taken for granted: theMcKinsey Global Fashion Index (MGFI) forecasts
growth of 3.5 to 4.5 percent for 2019, slightly below
2018 growth, predicted at 4 to 5 percent. Optimism
can be found only in pockets, notably in North
America and in the premium and luxury segments,
aided by their strong performance in 2018.
The majority of executives in the remaining
segments and geographies are pessimistic, citing“dealing with volatility, uncertainty and shifts
in the global economy” as their primary concern
for the year ahead. Risks of trade disruptions andslowing economic growth, even in key growthmarkets in Asia, could undermine global growthprospects, as could uncertainty over other major
events such as Brexit or the possible onset of a
global economic slowdown.
All this comes against a backdrop of a
fashion industry that turned a corner in 2018,with increased growth justifying the optimism

expressed in last year’s global fashion survey.
But even with this more positive backdrop,
executives are now fully acknowledging thechanging nature of the industry, using words suchas “changing,” “digital,” and “fast” to describe it.
In a year of reckoning, for which the McKinsey
Global Fashion Index predicts growth of 4 to
5 percent for 2018 (up from 2.5 to 3.5 percent
in 2017), fashion players have begun to lookproactively at opportunities rather than justfocusing on challenges ahead.

According to McKinsey
FashionScope, Greater China is
expected to overtake the US as
the largest fashion market in
the world in 2019.
However, recovery continues to beunequal, with most of the growth coming fromluxury and emerging markets in Asia. According
to McKinsey FashionScope, Greater China
is expected to overtake the US as the largest
fashion market in the world in 2019. Mid-market
companies and mature economies continue to lag,with the exception of North America, which saw
higher than expected growth supported by
an expansive fiscal policy. Meanwhile, polarisation
persists: the top 20 companies in the industry
account for 97 percent of economic profit, while
an increasing proportion of publicly-tradedfashion companies struggle to create any economic
value. The prizes for those who can adapt may begreater than ever — but so are the penalties for
those who fail.

11

Industry Outlook

Sunny intervals — but storms ahead

Executives describe 2018 with the words “changing,”“digital,” and “fast”
New

Exhibit 1:

The State of Fashion 2019

Top 3 words to describe
the industry

After strong performance in 2018, the industry
will slow slightly in 2019. The McKinsey Global
Fashion Index predicts industry growth of 3.5 to
4.5 percent in 2019 compared with a 4 to 5 percent
estimate for 2018. The weaker forecast reflects
economic predictions for slightly slower global
growth and potential disruption to trade relationships. We see Latin America, Middle East andAfrica and Russia experiencing more economic
and political challenges, which will likely dampen
consumer spending. Europe is facing a slowdown
and US growth may have peaked in 2018. Emerging
Asia Pacific countries and much of emerging
Europe, on the other hand, will continue to see
strong spending growth with more global players
entering these markets.
The caution in the economic outlook
is also reflected in our BoF-McKinsey State ofFashion Survey, with 42 percent of respondents
expecting conditions to become worse in 2019.
Dealing with volatility, uncertainty and shifts in
the global economy are seen as the top challenges
for the third straight year. This pessimism could
be driven by fears of an accelerating trade war
as China and the US react to each other’s tariffs,
uncertainty over how Brexit will play out (still
unclear as we go to press), or just a feeling that a
10-year boom is now overdue to tip into recession.
Over the past year, the global fashionindustry has reached new heights. We see growthof 4 to 5 percent in 2018, slightly ahead of our
projections for 2018, and a considerable uplifton the 2.5 to 3.5 percent seen in 2017. Better
performance has been driven by strong demand
for luxury and value brands, sales growth in the
US amid tax cuts and growth in emerging markets.
However, as we describe in the McKinsey Global
Fashion Index, this recovery has been polarised.
Most of the economic gains have accrued to the top
20 “winners,” most notably in the luxury segment,
while a growing number of players are struggling
to create economic value.
12

Still, better industry conditions on
aggregate have brought an overall change
in attitudes. Now used to uncertainty after
living with it for so many years, in 2018 fashion
executives have begun to think less about survival
and much more actively about their strategic
agenda. When asked in the BoF-McKinsey Stateof Fashion Survey to describe the industry, theword that comes to the minds of most executives(34 percent) is “changing.” The second and third
most common words are “digital” and “fast.”
The implication is that change has become a key
priority among industry leaders, with a particularfocus on digital and speed-to-market.

Much of emerging Europe willcontinue to see strong spending
growth with more global players
entering these markets.
The attitudes of executives also reflect
evolving consumer behaviours that are forcing
industry players to “self-disrupt” (the #1 trend
identified by executives for 2019.) Footfall in
the physical environment continues to decline,
which is driving the need for brands and retailers
to develop their omnichannel strategies. Social
media has an increasingly important voice indictating consumer demand, and it is helping small
brands grow explosively. Across the industry,
speed-to-market and responsiveness to consumer
needs are becoming critical success factors.
When asked to reflect on the importanceof the trends we predicted in last year’s Stateof Fashion report, executives identified technology-related issues as their top four choices.
Consumer shifts enabled by technology wereparticularly salient, with “mobile obsessed” citedas the most important of the trends we predicted.
The second- and third-most important are“platforms first” and “start-up thinking,”

Top 3 words; % of respondents who
mentioned word, n=274

First

Second

Third

2016

2017

2018

Uncertain

Uncertain

Changing

54

53

34

Changing

Challenging

Digital

31

32

26

Challenging

Optimistic

Fast

29

21

25

Question: What are the 5 adjectives you
would use to describe how you feel about
the fashion industry in 2018 so far?

Source: BoF-McKinsey State of Fashion Survey

Executives generally viewed consumer shifts enabled bytechnology as the most important trends in 2018
Exhibit 2:
Perceived impact of2018 trends

Technology related

Consumer shifts

Mobile obsessed

Average rating of respondents (1-10)

Start-up thinking
Getting personal
Sustainability
credibility
Predictably
unpredictable
Asian trailblazers
Globalisation
reboot

Question: Looking back at 2018 sofar, how much have the following
trends impacted your business?

AI gets real

Source: BoF-McKinsey State of Fashion Survey

13Volatility, uncertainty and shifts in the global economy isstill foreseen as the industry’s #1 challenge

Industry Outlook
New

Exhibit 3:
Main challenges foryear ahead
1st

2nd

2017

2018

2019

Dealing withvolatility,
uncertainty andshifts in the
global economy

Dealing withvolatility, uncertainty
and shifts in the
global economy

Dealing with volatility,
uncertainty and shifts
in the global economy

Sales andprofitability
growthCompetition
from online andomnichannel

15% of respondents

Competition
from online andomnichannel
13% of respondents

3rdCompetition
from online andpure-play players

Value chain
improvement anddigitalisation

Speed of changing
consumer preferences

Supply chain
improvement

Decreasing foottraffic and offline
retailing pressure

Need to achieve
greater sustainability
and transparency

The State of Fashion 20194th

7% of respondents

7% of respondents

Question: What do you think will be thesingle biggest challenge for the fashionindustry next year?

Source: BoF-McKinsey State of Fashion Survey

While the premium/luxury segment expressed overall optimism,
value and mid-market players appear to be more cautious

Become worse
Remain the same
Become better

Exhibit 4:Market segment 2019F

Outlook for industry
conditions in 2019
Premium/luxury

32

12

56

% of respondents

Mid-market

58

Value

54

42

19

27

Geography 2019F

North America

EuropeAsia
Question: How do you expect conditions
for the fashion industry to develop overthe course of the next 12 months?
14

30

6

47

51

64

9

44

19

30

Source: BoF-McKinsey State of Fashion Survey

again highlighting companies proactively dealing
with digital disruption in the fashion system.
We were surprised to find artificial intelligence (AI) less highly ranked. This shift may nothave reached critical mass in 2018, but we predict
it will continue to affect the industry in 2019and beyond. Players including Amazon, Alibaba,
Myntra and Stitch Fix have made progress acrossvarious areas of the value chain and others will
follow suit. Ananth Narayanan, chief executiveof Myntra, remarked that, “for curation andassortment, we are using a lot more data science
to tell what will sell. I think that could extend a lot
more into manufacturing and the back-end system
and we are doing parts of that already at Myntra.”An increasingly important priority
is sustainability and transparency, reflecting
rising concerns on the part of consumers andcompanies about how to alleviate their impact on
the environment. Sustainability, which for the firsttime breaks into our respondents’ list of the mostimportant challenges, is evolving from a tick-box
exercise into a transformational feature that isengrained in the business model and ethos of many
recent success stories.
By geography, the most optimistic about
the coming year are executives in North America.
By segment, the most positive are executives
from luxury brands, reflecting their strong
growth trajectory in 2018. In all other regions
and segments, executives are notably pessimistic,reflecting the potential challenges ahead.
Not surprisingly, executives are looking
to invest where they see the most need to add
value. For the third year straight, the top sales
growth investment priority remains developing
omnichannel capabilities. This reinforces ourperception that executives have finally come toterms with the fact that the industry is
digitising, but are not yet satisfied with their own
response. Some 54 percent of the BoF-McKinsey
State of Fashion Survey respondents said
increasing omnichannel integration (alongside

investing in e-commerce and digital marketing)is their number one priority for 2019 for the thirdyear running.
From an operational perspective,
another persistent trend has been the desire toaddress cost structures at an organisational level,
including efforts to improve productivity. Thisremains a key priority in 2019 with 29 percentof the BoF-McKinsey State of Fashion Survey
respondents saying they wish to “review organisational structures and focus on increasing employee
productivity.” This underlines the need to adapt
operating models and create a more agile organisation that can thrive in the digital world.

In 2018, fashion executives havebegun to think less about survival
and much more actively about
their strategic agenda.
Overall, the fashion industry continues
to hover in a state of flux and the fortunes ofindividual players can turn with frightening
speed. As our 10 trends indicate, new markets,
new technologies and shifting consumer needs
present opportunities but also risks. We predictthat 2019 will be a year shaped by consumer shifts
linked to technology, social causes and trust issues,alongside the potential disruption from geopolitical and macroeconomic events. Only those brands
that accurately reflect the zeitgeist or have thecourage to “self-disrupt” will emerge as winners.

15

The State of 						 Fashion 2019The State of Fashion 2019

GLOBAL ECONOMYFASHION SYSTEM

01.

02.

03.

04.

05.

06.

07.

08.

09.

10.

CautionAhead

IndianAscentTrade 2.0

End ofOwnership

Getting
Woke

Now orNever

RadicalTransparency

Self-Disrupt

DigitalLandgrab

On Demand

Downward
movements in
key economic
indicators andother potentiallydestabilisingforces willconspire to createa more cautious
mood. With thepossibility of a
global economic
slowdown by 2020,
companies will turnmore prudent andstart to look moreaggressively into
opportunities toboost productivity
compared toprevious years.

India becomes a
focal point for the
fashion industry
as its middleclass consumer
base grows andmanufacturingsector strengthens.
Fashion players
must redouble theirefforts in this highly
fragmented andchallenging market
where an educatedand tech-savvy
demographic rub
shoulders with thepoor and upwardly
mobile.

All companies willneed to preparecontingency plans
to face a potential
shake-up of global
value chains. On
the one hand,the apparel trade
could be reshapedby new barriers,
trade tensions
and uncertainty
and, on the other
hand, by newopportunities fromgrowing SouthSouth trade andthe renegotiation of
trade agreements.

The lifespan of the
fashion productis becoming
more elastic
as pre-owned,
refurbished,repair and rental
business models
continue to evolve.
Fashion players will
increasingly tap
into this market
to gain access to
new consumers
seeking both
affordability and amove away fromthe permanent
ownership ofclothing.

Younger
generations’passion for socialand environmental
causes has reachedcritical mass,causing brands
to become more
fundamentally
purpose driven
to attract bothconsumers andtalent. Consumers
from some, but
not all markets
will reward playersthat take a strong
stance on socialand environmental
issues beyond
traditional CSR.

In the mobile
consumerjourney, the gap
between discovery
and purchasehas become apain-point for amore impatient
fashion consumer,
who seeks topurchase exactly
the products
they discover,
immediately.
Players will focus
on bridging thisgap throughshorter leadtimes, improved
availabilityof advertised
products and newtechnologies suchas visual search.

After years of having
personal data
owned and handled
by businesses, amore distrusting
consumer now
expects companies
to reciprocate withradical transparency
and sharing of
information. For
companies tomeet a new bar for
consumer trust, they
will need to offer aheightened level oftransparency along
dimensions suchas value for money,
creative integrity
and data protection.

Traditional brands
are beginning to
disrupt their own
business models,
image and offering
in response to
a new breed ofsmall emerging
brands that are
accelerating thanks
to decreasing
brand loyalty anda growing appetite
for newness.
We expect morebrands to follow
suit on this pathof self-disruption,
which will have asignificant impact
on their operating
models.

As the race to be
the platform of
choice for bothcustomers andbrands intensifies,
e-commerce
players willcontinue toinnovate by adding
profitable valueadded services.
Whether throughacquisitions,investments orinternal R&D,
those players whodiversify theirecosystem will
strengthen theirlead over those
who remain pure
players relying
solely on retailmargins.

Automation anddata analytics haveenabled a new
breed of start-ups
to achieve agile
made-to-orderproduction. Massplayers will begin
to experiment next,
responding more
rapidly to trends
and consumer
demands,
achieving just-intime production
and reducing
overstock andmaking short,small-batch
production cycles
the new norm.

70%

Percentage of survey
respondents that wereconcerned about
the overall global
macroeconomic
outlook in 2019.

16

CONSUMER SHIFTS

690m
Projected number ofsmartphone users inIndia by 2022, 2.3x
the usage in 2017.

62%
Percentage of survey
respondents that
believe changes intrade policy will pose
potential risks to global
economic growth(Q2 2018 sentiments,+8% from Q1).

44%
Percentage ofsurvey respondents
that believe thepre-owned businessmodel will be more
relevant in 2019 thanin 2018.

6.3x

The number of times
the word “feminist” isforecast to appear onretailer homepages
and newsletters in 2018
compared to 2016.

24h
In 2018, customersof Amazon in the US
expected deliveries
within 24 hours,
as opposed to a
9-day delivery time
expectation in 1995.

65%
Percentage of survey
respondents that cited“consumer needs
for trust in productauthenticity and creative
originality” in their top
5 trends for 2019;
ranked 2nd out of 12.

#1
Top ranked trend thatfashion executives
predict will shape
the fashion industry
in 2019, included
in top 5 by 80% of
respondents.

2018

2025

4x
Revenue CAGR of
fashion e-commerce
retailers over traditional
fashion retailers from2013 to 2017.

Aspiration level for ashift to nearshoring
will double between
2018 and 2025.

17

GlobalEconomy01. CAUTION AHEAD

The State of Fashion 2019

A potential turn in the economic cycle isprompting concern among industry executives
over prospects for the coming year. Following
a prolonged period of growth and rising costs,
strategic priorities for the subsequent period
are likely to focus more on being nimble andboosting productivity.

Frédéric Soltan/Corbis via Getty Images

While last year was characterised by cautious
optimism in the face of uncertainty, this year
various indicators point towards clouds on thehorizon which could somewhat dampen global
economic growth prospects. Global growth has
averaged above 2.5 percent in the years since thefinancial crisis, but there are signs of a plateau.1
Additionally, after a long period of accommodative monetary policy, the US Federal Reserve andother central banks are starting to raise interest
rates, increasing the cost of borrowing for many
companies and consumers. The European Central
Bank is also signalling tightening monetary policyin the coming months, increasing the chance that
global economic growth could start to slow.

18

Forecasts from the World Bank,IMF and OECD predict slower growth in developed
markets through 2020, and a flattening of thegrowth curve in developing markets. Looking
ahead to 2019, there are signs that Europe,
Latin America and the Middle East could be
most vulnerable to a deceleration. The US andChina could also face a slowdown, with fears of apotential bubble in the former, and trade dynamics
could impact consumer spending and fashion
sector growth in both.

In addition, advanced economies are
struggling to lift labour productivity, which has
remained basically flat over the past eight years,
dampened by after-effects from the financial crisis,
while significant advances in automation anddigitisation come with lag effects and transitioncost. China and India have bucked the global
trend and continue to see sharp productivity
increases, measured by GDP per person employed.
(Productivity growth and increases in the numberof employed people are the key drivers of
economic growth.)
These official forecasts are also reflected
in sentiment among industry leaders. In a surveyof more than 1,000 international executives andchief executives across industries published by
McKinsey in September 2018, some 41 percent
expect global economic conditions to worsen,
compared with 35 percent in June 2018 and just 15
percent in December 2017.2 This sentiment echoes
the views of the IMF, whose managing director
Christine Lagarde said during a Bretton Woods
Committee meeting in October 2018 that “It’s notjust clouds on the horizon that we see, but some of
the clouds have started opening up, and it’s a bit
more than a drizzle.”319

Global Economy

The State of Fashion 2019

None of this has gone unnoticed in
the fashion industry. Executives view economic
conditions as a potential challenge, citing it as
the third biggest trend for 2019 in the latest
BoF-McKinsey State of Fashion Survey. Forty-two
percent expect industry conditions to worsen in
2019. Excluding respondents from North America
and the luxury segment, which are the main
pockets of optimism, the majority of executives
are even more pessimistic about the year ahead.

“It’s not just clouds on thehorizon that we see, but someof the clouds have started
opening up, and it’s a bit morethan a drizzle.”
The strong performance of the global
economy over recent years has been accompanied
by rising investments by fashion industry players.
Sixty-eight percent of companies’ cost bases haverisen over the past five years, while only 22 percent
have seen a decrease. Average selling, general andadministrative expenses (SG&A) were 36 percent
of sales in 2017, compared with 34 percent in 2013,
according to analysis from McKinsey’s Global
Fashion Index. Priority investments in sales
growth named for this year were omnichannel
and e-commerce, developing CRM capabilities,
improving in-store experiences and investing inbrand building.
For costs of goods sold (COGS), on theother hand, the picture is more nuanced. Overthe last five years, COGS to revenue increased by
0.5 percentage points or more for 43 percent ofcompanies in the MGFI and by over 2 percentage
points for 25 percent of companies, often due tomarkdown pressure.
To offset the impact of slower growth
and rising costs, companies need to set a strategic
agenda to boost productivity over the coming
20

01. Caution Ahead

period. Several companies have already taken
steps, implementing cost reduction and restructuring programmes. As a result, SG&A ratios havebecome more fragmented, with leading companies
seeing a slower rate of cost increase than laggards.
Among companies to act are hosiery and bodywear
specialist Wolford, which launched a restructuring programme in late 2017,4 J.Crew, which said
in 2017 it aimed to cut costs and rebrand,5 andH&M, which said in 2017 that it was aiming to
reduce costs by 5-6 percent.6 More recently, Under
Armour announced plans to continue to focus anddrive productivity in September 2018.7
Looking at the year ahead, 17 percent ofrespondents to the BoF-McKinsey State of Fashion
Survey said they would focus more on improving
costs rather than growing sales. The main cost
improvement areas cited include reviewing organisational structure (11 percent increase compared
to 2018), diagnosing end-to-end efficiency
opportunities and reducing product assortmentcomplexity. Still, the proportion of executives
planning to focus on cost efficiency is not substantially higher than the 16 percent of respondents
that said the same in the previous year, suggesting
that, while executives are concerned about
economic development, cutting costs is not yet
a top priority on fashion executives’ agendas.

Executives view economic
conditions as a potential challenge,
42 percent expect industry
conditions to worsen in 2019.
Our “winners and losers” analysis in
the McKinsey Global Fashion Index may serveas additional inspiration to take a step towards
efficiency: on average over the past five years,
firms in the top 20 percent of economic profit
have seen significantly lower SG&A and COGS asa proportion of revenue (4 percentage points and 6

percentage points respectively), comparedwith those in the bottom 80 percent, suggestinga strong link between keeping costs low and astrong bottom line.
As the macroeconomic landscapeshifts, we expect companies will seek to protect
themselves from slower growth by implementing“shock proofing” measures. These will primarily
be aimed at boosting productivity throughgreater efficiency and cutting costs. To ensure
these interventions deliver sustainable benefits

over the longer term, fashion players shouldseek to couple productivity enhancements withnecessary innovation efforts, such as automationof production, analytics-driven decision making,review of omnichannel footprint and reorganisation for better agility. Those that are successful aremost likely to reap rewards in terms of outsized
performance.

Among executives of all industries, there’s an increasing view that theeconomy will worsen
Exhibit 5:

Expected change in global economic conditions, next 6 months% of respondents
Global economy
Dec
2017
Substantially better

Mar
2018

Jun
2018

Sep
2018

3
48

5
38

3
29

Moderately better

223

Moderately worse
14
1

Substantially worse

24
1

Respondents who answered “the same” are not shown.
In Dec 2017, n=1,648; and in Sep 2018, n=1,158.

32
3

37
4

Source: McKinsey Economic Conditions Snapshot, September 201821

Executive Interview

01. Caution Ahead

Joann Cheng

but as long as our portfolio has[such diversity,] the impact canbe mitigated.

Chairman of Fosun Fashion Group & Lanvin

The State of Fashion 2019

BoF: How do you think
Western luxury brands
like Lanvin and St. John
can enhance their appeal toChinese consumers?

The chairman of the fashion groupof Fosun International, an $80 billion
Chinese conglomerate which owns
Lanvin, St. John Knits and Wolford,
talks about global trade tensions,
China’s slowing growth and future
investment opportunities.
— by Casey Hall

BoF: If there is a deepeningof the trade conflict between
China and the US, how would
Fosun be impacted?
JC: I don’t think that the fashionindustry is the area that will
be hit by trade wars. My own
portfolio is worldwide including
the US, but the core market ofthe portfolio is in Europe.
I don‘t think we will be verymuch impacted.
BoF: And what about thepotential for further
economic slowdown within
China? Is that something thatconcerns you?
JC: China is still a large economy
with very strong internal consumption power. Anyway,
for our portfolio, balance anddiversity are very important.
When I refer to diversity, it’s not
only a category diversification
but also a geographic and demographic diversification... We’renever able to omit all the risks,

22

JC: China is quite a uniquemarket and also very crucial
for the luxury fashion business.
Sometimes people think ofGreater China as one business,[but] actually, in my view, youhave different cities and different
provinces across a very large
geography, so if you handle
China it‘s not only handling one
market region. You also handle
different cultures, different
demands in the system, different
tiers of cities.
However, one thing is true:
Chinese consumers are
becoming more international. They are more awakened;
they’ve learnt self-expression.
The young generation are digital
natives; they are global citizens.
Connecting better with ourChinese audience is one of thepriorities for brands like Lanvin,
St. John and Wolford. We haveto go digital and offer offline
channels so people in China[can] use their smartphone toshop [in a seamless way.]
Also we need to create our brandnarrative and tell the story intheir own language and how that
relates to our brand DNA. Of
course, we need to optimise theproduct portfolio to reflect theconsumers’ needs, so productis key. Customised events andproducts will make our products
more appealing to Chinese
consumers. And we have to drive

the force on fast-changing social
media to really integrate themulti-social [experience]. Finally,[we are focusing on] improving
the brand shopping experience
using O2O omnichannel.
BoF: At Lanvin, you‘verecently brought on a newchief executive. What do you
see as his priorities to revive
the brand?
JC: Yes, Jean-Philippe Hecquet
is super strong. The first priority
is to recruit the right designteam to create appealing andwell-balanced collections toreinterpret the brand DNA andthe clothes in a powerful andmodern way. Then we‘ll focus on
the collections.

and the winning spirit amongst
teams. So, the whole organisational chart needs to support our
future growth.
BoF: How will your investment scope and target
strategy change in 2019?
JC: At Fosun Fashion Group
we consider ourselves as the new
kid on the block. Our strategy inboth investment and operations
could well be dynamic in view ofthe development of the wholegroup and the whole industry.
However, whatever changes we
make, it’s a broader core vision
that’s consistent with what
Fosun Group has been doing foryears, which is to focus on the
consumer lifestyle.

“For our portfolio, balance and diversity arevery important. When I refer to diversity,
it’s not only a category diversification but also
a geographic and demographic diversification...
We’re never able to omit all the risks, but aslong as our portfolio has [such diversity,]
the impact can be mitigated.”
In terms of the retail network,
I think he will focus on growing
the key markets, including
Europe, yes, and Greater China.
Another priority will be the store
concept, so that we can keep
delivering a consistent message
in the brand expression. Digitalis [central] to that so we needto accelerate brand digitisation,
invest heavily on communicationand the e-commerce platform.
In terms of the culture and thepeople, I think it’s quite clearthat we need to bring back theconfidence, the positive tones

One of the keys for Fosun Groupis happiness, so this has also
become our consistently-applied
strategy — around the happiness[aspect of ] the consumers’
lifestyle.
This interview has been edited andcondensed.

23

02. INDIAN ASCENT

02. Indian Ascent

The State of Fashion 2019

India is increasingly a focal point for the
fashion industry, reflecting a rapidly growing
middle-class and increasingly powerfulmanufacturing sector. These, together withstrong economic fundamentals and growing
tech-savvy, make India too important forinternational brands to ignore.

Economic expansion is happening across Asia,
but we expect that 2019 will be the year in which
India will take centre stage. The country is being
propelled by strong macroeconomic tailwinds
and is predicted to grow 8 percent a year between
2018 and 2022. The Indian middle class is forecast
to expand at 19.4 percent a year over the same
period, outpacing China, Mexico and Brazil.8
As a result, India is set to move from being an
increasingly important sourcing hub to being oneof the most attractive consumer markets outside
the Western world.

24

E-commerce leaders are moving toAI-based solutions. “Personalisation and curation,
based on personal taste will become a lot more
important,” says Ananth Narayanan, chief
executive of Myntra, a fashion e-commerce player
acquired by Flipkart in 2014. “It’s not about having
the largest selection, it’s about presenting the mostappropriate selection to the customer involved.”
The supply side of the industry is equallyrobust, and the growth of textile and apparelexports is expected to accelerate. According
to a 2017 McKinsey survey, 41 percent of chief
procurement officers expect to increase theirsourcing share from India.13 India’s average

good, happy to feel good and are expanding theconsumption of today.”
Given these dynamics, it is little surprisethat more than 300 international fashion brands
are expected to open stores in India in the next two
years. But India remains a complex market, which
presents challenges as well as opportunities.
The apparel business is still largely “unorganised,”with formal retail accounting for just 35 percent ofsales in 2016. Its share is likely to reach around 45
percent by 2025,10 still a relatively low proportion.
To build momentum around conventional
stores, Indian players are innovating the retailexperience. Retailers are leveraging technology
to enhance the in-store experience with digitalmarketing displays and improved check-out.
For instance, Madura Fashion & Lifestyle launched
the “Van Heusen Style Studio,” which uses
augmented reality to display outfits on customers.
Malls have increased their share of food service
and entertainment.
The growth in the apparel sector is also
being driven by increasing tech-savviness among
consumers. Ten years ago, technology was forthe few, with just five million smartphones11 in alabour cost is significantly lower than China’s andcomparable with Vietnam’s. There is also a highavailability of raw materials (e.g., cotton, wool, silk,and jute), which enable participation in the entire
fashion value chain.
Still, players looking to enter the
Indian market should recognise several inherent
challenges. First, India is a mosaic of climates andtastes. “If you break [India] up into four parts, i.e.,
north, east, south and west, North India is the only
region which is going to have winter, where you
have mild to severe winter for eight weeks,”
says Kapoor.
“Brands that are successful in India haveunderstood that, how [Indians] consume, whatcolour they consume, what kind of designs work,
what touch points and personalisation work may
be very different from a consumer living in New
York or Hong Kong,” Kapoor adds. “Indian women
have kept a lot of their traditional sensibilities alive

Brian Sokol/Bloomberg via Getty Images

India’s apparel market will be worth $59.3
billion in 2022, making it the sixth-largest in theworld, and comparable to the UK ($65 billion) andGermany ($63.1 billion), according to data from
McKinsey’s FashionScope. The aggregate incomeof the addressable population (individuals withover $9,500 in annual income) is expected to triple
between now and 2025.9 According to Sanjay
Kapoor, founder of Genesis Luxury, an Indian
luxury retail conglomerate, higher incomes arelikely to create a whole new class of consumer:“We are moving on towards the ‘gold collar’
worker. It’s a term that defines the well paid,
highly paid professionals, who are happy to lookcountry of 1.2 billion people and only 45 million
using the Internet.12 These figures have sinceincreased to 355 million and 460 million respectively (2018) and are expected to double by 2021,
when more than 900 million Indian consumers
will be online.

25

Global Economy

and you see a beautiful mix of both Indian andWestern sensibilities across the spectrum.”

The State of Fashion 2019

International companies considering
an entry into India should heed this importantmessage. Traditional clothing is still very much thedefault choice for women, making up an estimated
70 percent of women’s apparel sales in 2017.
Appetite for Western styles is likely to increase,
but it is expected that traditional wear will stillaccount for a 65 percent market share by 2023.14“We are moving on towards the‘gold collar’ worker. It’s a termthat defines the well paid, highly
paid professionals, who are
happy to look good, happy tofeel good and are expanding theconsumption of today.”
Another challenge is the low qualityof India’s infrastructure, which continues tolag behind that of many other Asian countries.
Nearly 40 percent of the Indian road network was
unpaved as of 2016.15 Poor infrastructure can makelast-mile delivery difficult. In addition, retail stockis also often below expectations.
However, there are signs of improvement.
“We have two fantastic luxury malls coming up
in Bombay at the Bandra Kurla Complex alongwith the convention centre,” says Darshan Mehta,
founder and chief executive of Reliance Brands,
which operates over 500 stores for international
brands. “So there is a whole new fantastic retailecosystem.”16
One sign of India’s challenges, and also
an indication of latent demand, is the growing
level of inequality in the country, which follows abroader global trend of rising income inequality.17
The gap between the top one percent of earners
26

02. Indian Ascentand the middle class is at its highest level in 92
years.18 Another consideration is the possibilityof corruption. According to Transparency
International, India ranks 81stout of 180 countries
on its Corruption Perception Index (versus China
at 77).19 A significant number of licences is required
for new entrants, so executives should beware of
the potential for complicated negotiations.
Still, many brands are determined totake advantage of India’s blossoming growth.
The majority are likely to choose one of threeroutes. First, players can partner with existing
e-commerce platforms. This is most suitablefor players with little brand awareness and withrelatively low capital to invest, and offers a good
way to test demand and customer preferences.
Second, brands that have little local knowledge
and are looking for fast entry can enter with afranchise model, developing brick and mortar
retail spaces. Finally, players that have significant
local knowledge and capital resources can create
fully owned and operated stores.
Indian authorities are certainly keen to
promote investment. Relaxed FDI regulations(e.g., allowing 100 percent foreign-owned single
brand retail operations), will likely lead to more
overseas-originated activity through the value
chain. We expect more outsourcing and morebrand-owned stores without Indian partners in
the years ahead. Most activity is likely to befocused on major urban centres, reflecting
demographic trends, rising urban consumer
spending power and improving infrastructurein those areas.

Of the top emerging markets, India’s GDP is expected to grow at thehighest rate
Exhibit 6:

India powers ahead of other major emerging markets
Real GDP CAGR 2018-22 forecast, %

India

8.0
6.1

China
3.7

Turkey3.0

Mexico2.3

BrazilRussia1.5

Source: Economist Intelligence Unit

In short, the Indian market offers
great promise. Despite structural challenges that
include inequality, infrastructure and market
fragmentation, we expect strong economic growth,scale and rising tech-savviness will combine to
make it the next big global opportunity in fashion
and apparel.

27

Executive Interview

02. Indian Ascent

Darshan Mehta

out of within a kilometre distanceto each other and Bandra Kurla
Complex, are going to increase
competition.

President & Chief Executive of Reliance Brands

DM: I think mid- to the high-end
because there is natural progression upwards. It’s what I call[going from] the hundred dollars
to the thousands of dollars.

The State of Fashion 2019

“Every time you look at India through the
Chinese lens you will not see [the opportunity]
correctly. India is a whole different ball game.
In India, it is not about the traditionally rich
Indians — they shop all over the world. It is
about the 999 others who are the customers
of tomorrow.”

The chief executive of the fashion
division of Reliance Industries, India’s
largest private sector conglomerate withconsolidated turnover of $63 billion,
talks about seizing opportunities in thefastest growing major economy
in the world.
— by Robb Young

BoF: If you look at most
five-year forecasts, growth
projections for India’s
apparel market and thebroader economy are quite
impressive. But just how
upbeat do you feel aboutbusiness opportunities
in 2019?
DM: Very upbeat. Last quarter
our GDP grew 7.7 percent.
So, we continue to retain thehighest GDP growth in theworld and everything prime
minister Narendra Modi is doing— barring currency pressure —looks very good.
For a very long time, the Emporio
Mall in Delhi became a bit oftorch bearer of luxury [moving]out of five-star hotel lobbies
into the mainstream consumer
mindset. Ten years later we now
have two fantastic luxury malls
opening in Bombay so there
is a whole new fantastic retailecosystem. The Jio World Centre
and Maker Maxity, both coming

28

BoF: Indeed. One of thebiggest challenges for fashion
in India has been the lack ofretail infrastructure. Is thischanging? Could 2019 be awatershed year?
DM: Absolutely, I think in thesame way that 2008 was. In 2008,
the Emporio Mall started but
the challenge with the Emporio
was that unfortunately it was thesame year the terrorist attacks
happened in Oberoi and the Taj
Hotel in Bombay. It took awaysome of the wind from the sails
but nonetheless the Emporio
marked a bit of a turning point.
I think 2019 is going to be similar,
we are going to see a very big
change. Quest Mall in Calcutta
is doing well; Palladium Mallin Chennai, early days, but you
can see the traction is building;in Saket [an upmarket suburbof Delhi], the DLF mall is going
through a complete overhaul[and then you have the new
Mumbai malls so] we are going
to see quite a bit of activity.
BoF: Which categories orsegments do you think willreap the most benefits?

BoF: What we hear aboutmost are the middle classes
swelling resulting in a
massive boost in more
affordable fashion segments.
Is it premature for us to
expect the Indian middle
classes to make a big impression in lower end brands?
DM: There are some categories
where marketers and brands
already reaped what we call the
democratic dividend of the richmiddle class. In a lot of thesecategories, individual players
have worked very hard to create
the [right] price-value equation.
Fashion spending and trading up
in the category should becomea habit and it is, but I think the
fashion industry overall has notdone enough.
BoF: Despite the upbeat
climate, India is still not
an easy place to do business.
What sort of pain-points
worry you most?
DM: One of the biggest worries,
which could become a substantial
pain-point, is the forex situation.
The economics of the Donald

Trump government and theirapproach [to] trade wars [areanother concern].
The second is the rise of oil
prices, especially given that India
produces negligible amounts
of its own oil and is largely
dependent on oil imports. Thisis [worsened by] a rupee-dollar
exchange rate which has erodedby close to six to seven percent
since the beginning of 2018.
From a consumer [spending]point of view, it’s not always easy.
You can either pass on the impact
in volume shrink or you canhave… deeper and more frequentdiscount on the product — bothof which erode the margin.
The [other issue] is… the pricevalue equation, which is getting
substantially reset [due to thecommoditisation of our sectorby] the likes of Amazon and
Flipkart. After the US, India isseen as possibly the next [market
where this will happen], so that’s
a worry.
BoF: Let’s talk more about
that. There is so muchdynamism happening
in Indian e-commercemarket; how bullish are you
about e-commerce as anopportunity for a businesslike yours, which is skewed
more toward luxury?
DM: Very bullish. We’ve createdvery clever software where
all our stores’ inventories areparallelly given digital exposure.
Last year a significant portion of
our brick-and-mortar sales [weredriven by] online. It also doesn’t[impair] the price-value equation
because it is one inventory, one
image and one price. For a place
like India, which has pockets of29

03. TRADE 2.0

Executive Interview
wealth, I am able to have accessto that because those pockets ofwealth may still not be ready fora fully-fledged store, [but] thecustomers that exist in the town
can still shop through my store.

The State of Fashion 2019

BoF: Reliance recently upped
its stake in Genesis Luxury
Fashion, the Indian groupthat distributes brands like
Bottega Veneta, Giorgio
Armani, Michael Kors andCoach and has a joint venturewith Burberry for the Indian
market. Does Reliance haveambitions to become a luxury
conglomerate along the lines
of an Indian LVMH?
DM: We’re certainly not trying
to clone anyone else. When
the Genesis opportunity came,we knew that they had a wholebunch of private equity players
who were not so strategic in theirapproach. We saw a good opportunity when L Catterton wanted
to exit and bought out all theother private equity players.
[Genesis Luxury founder] Sanjay
Kapoor had created a good poolof talent, a good entrepreneurial
ecosystem, some high-quality
real estate, and a great brandportfolio, all of which sat well[with us]. We will never be
predatory in nature, so havingbought the first 40 percent[stake] our intention was to sit asa new partner along with Sanjay
and his other partners to create
more value.
BoF: Through Reliance’s
direct partnerships withbrands like Zegna, Diesel
and Bally, you have daily
contact with many Western
luxury executives. Generally
speaking, how good of an
30

understanding do Westernexecutives now have of the
Indian luxury consumer?
DM: The singular mistake thatthey make is that the European
mindset comes from a few
centuries of inherited riches.
In India we’re now looking at
the first wave of what I call first
generation wealth, which spends
very differently than inherited
wealth. On the one hand, it is avery rich and powerful consumer
movement because new wealthhas an innate need to announce
itself in many ways and fashionis clearly one of the ways. Yet,on the other hand, first generation wealth also has very sharp
and recent memory of how that
wealth was created and hence
they spend differently because itis the wealth creator [himself or
herself ] who is spending it.
Second, because geographically
we are juxtaposed to China, every
time you look at India throughthe Chinese lens you will notsee [the opportunity] correctly.
India is a whole different ballgame. In India, it is not about
the traditionally rich Indians —they shop all over the world. It
is about the 999 others who are
the customers of tomorrow, whowill find it too intimidating to go
into the five-star hotel lobby or agallery to shop there. So [former
Burberry chief executive] Angela
Ahrendts came and took thebold decision to set a Burberry
opposite a Zara store [because]a woman coming out of the Zara
store will feel less intimidated
to go window shopping at the
Burberry store.
This interview has been edited andcondensed.

Companies should make contingency plans
for a potential shake-up of global value chains.
The apparel trade could be reshaped by new
barriers, trade tensions and uncertainty.
However, there may also be new opportunities
from growing South-South trade and therenegotiation of trade agreements.

Fashion is inherently sensitive to the policies
and politics that shape cross-border trade.
Recent talk of trade shifts between the US andsome of its key trading partners has brought theissue to the fore. At the same time the axes ofglobal trade are shifting, amid a surge in commerce
between emerging economies in the Global South.
The dynamics may lead to a rethink of sourcing
and pricing strategies in the year ahead.
As 2018 ends, fashion companies findthemselves in a cross current of trade-related
news flow. A sharp rise in trade tensions between
the US and other large economies seems set toincrease costs for some players and increase therisk of disruption. At the same time, new trade
agreements promise better trading conditions incertain instances.
In the US, the fashion industry accounts
for 6 percent of imports but pays 51 percent oftariff receipts, so the tariffs issue is criticallyimportant.20 In addition, with new tariffs coming
into force on goods from China (including leather
clothing, woven fabrics and wool yarn), there is adirect feed-through to the consumer. Companies
such as Samsonite and Gap, which have large
manufacturing operations in China, have said theyplan to raise their consumer prices.21

Still, while the US and China areraising tariffs against each other, China is at thesame time trying to make some imports cheaper.
A Chinese government decision to cut importduties led LVMH to reduce prices by 3-5 percent
in July on some items sold in China.22 In September
2018, China announced it would reduce tariffs for
textiles and construction materials from 11.5 to 8.4
percent. Any reduction of tariffs usually must be
offered to all countries equally under World Trade
Organization rules, but China said US goods would
still be subject to retaliatory tariffs.
Despite some of the positive developments in trade, the dominant theme over 2017has been tightening of trade conditions between
specific partners. For the G20 economies, there
were $74 billion of restrictive measures in May
2018, compared with $47 billion in May 2017, arise of 58 percent. Trade-facilitating measures,
which include eliminating or reducing tariffs andsimplifying customs procedures, meanwhile, fell
from $163 billion to just $83 billion, a 49 percent
drop.23 Consumers are also noticing more gloomy
trade sentiments: Google searches for the words“trade war,” “trade tensions” or “tariffs” are at thehighest level for at least five years, after growing
by a factor of 10 this year.24 The IMF, meanwhile,31

Global Economy

predicts rising tariffs and the ensuing escalationof trade tensions could reduce global economic
growth by 0.5 percent by 2020.

The State of Fashion 2019

Perhaps unsurprisingly, executives are
becoming concerned, and increasingly cite traderelations as a major worry for the coming year.
McKinsey’s Economic Conditions Snapshot in
September was the second in a row in which trade
policy was cited as a threat to global economic
growth. 62 percent of respondents said it was
their number one concern, up from 56 percent inMarch 2018.

63 percent of clothing designers
and 55 percent of UK-based luxury
goods makers are involved inexports and around 10,000 EU
citizens are employed in the UK
fashion industry.
A related issue is Brexit. A report by the
UK Trade Policy Observatory suggests that,
due to its high level of exports, reliance on international talent and dependence of raw materials
from abroad, the UK textiles, apparel and footwear
industry will be one of the hardest hit in termsof the impact of the UK leaving the European
Union in March 2019. Some 63 percent of clothing
designers and 55 percent of UK-based luxury
goods makers are involved in exports and around
10,000 EU citizens are employed in the UK fashionindustry. This explains why some 80 percent ofrespondents from Fashion Roundtable, a lobbying
body formed to advise the UK government on
matters relating to Brexit respondents, said thatthey felt Brexit would be bad for fashion in the UK
and EU.25 The prospect of Brexit has also started
to impact fashion companies in other countries,
particularly those being paid in sterling, which has
fallen by around 12 percent against the Euro and
10 percent against the US dollar since the Brexit
referendum in 2016.26
32

03. Trade 2.0

Against this backdrop in Europe,
the US fashion sector is also facing trade-relatedrisks. According to the United States Fashion
Industry Association’s 2018 Fashion Industry
Benchmarking Study, “protectionist trade policy
agenda” in the US is the number one businesschallenge. Before 2017, it never ranked higher
than eight. The US has announced tariff hikes
on $200 billion of goods from China including
clothing. To highlight the proactive stance taken
by some fashion players, American Apparel &Footwear Association (AAFA) at the end of May
published a letter signed by 60 US labels (including
Abercrombie & Fitch, Kate Spade, Levi Strauss,
Macy’s, Nike and Under Armour), arguing against
increased taxation of Chinese textile andapparel imports.
Some fashion companies have begun
to reconsider their presence in, and exposure
to, countries where tariff barriers could further
increase the cost of doing business. Wolverine
World Wide, Puma and Steve Madden are among
companies which stated they would consider
moving production out of China.27 Manycompanies had begun this process before thetrade tensions mounted, but they cite the recent
developments as a tipping point.
McKinsey’s 2017 survey of 63 international chief procurement officers suggested
that China’s share of apparel exports is likely tocontinue falling, although trade tensions are justone of several factors driving this downward trend.
Some 62 percent of respondents said they expected
China’s share of their companies’ sourcing todecrease between now and 2025.28
Trade data shows that these plans are
now becoming reality: a marked and ongoing shiftis underway in the apparel industry’s sourcing
markets, with new emerging markets increasing
their share compared to China.29
Still, while China might have passed its
manufacturing zenith in apparel, it will likely
remain an indispensable sourcing market for sometime to come, as described in our article “Global
Value Chains in Apparel: The New China Effect”
on page 34.
While concern over trade tensions isrising, there are also positive dynamics, with newagreements being put in place and new trade routes
being developed. The EU has recently entered into
new agreements including clothing and apparelwith Canada, Mexico, Japan, Singapore, Vietnam
and several countries from Eastern Europe.
In September 2018, Canada agreed to join the
United States and Mexico in a trade deal thatwill replace the North American Free Trade
Agreement.30
In addition, South-South trade is on
the rise, amid expectations it will increase fromaround 25 percent of global trade at present toaround 30 percent in 2030.31 Already, significant
new relationships are emerging. China’s expansive
One Belt, One Road initiative, which involves large
investments in the development of trade routes in
the region, has the potential to play a large role inthis development.
Finally, the Comprehensive andProgressive Agreement for Trans-PacificPartnership (CPTPP) and Regional Comprehensive
Economic Partnership (RCEP) will enable more
free trade between Asia and South America andwithin Asia. RCEP members export around $405
billion of textiles a year (more than half of the
global total) and import around $115 billion,so the agreements will have a significant
economic impact.

and production quality, for example throughnear-shoring or even on-shoring. Still, toughcommercial decisions will be required in theface of tariffs in key consumer markets. Luxury
players, especially those that derive most of theirincome from China or the US, may be required
to choose between raising prices or managing
squeezed margins.

Exhibit 7:

Belief that changes in trade policy willpose potential risks to global economic
growth% of respondents
62
56

25

Q4 2017

Q1 2018

Q3 2018

Source: McKinsey Economic Conditions Snapshot, September 2018

Overall, we expect trade-related forces
will drive two key dynamics in 2019. Escalating
trade tensions will see international brands
rethink their sourcing strategies, perhaps tothe benefit of countries involved in newly-negotiated trade agreements. A further increase inSouth-South trade, especially between emerging
APAC countries, is likely. Fast fashion, which
depends on short lead times, will need to find
new strategies to maintain delivery speed
33

In-Depth

03. Trade 2.0

Global Value Chains in Apparel:
The New China EffectChina’s rapid rise has had an outsized impact on apparel trade.
Now, new market forces are poised to upend trade again.

The State of Fashion 2019by Susan Lund, Mac Muir and Colin Britton“Made in China.” Labels bearing these three words
are tucked discreetly inside billions of articles
of clothing hanging in Western closets, a sight
so common that it became a symbol for globalisation itself. Many of the consumers who wear
these garments every day think of China simply
as the low-cost factory to the world — but thoseassumptions are outdated.
China’s role in the global apparel trade is evolving,
and because of its sheer scale, any shift in this role
has ripple effects felt around the world. Today,
China is pursuing ambitions to move into higher-value production by upgrading and modernising
its apparel manufacturing capabilities, and wages
are rising relative to the rest of the emerging world.
At the same time, the burgeoning Chinese middle
class is flexing its new spending power. China
itself is now one of the world’s biggest markets forfashion, and it can use its vast production capabilities to serve its own soaring domestic demand.
Although no other country has China’s scale andfootprint, the apparel trade is on the rise in otheremerging economies, and recent technology
advances in apparel manufacturing have even
opened the door for some types of global production
to take place in higher-wage countries, albeit ina more automated form. Below, we take a look at
historical and more recent shifts in the global
apparel trade and where it might be headed next, allof which affects not only sourcing decisions but also
opportunities for brands and retailers to tap into
tomorrow’s markets.

34

Fabric and Apparel: The First Truly Global
Value Chains
The history of trade and the history of the textile
industry is one and the same. The merchants who
plied the ancient Silk Road were an early modelof the modern supply chain, bringing luxurious
Chinese silks to Western Europe, where tailors
turned them into lavish garments for the nobility.
Seneca the Elder, a well-known orator of the Roman
Empire, turned himself into the ancient world’s
fashion critic when he blasted the flimsiness ofgarments made of decadent foreign silk. In the
1600s and 1700s, India became the world’s centreof manufacturing and trade as the British East
India Company exported prized vibrantly coloured
cotton textiles to wholesalers in London and
Amsterdam.
Indian fabric flooded the European market to suchan extent that it set off a protectionist backlash
and was eventually banned in France and England,
where thriving textile factories eventually became
the seedbeds of the Industrial Revolution. Acrossthe Atlantic, George Washington worried about the
optics of attending his inauguration in an imported
suit made by London’s finest tailors so soon after
the bloody fight for independence; his staff had
to hustle to find an American-made outfit for the
public swearing-in ceremony.32
Textile production steadily migrated back fromhigh-wage to low-wage countries in the 20th
century until policy makers took steps to halt theflow. From the 1970s until 2004, the textiles trade
was governed by the Multi Fibre Arrangement(MFA), a system of quotas that limited bilateralimports of specific types of textiles and apparel.
While it preserved some production in high-wagecountries, the system also prevented any single
developing country from dominating the textiles
export market.
The main beneficiaries of the MFA were developing
countries (such as Bangladesh) that might nototherwise have been able to compete with moreproductive low-wage countries such as China andIndia. Facing caps on its ability to export finishedgarments to advanced economies, China instead
grew its textile industry by expanding up and down
the supply chain.

As hundreds of millions of people
have joined the middle class inthe developing world, particularly
in China, they are flexing their
newfound spending power byexpressing their own tastes
through fashion. China is no longer
simply the factory to the world.
It is the world’s fastest-growing
consumer market, accounting for
more than 18 percent of all final
goods consumed.
The Rush to Manufacture in China
Restrictions imposed by the MFA began
to be phased out in 1995, with textile quotas
gradually pared back and then removed altogether
in 2005. The share of production remaining in
advanced economies shrivelled along with it,
and the entire global textile industry began toreconfigure. The result was not a broad-based
increase in production across much of thedeveloping world, but a rush directly to China.
In fact, some developing economies (including
several in Africa) lost much of their share to China
and saw their apparel manufacturing industries all
but wiped out.33

Across the advanced world, sourcing shifted toChina to take advantage of low labour costs.
This was particularly true for labels and retailers
selling low-cost, low-margin items. These labels
looked for the right combination of the lowest costs
and the fastest turnaround times — and in mostcases, they found the most competitive suppliersin China. As a result of this shift, consumers havecome to expect low prices and accept clothing as
a more disposable product. US consumers, forexample, have seen the real price of apparel fall by
44 percent since 1995.34
The map of global production was dramatically
redrawn after 2005, with China clearly at thecentre. In 1995, the United States was the world’s
leading apparel maker, turning out 13 percent of
the world’s textile output — a share that put it justahead of China, which produced 12 percent. By
2017, China’s share had ballooned to 47 percent,while the US share had shrunk to just three
percent. Similar trends can be seen in otheradvanced economies; Italy, for example, saw its
share of global production drop from eight to three
percent over the same period, and Japan’s dropped
from 11 percent to just one percent.
The World’s Fastest-Growing Market
for Fashion
After the great shake-up of the late 1990s andearly 2000s, it comes as a surprise to see that tradeintensity in fabric and apparel (that is, the ratioof trade to overall global production) has actually
declined. By 2017, the ratio of exports to output was
one-quarter lower than it was in 2000.
Now, the apparel industry is in the midst of being
reshaped once again — this time, by the power of
new consumers. As hundreds of millions of people
have joined the middle class in the developingworld, particularly in China, they are flexing their
newfound spending power by expressing theirown tastes through fashion. China is no longer
simply the factory to the world. It is the world’s
fastest-growing consumer market, accounting for
more than 18 percent of all final goods consumed.
Consider, for example, the explosive growth of35

The State of Fashion 2019

In-Depth

03. Trade 2.0

China’s annual “Singles Day” — a one-day burstof e-commerce that hit an estimated $25 billion
in sales last year, topping 2016 sales by almost 40
percent and surpassing Black Friday and Cyber
Monday in the United States combined.35

labour-intensive production to its inland provinces,where labour costs are much lower. Recently
however, even inland wages are rising faster than
the rest of the developed world, and Chinese manufacturing is becoming less competitive.

More of what gets made in China is now sold in
China instead of being exported. In 2005, China
exported 71 percent of the finished apparel goods
it produced; by 2017, that share was down tojust 47 percent. This reflects increasing levels of
consumption in China relative to the world andalso echoes the results of a recent McKinsey &Company survey, which suggested that three-quarters of Chinese consumers reported preferring or
somewhat preferring local brands of apparel andfootwear over foreign brands.36

As China’s exports have plateaued, other developing
nations with lower wages are stepping in. Apparelexports from Bangladesh, Vietnam and Ethiopia
have been growing by double digits annually since2010. Turkey is also a major producer of clothingthat is exported to Europe. In a 2017 McKinsey
survey, 62 percent of chief purchasing officers at
US and EU apparel companies said they wereplanning to diversify their sourcing away from
China in the near- to medium-term. Bangladesh,
Ethiopia, Myanmar and Vietnam emerged as
the top countries where respondents expect toincrease sourcing.37

This pattern is also beginning to play out inother emerging economies where incomes andprosperity are similarly rising, albeit on a smallerscale. In absolute terms, world trade in finishedand intermediate textiles steadily increased fromroughly $365 billion in 1995 to $860 billion in 2014.
Since then, it has dipped back to $740 billion — notbecause the market for fashion is shrinking, but
because the traditional producers of textiles andapparel are able to consume a greater share of their
output than ever before.

As China reaches a new stage of industrial
maturity, it is continuing to develop its own
domestic supply chains to meet rising domestic
consumer demand. It is able to do this successfully
because it has capabilities and capacity in every
stage of textile production, from the cultivationof raw materials through fabric weaving, dyeing,finishing and sewing final garments.

While a shift away from China is possible, it has notmaterialised on a significant scale as of yet. Capitalintensive cultivation of raw materials and weaving
in particular is most likely to remain in place,since moving these industries would be costly anddisruptive. Those parts of the value chain withthe lowest switching costs and the highest labour
intensity (typically the CMT stages) could move
more easily. But while other developing countries
do offer lower wages than China, the gap today is
not nearly as large as the wage differentials thatexisted between China and advanced economies
two decades ago when apparel manufacturing
began to relocate en masse. Via the Belt and Road
Initiative, China is using FDI, trade flows and infrastructure investment to build deeper connections
with other producers and export markets across thedeveloping world. In Ethiopia, for instance, China
has invested more than $10 billion in transportation and logistics infrastructure.38

Over the past decade, wages have climbed rapidly
in China’s more prosperous coastal regions, anda new generation has become less inclined thantheir parents to aspire to work in clothing factories.
In response, China encouraged the developmentof inland textile suppliers, in effect using labour
arbitrage within its own borders by shifting more

In addition to laying out a planned shift to Western
and Central China, the nation’s thirteenth five-yearplan (covering the period from 2016 to 2020) calls
for an upgrade of the textile industry. Its goals
include making production more technologically sophisticated and more environmentally
sustainable, offering higher-quality Chinese brands

Rising Wages and a Move up the Value Chain

36

to the world and improving quality.39 This may
involve shifting some production capacity awayfrom apparel and into more complex, synthetic
products such as automotive fabrics, disposables,
cutting-edge protective wear and medical textiles.
In short, China does not see its future in thelowest-margin parts of the value chain, acting as
the factory to the world. It is moving up the ladderto more valuable production and broadening
its focus beyond exporting finished goods toadvanced economies.
New Technologies and the Need for Speed
In addition to the China effect, other factors
are reshaping the apparel industry’s global
footprint, including the need to respond withagility to changing customer demand and the riseof new technologies.
Speed in production is critical to every fashionlabel and retailer — not just the purveyors of fast
fashion. The metabolism of fast fashion has gotten
even faster in the age of social media and big data.
Taking this model to the extreme, some influencers(such as China’s Becky Li, who shapes consumer
demand among her millions of followers on WeChat
and Weibo) are teaming with manufacturers tostart their own fast-fashion lines. Even traditionallabels are trying to cut down lead times before
introducing new seasonal offerings, so they can
get a better read on sales figures from the current
season and tweak their line-ups accordingly,
reducing unsold goods or designs that flop.
Taking full advantage of these insights requires
rapid turnaround times in manufacturing anddistribution, and it favours keeping the supply
chain together and locating apparel manufacturingcloser to the consumer to avoid shipping delays.
In the survey of US and EU purchasing managers,
54 percent said that proximity to customers is
becoming more important, and another 22 percent
said it may be more important in the coming years.40

personalisation at the same time. Most garment andshoe manufacturing is not highly automated, butthese technologies are maturing and overcomingsome of their early limitations. Automation
technologies should ensure that China remains a
powerhouse of global apparel production even as its
wages rise. In fact, some Chinese apparel makers
are moving to automate quickly — not necessarily
to save on labour but in pursuit of speed. The robust
growth of China’s consumer market should not only
help to anchor its apparel industry but should also
provide the incentives needed to invest in
high-tech manufacturing.
A limited slice of production could even return toadvanced economies, although in a very different
form than the labour-intensive textile factories
that closed in the 1990s and early 2000s. Adidas’
widely known “Speedfactories” offer a glimpse
into what the future could hold. Nike has pursued
a similar strategy with the introduction of its
Flyknit athletic shoes. Because they have two sewn
pieces rather than the 37 pieces in its traditionalrunning shoes, Flyknits can be made with a fully
automated process, from the weaving of the fabricto the assembly of the shoe. As a result, Flyknits
are mostly produced in Mexico, which has higher
labour costs than Vietnam and Indonesia (where
Nike’s traditional running shoes are made), but iscloser in proximity to the United States.41 Amazon
recently patented a system for robo-cutting fabrics
into customised orders, an innovation it could
potentially offer as a service to the multitude ofapparel companies that operate on its platform.42
These new models could be harbingers of acontinuing reduction in the apparel trade and a
growing emphasis on localisation. The value chain
appears headed toward a high-tech, fast-moving
future — and its global footprint could be evenmore fluid.
The authors work at the McKinsey Global Institute, whose
mission is to help leaders in the commercial, public and social
sectors develop a deeper understanding of the evolution of the
global economy.

New technologies such as robotics and 3D
printing may enable companies to deal withthese time pressures and offer customers greater37Consumer
Shifts

04. END OF OWNERSHIP

Caution Ahead

The lifespan of fashion products is being
stretched as pre-owned, refurbished, repaired
and rental business models continue to evolve.
Across many categories consumers havedemonstrated an appetite to shift away fromtraditional ownership to newer ways in whichto access product.

The State of Fashion 2019

In fashion, the shift to new ownership models isdriven by growing consumer desire for variety,sustainability and affordability and sourcessuggest that the resale market, for instance,
could be bigger than fast fashion within ten years.43
In recognition of this consumer shift, start-ups
will not be the only players making their mark inthese segments — established fashion brands will
accelerate the pace with which they embrace newownership models to further their relevanceto consumers.

Oscar Wong/Getty Images

In more and more categories, consumers
are choosing to rent rather than own goods
outright. Think of Spotify supplanting CD sales
and downloads, Netflix replacing video storesand ZipCar standing in for car ownership among
many young urbanites. This is a fundamental
evolution in consumer behaviour and we expect itwill have an impact in the fashion business in theyears ahead.

38

This trend is partly driven by theyoung generation’s hunger for newness, whileembracing sustainability. Research shows thatthe average person today buys 60 percent more
items of clothing than they did 15 years ago.44
But consumers keep that clothing for only half as
long as they used to. For example, a survey donein Britain found that one in three young womenconsider clothes “old” after wearing them onceor twice.45 One in seven consider it a fashion
faux-pas to be photographed in an outfit twice.
Simply put, young people today crave newness,and these cohorts are much more likely toembrace churn in their wardrobes. At the sametime younger generations are more interested
in sustainable clothing than older consumers.
Rental, resale and refurbishment models lengthen
the product lifecycle while offering the newness
consumers desire.
Meanwhile, luxury brands are raising
prices, significantly. Prices of fine watches andjewellery have nearly doubled since 2005.46
Tracking global prices of Louis Vuitton’s Speedy
30 handbag suggests an increase of approximately 19 percent per year since 2016.47 So, evenconsumers with six-figure incomes are looking
to discounts and alternative models of acquisition
for relief.

One in seven consider it a fashion
faux-pas to be photographed inan outfit twice. Simply put, young
people today crave newness.
39

Consumer Shifts

The State of Fashion 2019

These demands are catalysing the
successes of rental and pre-owned models. We
expect that the ability of these players to satisfy aheightened desire for newness and an increased
unattainability will bring them into the spotlightin 2019.
Luxury consumers can circumvent theprice increases of the Speedy 30 bag, for example,
through The RealReal, which was founded in2011 and, as of May 2018, enjoys a $450 million
valuation.48 It sells luxury brands, in gently used
form, via a consignment model. The RealReal’s
hook: top fashion brands, up to 90 percent off. It
recently raised $115 million in a Series G funding
round and plans to expand its brick and mortar
presence in the US.49“The consumer who is moreinterested in access versus
ownership is happening across
many industries. We looked at
this evolution and asked,‘how do we participate?’”China’s YCloset takes a different
approach, using a subscription rental model togrant customers access to an array of clothing
and accessories free of additional charges. If thecustomer likes a particular piece, they have theoption to buy it outright.
While established brands have traditionally turned a blind or scorning eye towards
second-hand retail, they are now wading into
the pre-owned and rental markets. For example,
Stella McCartney launched a partnership with
The RealReal in 2017, offering a $100 credit
to consumers consigning her products on
the platform. This can create a circular flowthat encourages footfall in Stella McCartney
stores, while building confidence in the quality
and longevity of Stella McCartney products.
40

04. End of Ownership

Additionally, because of the circular nature of thispartnership, it bolsters the corporate and social
responsibility of the fashion brand.
Other luxury players, such as Richemont,
have purchased resale or rental businesses
outright, to take control of how their products andbrands are marketed on the secondary market.
Some players have ventured into refurbishment, taking advantage of its sustainability
benefits. Eileen Fisher, through its programme“Renew,” takes back gently-worn products, andeither refurbishes them or uses the materials
to create new products all together. Patagonia
pioneered an in-house repair and resale modelby buying back their own products and sellingthose used items at a discount price. On its website,
Patagonia asserts, “The single best thing we can dofor the planet is keep our gear in use longer and cut
down on consumption.”50
Express is betting on the rental market,
launching “Express Style Trial,” which allows
consumers to rent up to three items at any given
time for a monthly fee. In an interview with CNBC,
Express’ chief customer experience officer,
Jim Hilt, states, “The consumer who is moreinterested in access versus ownership is happening
across many industries. We looked at this evolution
and asked, ‘how do we participate?’”51 In New York,French label Ba&sh is offering free rentals overa weekend period as part of its North America
expansion strategy.52
Turning to the year ahead, we expect
2019 will be known for three developments inparticular. First, the number of brands getting
into the rental, resale and refurbishment businesswill increase markedly; established players will
progressively regard alternative ownershipas a force they need to embrace or at least test
through new collaboration models with retailers
or start-ups in the sector. This will require carefulbusiness model considerations and a clear choice

between partnerships, in-house development
or M&A. Second, we predict a notable increasein the number of “rental native” brands born
exclusively for rental or subscription models.
We would also not be surprised to see a unicorn inthis space soon. Finally, more consumers will see
a growing proportion of their wardrobes made up
of pre-owned or rented products, especially forhigh-value items and accessories. While traditional
players need not yet be alarmed, it will be essential
to fully understand the emerging signals of what
consumers prefer to own versus rent.

Exhibit 8:

Expectations on consumer appetite for
new ownership models% of respondents

More relevant in 201944

22

Pre-owned

Less relevant in 201941

28

RentalSource: BoF-McKinsey State of Fashion Survey

41

Executive Interview

04. End of Ownership

Jennifer Hyman

merchandise value that passes
through — we’re talking tens ofbillions of dollars’ worth of goods,
that’s number one.

The State of Fashion 2019

Co-Founder and Chief Executiveof Rent the Runway

The chief executive of Rent the Runway
reveals the reason why industry leaders
keep underestimating the fashion rental
market, how she got free real estate andwhy this market works for consumers
who refuse to be ‘ripped off.’— by Lauren Sherman

42$5 million a year using the same
product, with the same inventory.
Now, the value that she might bederiving from it is different. One“I think that there are going to be a few verylarge, very dominant players in this market.
It could be a winner-takes-all market or it
could be just two or three businesses emerge
as the global winners [but] it’s not an easybusiness to copy.”

BoF: How would you
characterise the state of the
fashion rental market today?
JH: The fashion rental market
globally today is a lot bigger thanit’s given credit for [because] if
you look at the GMV [gross merchandise value] of the amountof product that is exchanged
through platforms like Rent
the Runway, and platforms like
The RealReal and thredUP, the[latter two are] longer-termlease models versus a shorter-term rental model that is Rent
the Runway. I put businesses
like The RealReal or thredUP
into the larger market of rental
businesses because if you buy
a handbag right now with theintention of selling it on The
RealReal and get a portion ofyour spend back, what you’ve
effectively done is rented that
handbag for six months. Rental
is about the customer intention
behind the usage of the item.
When we think about the

Number two is that there’s
a larger movement fromconsumers all over the world
buying clothing for multipleuse, to clothing for single-use
items. Thirty years ago, 70 plus
percent of all fashion purchasesin the United States were done at
department stores. Now only 28
percent of all fashion purchases
are done at department stores.
The primary locations of consumption, not only in the US
but all over the world, are via
channels like Amazon, Walmart,
H&M, Target, Zara where you
go in and you’re buying cheap
clothes where the intention is
to only wear those clothes onceor twice.
BoF: Who is your customer
today and how has thatchanged over the years?
JH: Our customer base today
represents 76 percent of all zip
codes in the United States. Given
the segregation that exists in the
United States, it means we’recatering to almost everyone.
We have subscribers who havehousehold incomes of $60,000
a year, we also have subscribers
with household incomes of overwoman is subscribing because
she never in a million years
would have been able to afford
what is being offered via thesubscription; [another] woman
might be using it because it
just saves her time or it’s more
efficient for her, or she needs a
new outfit for every day at work.
BoF: How has yourrelationship with designers
changed?
JH: The way we work with theindustry has changed dramatically over the past ten years.
We used to have to beg people
to work with us, and now they
are coming to us and are reallyexcited about diversifying all
the ways that they work withus. Designers were under the
impression that they werecompeting against otherdesigners. If I was Diane vonFurstenberg, I might thinkthat I’m competing against
Tory Burch or Alice + Olivia.
Now designers understandthat they’re competing against
Amazon and they’re competing
against Zara.
With our top 100 brands, we’re
their number one or number two

customer. Not only do we workwith them on wholesale; we’re
working with them on innovation. We’re working on custom
collections, on extended sizing,on using data to help inform
what they produce in the firstplace. We help them use rental
as a monetisation channel fordifferent components of theirinventory, so [in reality], there’s
five or six ways that we work withdesigners to build their businesses. What designers have reallyseen is that the customer basethat Rent the Runway is bringing
to them is new and different thantheir other partners; that we arebringing a new customer who’s
trying the brand for the very firsttime. We’re part of that processof helping that customer fall inlove with the brand.
BoF: How did you know thatphysical retail had to be partof the experience? How haveyou developed it?
JH: The Neiman Marcus partnership was fundamentally, for us,
about free real estate. We would
rather have our own physicalspace that has more square
footage where we can control thehours and the experience. When
we started our retail strategy
many years ago, we didn’t have asubscription business so we hadconcepted the store in a different
way; it would be a place to build
awareness of Rent the Runway,
give people the ability to try
things on before they rented it sothat they weren’t fearful about fit.
Now that we’ve seen the incredible growth of the subscription
business, we’ve seen how aphysical footprint can provide
even more convenience andmagic to the customer base43

05. GETTING WOKE

Executive Interview

BoF: How much do you think
your consumers care about
value and to what extent doesit play into their mindset?
JH: We need to switch the wordfrom being value to being smart.
The average consumer cares
about making smart choices,[about] not being ripped off. She
is thinking about how often
she’s going to use something for.
I don’t think that fast-fashionis a larger piece of the fashion
market. It’s just that they’ve
understood earlier that no one
is going to spend a few hundred
dollars or a few thousand dollars
on an item that they’re only
going to wear once or twice.
There is a lot more intelligence;
we know what things cost, we
can be in a store, we can look up
price comparisons right away.
We’re shopping on Instagram.
Within this there’s an appreciation of quality. I think that theconsumer does appreciate thatdesigner clothing and luxury isof much higher quality than what
they are buying from Amazon orwhat they’re buying from H&M.
44

“Now designers understand thatthey’re competing against Amazon andthey’re competing against Zara.”
Therefore they figure out: ‘where
and when do I want to invest in
quality and when am I comfortable with the low-quality substitutions?’
BoF: There are so many
second-hand businesses
coming up. Do you think thenumber of these different
services will continue toincrease going forward?
JH: Anyone could put up a
website and say, ‘We’re renting
Prada.’ There’s no way toshort-circuit this because inorder to rent Prada, you haveto become an expert in reverse
logistics, build all of those direct
relationships with the designers
to actually procure and buy that
product. Some folks have tried to
do this via second-hand channels;
they just procure the inventory
from second-hand or third-handmarkets. I think that there aregoing to be a few very large, very
dominant players in this market.
It could be a winner-takes-all
market or it could be just two or
three businesses [that] emerge as
the global winners [but] it’s notan easy business to copy given
how difficult it is to do well andall of the technology and logisticalbarriers to setting this up and theamount of capital that you need.

BoF: What do you want toaccomplish in the next five
years?
JH: We believe that this businesscan be a $100 billion company.
We believe that that is applicableall over the world, it’s applicablein all different kinds of categories. As we grow, our designer
brands grow along with us.
The closer I’ve got to designers,
the more I really want to put bad
fashion out of business. I thinkthat it’s egregious how they’vebeen copying the intellectual
property of all of these designers
for many decades and undercutting them. From a sustainability
standpoint, there is absolutely
no reason to fill up our landfills
every single year with all of thisjunk. One-fifth of LVMH Groupis not thrown into a landfill every
year; it’s one-fifth of H&M.
This interview has been edited andcondensed.

Younger consumers are seriously concerned withsocial and environmental causes, which many
regard as being the defining issues of our time.
They increasingly back their beliefs with their
shopping habits, favouring brands that are alignedwith their values and avoiding those that don’t.

Brands are responding by integrating social andenvironmental themes into their products andservices. The benefits of these policies are clear,but as the causes that some brands champion
venture into controversial territory there are risks
and consequences for those that fail to get it right.
Nine in ten Generation Z consumers
believe companies have a responsibility to addressenvironmental and social issues.53 The inclusionof the latter is a departure from the views of theprevious generation of millennials, which had agreener focus. The change is reflected in the higher
profile of social issues, and campaigns such as#metoo, #blacklivesmatter and #timesup, all ofwhich have entered the mainstream lexicon overthe past couple of years.
The views of Gen Z and millennial
consumers are critical. Together, these cohorts
represent around $350 billion of spending powerin the US alone (~$150 billion spent by Gen Z54 and~$200 billion by millennials)55 and Gen Z alone
will account for 40 percent of global consumers by
2020. But concern over environmental and social
issues is not restricted to younger consumers.
Some two-thirds of consumers worldwide say theywould switch, avoid or boycott brands based on
their stance on controversial issues.56 Half of theseregard themselves as activists, driven by passion.

The other half are less dogmatic, tailoring theirdecision to the situation at hand.
Still, the dynamics behind the numbers
are compelling. Over the past three years athird of consumers worldwide have expanded
the scope of their purchasing decisions toincorporate principled values and views. A new
global ethos is emerging, and billions of people
are using consumption as a means to express their
deeply-held beliefs.
Signs of this evolving agenda can befound beyond consumer sentiment too. Fashioncompanies are showing signs of getting “woke”57(a phrase defined as “alert to injustice in society,”
popularised on social media). For example, basedon a “data scrape” of over 2,000 fashion retailers,
the appearance of the word “feminist”
on homepages and newsletters increased by afactor of more than five from 2016 to 2018.58
Many brands and retailers including Nikeand Levi Strauss are on board, and both companies
have taken a clear stance on social issues in recent
months — Nike supporting Colin Kaepernick,the face of the NFL’s “anthem protests,” andLevi’s fronting a campaign against gun violence.
Gucci has also supported that cause, supportinga student-led march calling for more gun control.
45

Consumer Shifts

The State of Fashion 2019that was in that market. We’regoing to be accelerating our
retail footprint throughout the
US. We’re launching a series ofRent the Runway drop boxes in
WeWorks in six different cities
across the United States so that
our subscribers can walk into
the lobby of a WeWork, drop off
inventory clothing that they’ve
already worn and immediately
new slots will be opened up forthem of new items that they canpick from their subscription.
It’ll make the process ofreceiving something new fromus even quicker.

Consumer Shifts

The State of Fashion 2019

And American designer Jeremy Scott appeared at
his New York Fashion Week show with a T-shirt
urging, “Tell your senator no on Kavanaugh,” inreference to the then-embattled US Supreme Court
justice, undergoing confirmation hearings.59

Not all causes that fashion
brands advocate are universally
popular, and these can comewith significant risks. Besides
potential controversy fromsupporting divisive causes, brands
may also risk being perceived as
hypocritical if they do not carefully
ensure consistency in theirmessages and actions.
In Asia, Fast Retailing, the parent
company of Japanese retailer, Uniqlo, has madeefforts to hire refugees and, since 2016, hasdonated over $5 million to the support of refugee
initiatives in Asia.60 British retailer, ASOS, hastaken a different approach to support refugees,
launching an exclusive lingerie line in partnershipwith designer Katharine Hamnett and Help
Refugees, an NGO that will receive all profits fromthe initiative.
Some fashion players have attachedcollections and ranges to specific causes (H&M
launched a Pride collection in 2018 in support of
the LGBTQ+ community. Balenciaga collaborated
with World Food Programme, donning its slogan,“Saving Lives, Changing Lives”) and others havegeared campaigns to reflect beliefs (In a 2018
campaign to promote diversity, Moschino switched
to using only models of colour).
Some companies are taking things a
step further, putting purpose at the heart oftheir strategy and operations. There are growing
46

05. Getting Woke

numbers of B-Corporations, which are certified
to have considered the impact of their decisions
on people, society and the planet. Companies
including Danone, Ben & Jerry’s and Patagonia
are B-certified. In the fashion, apparel and beauty
sector the number of B-corps had risen to nearly
200 as of April 2018, compared with just sevenin 2010. Athleta promises that 40 percent of its
products are made of recycled and sustainable
materials, while Eileen Fisher and Allbirds havemade similar commitments. The latter donates
returned used shoes to charity. We would not be
surprised if at least one $500 million-plus fashioncompany became a B-corp in 2019.
Notably, environmentally- and socially-focused companies are considered by younger
cohorts to be better prospects as employers,
and the vast majority say they would be moreloyal to companies that are aligned with thosevalues. Commitment to tracking organisational key performance indicators is critical, as
LVMH has done, setting out to have equal gender
representation among executive ranks by 2020.61
A commitment to values on a group level can have
impact on its brands’ culture. As mentioned by
Balenciaga chief executive, Cédric Charbit, “I think
the fact the brand belongs to Kering, and having
Kering expressing commitment towards sustainability and values as a group, makes a difference.
You work in an environment where this matters,
this exists and we all are committed to this.”
Not all causes that fashion brands
advocate are universally popular, and these cancome with significant risks. The NFL “anthem
protest” was a divisive issue in the US, creating
a mixture of applause and backlash for Nike.
Still, it created earned media exposure worth
more than $163 million, within just days of thecampaign launch.62 Besides potential controversy
from supporting divisive causes, brands may alsorisk being perceived as hypocritical if they do notcarefully ensure consistency in their messages andactions. In 2018, Primark was severely criticisedand called “unethical” for releasing a line of Pridethemed T-shirts which were produced in Turkey, acountry which is ranked third-worst in Europe for
LGBTQ+ equality.63 Nike recently faced pressure
from civil society groups to ensure fair wages arepaid to workers of suppliers in emerging markets.64

some customers, the calculation, of course, is thatthe loyalty rewarded by its remaining customers
matters more.

Another reason that brand alignment
with causes can backfire is that discerning
consumers can easily spot the difference between
gimmicks and a genuine purpose that aligns withthe values of the organisation. Companies can
expect consumers to closely examine the level ofcontinuity across campaigns and the nature of
their strategic and operational decisions, as wellas their tone.

Total fashion, apparel and beauty
B-Corps

It is worth noting that right now, themovement is much more pronounced in Westernmarkets and that in certain territories it is not at
all appropriate for brands to align with certain
issues. While consumers in Western markets
currently do tend to dominate the movement
towards environmental and social conscience,that is likely to change. In the coming year we
expect rising numbers of consumers in othermarkets to increase their levels of commitment.
Darshan Mehta, founder and chief executive ofReliance Brands, a subsidiary of the Indian retailconglomerate Reliance Industries, believes “thenumber of voices is not enough to aggregate toanything significant [yet], but it’s a small wave anda tsunami may wash onto our shores [in India] inthe years to come.”

Exhibit 9:

Absolute number of corporations

197
186

200

150

100

138

Examples:Eileen Fisher
Athleta
Allbirds
Mud Jeans
Soma

87

50

0
2015

2016

2017

Apr 2018

Source: B Lab

Despite the many associated risks, somelarge brands will be willing to court controversy to
express beliefs, particularly luxury players, which
will seek to attract younger consumer groups
looking to trade up. There are clear benefits fromdoing so, and the more that companies express anauthentic view, the more that those who don’t will
be exposed. And while there is a counterargumentthat expression of controversial views may deter
47

Executive Interview

Cédric Charbit

The State of Fashion 2019

Chief Executive of Balenciaga

The chief executive of Balenciaga
discusses the culture of selfdisruption, Kering’s influence onsocial commitments and the need forbrands to focus on members of theircommunity even when they are notpaying customers.
— by Imran Amed

05. Getting Woke
BoF: What are the biggest
priorities and opportunities
for the fashion industry
in 2019?
CC: There are two things
that I think are going to begame-changers. In the future,
we will all make commitment
part of the aesthetic. It’s what
you call activism or being meaningful in what you do in terms offashion. A product can no longer
be only and purely craftsmanshipplus creativity and heritage:
we need to add values andemotion to it. Products need tobe meaningful.
The second thing that I feel isgoing to be very important is how
we engage with our audience. It’sof course about the customers
and also the non-customers; thepeople who just want to engage
with you on the digital side, forexample, on social media andthe other stakeholders of theindustry. The brand is not only
here to sell product to the client.
It’s also about communicating
and conveying messages andvalues to the entire communityof the brand. I think we have to
be community-centric, audience-centric. As a brand we rely
on many, many other stakeholders. We should really focus on ouraudience as opposed to justour clients.
BoF: When you’re thinking
about making a commitment,
how do you think about whichcauses to get behind?
CC: Balenciaga has gained
a lot of visibility lately. We haveenjoyed much broader exposure
than in the past. What should
we do about this exposure andhow do we raise awarenessusing the Balenciaga brand as48

a platform, not only to convey
our creativity and product, growour business and improve ourmarket share, but also to use theplatform to raise awareness? Thiswas very much our mindset in thefirst place.
It is how we work together with[Balenciaga’s artistic director]
Demna [Gvasalia]. It’s having
him at the helm of the creative,
artistic direction of the brandbut also being part of what wewant to do with the brand, itsvalues and its future. Fashion
cannot lock itself in the so-calledivory tower anymore. We need
to be conscious of the world andreflect what’s happening. Demnaembodies this new generation of designers who want toexpress this. I think this is quite
important. It started in a very
genuine way.

BoF: What was the reaction
from your community?
CC: It was not like we were
waiting for feedback; we felt
convinced that we should dothis and we were extremely
determined to do this. There
was an authenticity about it.
Second, the show exposure andvisibility about the World Food
Programme is not something thatwas hidden. It was clear and loud;it was on the runway and it says,
Balenciaga supports the World
Food Programme. It’s a good
example of having commitment
blended and integrated withthe aesthetic as opposed to havecommitment being somethingthat we do aside or something we
do in the shadows.
I hear store managers and sales
assistants telling me that some

“Fashion cannot lock itself in the so-calledivory tower anymore. We need to be consciousof the world and reflect what’s happening.
Demna embodies this new generation ofdesigners who want to express this.”
BoF: Why did you make thedecision to support the World
Food Programme?
CC: It was linked to the creative
process of Demna. It’s not [ just]selecting a cause; it’s also making
sure it makes sense and it ties
back to what he has in mind
as a creative vision. The show
was about accumulation, it
was layering of pieces. It was asense of opulence and I think hewanted to [contrast] that [with]
the World Food Programme, it’sto feed that tension between
accumulation and giving back.

customers have [told] them thatit’s the first time in their lifethey’ve made a donation. If we
can influence how people dress
but also in a way, try also to[make them] think, I think it’s
great. This initiative has brought
us a lot of comments, likes andtransactions. At the end of the day,this is how you engage with thecommunity, to engage with thebrand, not only via transactions.
BoF: Why do you thinkbrands are taking a more
vocal stance now than theymight’ve done before? What

are the dynamics at play thatmakes this an appropriate
thing for a luxury fashion
brand like Balenciaga to do?
CC: The fact the brand belongs
to [a group like] Kering, expressing commitment towards sustainability and some values as agroup I think makes a difference.
Nobody’s forced [to do anything]but there’s an environment andthere’s a context [that is supportive]. Second, [with] social media
and the fact that there’s now adirect contact to customers andthe Balenciaga community, it’stime to not only push productbut also to push the values andto explain the creative process
in a better way. I would call it
storytelling, in a way. What haschanged is the fact that there
are now leaders in the luxury
industry such as Kering thatare taking a commitment
towards values.
I also feel it’s about the direct
relationship we have withour community, where we
can express ourselves. We’reextremely exposed and visible
and we could make a difference.
It’s part of our responsibility.
I feel this has always been partof fashion, to push the norm,
to change things.
When you think of wearing alogo of a brand, is that an
expression of a status symbol? I
personally don’t think so. I think
what matters for our audience is
to make sure that when you wear
a Balenciaga logo it means you
belong to the community, youembrace the aesthetic and you
share the values. The creativity ofthe brand becomes very relevant
and important for customers.
To put your name on a T-shirt is
simply not enough. You need to49

06. NOW OR NEVER

Executive Interview
make sure that you engage withpeople in the right way so theyshare and they belong.

The State of Fashion 2019

BoF: Balenciaga, since thearrival of Demna, has beena disruptive force in theindustry. How do you keep
the core of the brand andwhat makes it this historical,
beautiful heritage brandwhile disrupting it enoughto make it exciting, freshand new?
CC: The brand is 101 years old
and Cristóbal Balenciaga himself
was a leader, not a follower.
I think we have inherited his
spirit. It makes total sense forBalenciaga to be today a brandthat is not a follower; a brand thatis a leader, pushing the norm, abrand that is doing a very uniquecasting, a brand that is pushing
the norms of fashion, of volumes,of proportions on everything
we do. A brand that is trying torethink how we do retail and ourstores, a brand that is rethinking
how we act on social media, ourtone of voice, who we hire, ourcommunity, what we do.
We are called disruptive. Demnais sometimes called disruptive.
I feel this is very Balenciaga. It’svery much us and when you talkto people internally they all feel
we are just simply acting normal
and we just do the right things.
Sometimes I’m asked, ‘How do
you do to get the millennials
shopping at Balenciaga?’ We
simply never ever talk about
how to appeal or sell to millennials. We simply never have a
discussion on how to break therules, how to make some noise,
how to be disruptive. The branditself has inherited the spiritof a leader, someone who was50

pushing the norm. The models
Cristóbal Balenciaga were using
were called monsters; people
didn’t like how they looked. He
used some very inexpensive
product like fishermen garments
and elevated them to a couturelevel. The guy was a disrupter at
the time.
Now that we see the pictures inblack and white and we see allthis beauty and the power of his
creations, 100 years after we feel
this is elegance and beauty.
At the time it was extreme. It wasdifficult, it was controversial andnot everybody was into it. The
reviews were just really tough on
him. What I’m trying to say here
is Balenciaga the brand has aspirit of being a leader. Instead of
disruption I would call it leadership and innovation. Leadership:
not because we are at theforefront, but leadership because
we do things in a very unique andvery Balenciaga way. Innovation:
because we look at the brand, thecreative side of it, how we engage
with people and how we manage
the brand in an inventive way
as well.
BoF: Your best-sellingsneakers have been a big partof Balenciaga’s success story.
Can you help us understandthe luxury sneakerphenomenon better, since you
guys were really some of thepioneers who brought this
into the mainstream?
CC: Sneakers started atBalenciaga for two reasons.
The first one is because it wasa creative vision, something
Demna wanted to do because
he was true to what he felt wasright for the brand and withhis aesthetic.

Second, the way we have worked
sneakers at Balenciaga from adesign, a product development
standpoint and from a communication standpoint was the sameas if it was an amazing couture
dress or a perfectly-cut tailoredjacket. If we look at the Triple S
for example, it’s the combinationof three different soles that are
not stuck together. They’re justassembled together. The amountof work to create that shoe forme is at couture level, meaning
the shoe is clearly pushing thenorms. Balenciaga was pushing
the norms whilst creating megavolumes, whilst proposing things
that were unique and new andforward. I think there’s a lot of
DNA in that shoe.
So, why are sneakers replacing
handbags? The products we sell
today need to be meaningful,let’s say I call them smart, likea smartphone for example. The
shoe, it’s the equivalent of asmartphone. The sneaker itself is
extremely meaningful for people.
You can work, it’s very versatile,
it goes from day to night, it goesfor the weekend, it goes for work.
It’s about the casualisation of theplace to work and how people
dress to go to work. Sneakers
have become their own category.
It’s not a trend; it’s a relevant
category for brands. I don’t wantto make a statement. Are shoes
the new bags? Maybe. There’s a
lot of space for bags, but what
I can say is that that shoes arealso a great alternative to stilettos
and sneakers have found a great
market share simply because
they blend nicely with the way
we live.
This interview has been edited andcondensed.

The time lag between discovery and purchaseis a pain-point for customers who continue
to expect better experiences. Companies are
increasingly focusing on reducing this sourceof friction and launching new technologies toenable a smooth and speedy transition frominspiration to acquisition.

The consumer psyche is changing fast. Technology
leaders such as Amazon, Uber, Netflix and
Deliveroo have raised customer expectations interms of speed and convenience. Through its Prime
offering, Amazon has created an expectation thatdelivery should be next day, or even same day.
Customers now expect to get a taxi, watch a film or
receive a meal almost instantaneously, and to makea choice based on an easy-to-assess interface or app.
This resulting need for immediacy
shows up in various customer experiences. Some
61 percent of respondents to one UK survey are
not willing to wait more than 45 minutes for atakeaway food delivery to arrive. Around one infive say they will wait just 5-10 minutes for a taxi
ordered via an app.65 This changing sentiment isrevealed by shifting patterns of internet searches.
Google search interest for businesses and the likethat are “open now” has tripled in the past two
years. Searches for “store hours” have dropped.66
This demonstrates a subtle but fundamental
change in mindset.
If tech companies have taken a lead on
streamlining the customer decision journey,
fashion companies have largely failed tofollow. Across the industry, the process is more

fragmented than it is on digital-native platforms,
with customers often struggling to shop basedon their ideas, desires or inspirations.
One reason is that the way consumers
get inspired has changed. In the old world, theywould often get ideas for purchases directly frombrands (intermediated by magazines) or fromin-store assistants. Now consumers turn to amuch wider range of inspirations, from social
media, celebrities and influencers, to spotting an
attractive look on the street. According to a 2017
millennial survey, consumers are more likely
to find inspiration from external sources(e.g., influencers, friends, TV) than directly fromthe brand or retailer (i.e., store website, in-store
staff). Some 41 percent of respondents say they rely
on influencers and bloggers, compared with just
20 percent who put their faith in store employees.67
The increasingly diverse nature of
inspiration can be a source of confusion for some,because it removes the direct connection between
the idea and the item. Instead, consumers must
now seek out the product they are looking for basedon their best guess of the right brand, description,season or retailer. This represents a significant
pain-point in the customer decision journey.
51

Consumer Shifts

The State of Fashion 2019

From a brand perspective, more fragmentationand degrees of separation create roadblocks inconverting inspired consumers into purchasers.
The key pain point comes at the stage
after the consumer has had an idea, but before
they have identified where they can purchasethe product. As a result, the instant gratification
impulse is frustrated. The consumer moves on
and the sales opportunity evaporates. Drilling
down into the causes, this pain point is at least
partly caused by an inability to identify and findthe product. Word-based searches do not lead tothe right place and often consumers wouldn’t know
the right terminology for the product they search.
The challenges are particularly onerous when
the customer does not know the name of thebrand concerned.
This problem is exacerbated by themobile experience, evidenced by the fact thatmobile is capturing share of online traffic, yetconversion rates are still lagging behind otherdigital channels. Based on a basket of appareland jewellery retailers in the US, UK, Europe andAsia, average sales conversion rates on desktop arearound 3.2 percent, while on mobile they are 0.9
percent.68 The cause is that the mobile consumer
journey is not yet streamlined or compellingenough to inspire a purchase. It is often that
products are difficult to view on a small screen,or that the check-out process is cumbersome
and contains too many steps. In any case, theexperience is not as seamless as it needs to be.
This is a serious challenge for the fashion industry,
especially given the relentless migration fromdesktop to mobile.
In seeking a solution, fashion may learnsomething from other industries. In music,
Shazam enables consumers to identify the nameof tracks or albums simply by sampling the music
wherever they hear it. The app has 150 million
users a month and has been downloaded a billion
times.69 “There’s this huge focus on… doing a much
52

06. Now or Never

better job at curation and discovery,” says Stitch
Fix chief operating officer Mike Smith. “There’s
going to be a higher burden placed on the retailer
and the brand instead of the customer doing all
the work.”

According to a 2017 millennial
survey, consumers are more likely
to find inspiration from externalsources (e.g., influencers, friends,
TV) than directly from the brandor retailer.
In fashion, some emerging technologies
are similarly aiding in product identification.
21 Buttons is a social network that is designed
to increase “shoppability” potential, by enabling
influencers to share shopping links to items theywear in posts.70 WeChat users are linked fromblog posts directly to brand mini e-commercesites, allowing them to find inspiration andpurchase in one place without ever leaving
the Chinese “mega-app.”
Looking forward, visual search is aparticularly interesting proposition for the
fashion industry. Screenshop enables users totake a screenshot or picture of “tops, skirts, shoes,etc.” and then shop similar items straight fromtheir phones.71 UK start-up SnapTech (previously
SnapFashion) is a leader in the field. Marie Claire
editors used the company’s Snap the Celeb feature
to search for high street options that were similar
to what they were seeing on the catwalk or street.72
Elsewhere, Israeli company Syte.ai has developed
a visual tool for fashion (serving some of the bighigh street fashion names as clients) and raised$8 million in early funding.73 Singapore-based
start-up Visenze AI launched “Shoppable User
Generated Content,” a visual recognition tool that
“understands and tags user-generated contents
making items within images easy to discover,search and purchase,”74 and works with leading
retailers, such as Myntra.75
Larger fashion players and retailers
are also catching the wave, either developing
tools in-house or partnering with technology
companies. Asos, for example, has developed a“Style Match” search tool and the company expects
visual search to help drive sales growth of 30-35
percent.76 Chief executive Nick Beighton remarks,“One of the things we are solving for customers is,‘What do I wear this morning? What do I wear to
do whatever I want to do today, to feel confident
about whatever I’m doing?’ Visual search is one of
the ways to take away that friction.”
Forever 21 partnered with Donde Searchto create Discover Your Style, a visual searchtool which can locate items from features such as
silhouette and colour. A pilot increased averagepurchase value by 20 percent. Finally, eBay haslaunched an app allowing users to find items
based on photos. The company says AI is driving
more than $1 billion per quarter in incremental
sales. Amazon is using artificial intelligence tohelp people shop. Its “Echo Look” functionality isable to learn about an individual’s style and makerecommendations based on what it sees.
It is interesting to note that, while many
players are racing to innovate in this space, itappears that no single player has captured masscustomer adoption — yet. We think 2019 is the year
we will see clear signals of how these tools will
integrate into the day-to-day shopping experience
for the average fashion consumer, and which ones
will succeed.

in improving mobile conversion rates, streamlining the check-out process, improving searchand optimising the user experience. Offensively,
we expect brands and retailers to increasingly
collaborate with technology companies to develop
proprietary tools such as visual search engines.
We predict that once one solution becomes a clear
winner (such as Shazam in music), there will be a
step-change increase in consumer adoption.

Exhibit 10:

As conversion rates are significantly
lower for mobile than desktop, retailers
will work to improve the customer
journey
Fashion average sales conversion rates, desktop and mobile,
%

3.2

0.9

Desktop

MobileSource: McKinsey & Company

The implications of these new technologies are considerable and will lead to bothdefensive and offensive plays. On the defensive
side, we expect next year the majority of fashion
players will integrate commerce functionality
into social media, enabling direct-to-productjourneys. They will also likely continue to invest
53

Executive Interview

06. Now or Never

Jeff Gennette

our disposal before. A store
needs to be broader than just aplace of transaction. It needs
to be a place where people
gather and if you don’t bringin experience, education andentertainment, you’re not goingto do as well. When you create
community within a store andyou bring customers together
they stay, they linger — andthey buy things but they cometogether in another way.

The State of Fashion 2019

Chairman & Chief Executive of Macy’s

The chief executive of Macy’s talks
about off-price competitors, the magicof radiated sales and how he plans toreinvent the store experience acrossAmerica by removing pain-points
and friction.
— by Imran Amed

BoF: As you look to the
fashion industry in 2019 what
are the biggest challenges andopportunities for fashion andretail today?
JG: Consumers are their own
curator now. They’re armed
with more information that is
informing a more competent
point of view about how they
put themselves together and how
they use fashion for individual
expression. That’s flipping what
the role of a retailer is today andrecognising that you’ve got thiscustomer that is, in some cases,
ahead of you. But you also dohave a lot of customers that arelooking for you to help themcurate, and then allow them,through personalisation engines,
as broad a menu as possible
online so they can curate
for themselves.
We’re also finding that ourcustomers are spending lesson apparel and expecting moreexperience. We now have new
economic models that can help
us add experiences into ourbrand that we didn’t have at

54

Then, the last thing is going froma ‘house of brands’ to a ‘branded
house’. Customers aren’t buying
monolithically by brand any
more. As a retailer, you’d better
have your own ethos about
what you stand for — that’s yourparticular competitive mode.
It better be something that acustomer gives you credibility
for and that you can credibly
do, and you can do it with theleast friction possible. This idea

“A store needs to be broader than just aplace of transaction. It needs to be a place
where people gather and if you don’t bring inexperience and education and entertainment,
you’re not going to do as well.”We’re also looking at VR, andhow it bolts onto a strategy anddrives customer advocacy.
We played with VR to say, ‘Okay,
let’s put it into our furniturebusiness.’ We had this issue
with furniture, which is one of
our signature businesses, where
we could only sell the wholeassortment in no less than about
20,000 square feet. Now with
VR we can do it in 5,000 squarefeet. It’s opened up our ability
to get furniture into a lot moreof our buildings. It’s massively
increasing the basket size of thatpurchase [and] it’s massively
reducing the return rate. Using
technology to solve a stubborn
problem and solve where acustomer is needful of more
inspiration is how we’re looking
at technology. I think this confluence of experience and technology with any retailer today would
be the second biggest thing that I
would comment on.

that what you stand for [is more
important than] the sum of all
the parts of what you used tocarry in your brand.
BoF: What has changed in
the way you think about thefunction and purpose of aretail store? If everyone canbuy everything online, what
is it that really gets someone
into a store now?
JG: This took us a long time tofigure out. We had too many
stores through many acquisitions over the years, [so] when
you look at a store of our size,
we were almost virtually all
mall-based. We had to look at
our portfolio and shed thoseunits that didn’t make sense to
the [local] community, either
because the mall developer
wasn’t investing, or the mall was
extraneous because we had amore powerful location nearby.

We spent a lot of time over thelast five years shedding a lot of
those extraneous stores. We
ended up with a remaining
portfolio that is balanced wellacross all the major markets inthe country. We look at those
flagships and aspire for thoseto be just these heart-pounding,
all-five-senses tourist attractions,like what we’re doing in Herald
Square. That’s our vision forwhat a flagship could be.
Then the next category of storesis our regional flagships andthere’s about 250 of them in theStates that will stand the test oftime. They’re the A malls that areevaluated by Green Street. All of
our mall developers are investingheavily. What they’re doing in
those malls is they’re actually
taking a lot of apparel andaccessories out of those malls
and re-mixing their tenant mix.
They’re putting in a lot more
food and beverage and they’re
putting in more entertainment.
They’re putting in mixed use[and] community centres.
Then the third bucket is tertiarymalls. The mall developers are
not investing in them; they’remilking them for cash. But
they’re neighbourhood stores for
us and so we’ve got customers
that want to pick up their basics.
They really want to use theirfulfilment options; they want tobuy something online; they wantto have it shipped to the store.
We can operate them much more
efficiently to make them better
experiences.
We have new economic models
like what you’re used to in
Selfridges, where 50 percent ofwhat is in that building is leased.
It’s about 5 percent in the States,

55

Executive Interview
so I can start playing with that
line, the economic model, tosay, “Look, I’ve got space. You’ve
got a brand and I’ve got traffic.
I’ve got a devoted customer that,frankly, [if ] I put your brandin there and I give you spacefor it and start leasing more ofthat for something that’s added
into the customer experience.”
We’re looking at services…liketravel, watch repair, post offices,
pharmacy [and] what we’re doingwith optical.

The State of Fashion 2019

BoF: In a way, that’s moreof a real-estate model, right?
It’s almost like a mall within
a mall, is that correct?
JG: Yes. For instance at
Selfridges: when you go into that
store, you don’t know what’s
leased and you don’t know what’s
owned. It’s absolutely seamlessto the customer. I think it’s got
to be; what are the needs of thecustomer and how do you makeit as easy for them as possible?
When they walk in and it’s
Macy’s, it’s got to be a Macy’s
experience. A concession model
traditionally has all been aboutthat brand or that subset and it
hasn’t been customer centric.
I think the hybrid is that whatever’s in that building has got to be[consumer focused so] that thecustomer is able to navigate any
way that they choose.
BoF: One of the things you
mentioned was that neighbourhood stores can be run
more efficiently; what did you
mean by that?
JG: Today we have a lot of businesses that are really transactional and we treat them likethere is a service component to56

06. Now or Neverthem. There’s six businesses
in the entire store that needreally [hand-to-hand] attention
at all times. Those businesses
are businesses where Macy’s
remains relevant, so we’re in thegame with market share [for big
ticket segments] like furniture,
mattresses, as well as men’s
clothing, dresses, fine jewellery,
women’s shoes and the entire
beauty floor.
When you start looking at [other]businesses like most casualsportswear, kids, handbags,
if you have the brands and you
have the right values, you can do
it without human capital. That’s
where you can be much more
efficient. If you look at what’s
going on in off-price right now
you see that it is operating withvery reduced selling cost.
But what they have is they havea thrill of the hunt. They have amuch faster turnover. They’ve
got new content that’s arriving
daily. They’ve got great pricesthat are incredibly transparent
to the customer. It’s very easy,
there’s no sales, no gimmicks.
You start to think about thosebusinesses, particularly in a lotof the apparel businesses, and if
you get that model right you cando it with less human capital cost,which would mean that you startto eliminate registers, you start
to reduce space in these storesand really curate the assortment
so that you just bring into that
local store that content which isright for that community.
BoF: How does that connect
with the online component?
JG: Hand in glove. It’s totallysupportive and symbiotic,
especially when you think about‘buy online, pick up in store’,[considering what] we carry rightnow — about ten items online
to one item in a store in terms of
the SKUs. We believe, in termsof ‘endless aisle,’ that we can takethat SKU assortment higher.
In the past, you had to have that
one item that you were ordering
online in that store in order for acustomer to pick it up and so wewere constrained by whatever
the customer was ordering
online. [So] we added a thingcalled ‘buy online, ship to store’.
The customer is loving the fulfilment options that most retailers,
who are omni-channel, are[moving towards]. You have lotsof options once it hits that store.
You could have it delivered to thecustomer’s office if they choose.
In most cases, they come andpick it up and they hang out inthe store. In about 20 percent of
those cases, that customer buys
something else when they’rein the building. Generally what
they’re buying is equal or higher
than the value of what they’re
picking up, something we callradiated sales.
BoF: If there are fewer
check-out areas and lesshuman capital, does thatmean the future of retailpotentially has robots andautomation in terms ofserving customer?
JG: I wouldn’t say it’s robots,
but what I would say is that every
customer that comes into ourstores has got their mobile device.
If we can make that as purposeful and as useful to them as weknow it can be, there’s so muchthat opens up to them that gives
them control of that transaction
and that experience.

The power of the mobile deviceis [that] everything the customer
needs is going to be in that device.
However she wants to transact,
what payment types she wants
to pick, what coupons she wants
to select, if she wants self-checkout, everything is in that portionof the mobile app. This idea
about the store opens up andyou can do whatever. It will tell
you product reviews, it will give
you online video. It just exposes
you to whatever you want toknow about that building or the
products within it or the services
that we offer within it.
Then the third idea about themobile app is what we call My
Stylist, which is your opportunity to get help on demand. When
we offered our beauty customer
the opportunity to self-select,
we saw how many of ourcustomers did not want to deal
with the sales colleague. They
want to know that you’ve got
their size, their colour. Once theyfind that, they don’t necessarily
want to deal with a colleague.

markdowns on that brand andwe’re going to save a size 8,
if that’s her size. We’re going tohave her style that’s ready to go
whenever she wants to buy it.
She’s got to agree that this issomething that she wants.
The customer is going to be incharge on this. We’re going to
be able to have data to operate
as a tool for her, but our biggest
mission is; how do we make iteasier for a customer? There’s
still way too much friction withall retailers. You’ve got Amazon
that’s done a great job with convenience and price, but no brickand-mortar interface with that.
I think Macy’s does a good job on
those subjects. We have brickand-mortar interface, which
gives us our competitive mode.
This interview has been edited andcondensed.

BoF: As you gather moredata from your customers
about their purchasing
behaviour, the way they
operate in store, the waythat links to their online
behaviour, what can you
imagine a company likeMacy’s could do withthat data?
JG: The biggest opportunity iswhat we can offer the customer
in terms of a recommendationengine that satisfies every one ofher needs. If she’s got a tendency
or proclivity to buy a particular brand, but only on sale, it
notifies her when we’re taking
57

In-Depth

06. Now or Never

Digital Innovation Made Simple
A guide to the tools that can help you enhance customer experience
quickly and flexibly.
by Tunde Olanrewaju and Neil Robbins
When it comes to the use of technology in fashion
retailing, there are two truths universally acknowledged. First, that technology is very important.
Second, that it is very difficult ­— time-consuming,
expensive and risky.

The State of Fashion 2019

The first is true. The second is not.
Already, fashion is seeing a constant streamof innovation, with technology creating newexperiences for customers. Asos, for example,
is using visual search to let customers purchaseitems that they’ve seen, even if they don’t know
the brand or the name of the item. Asos customers
can also talk not to a sales assistant, but to Google
Assistant. Zara is shipping products to customers
straight from their stores. Zozo is producing
custom-fit garments on a mass scale. Innovations of
this sort often begin as a novelty in the market but
can quickly set new customer expectations. Oncecustomers experience Amazon Prime delivery,
for example, or shop using apps on mobile devices,it becomes harder and harder to lure them backinto stores or to force them to use old-fashioned
websites and wait a week for delivery. While
experiences such as these would have seemeddaunting to create only a few years ago, with
developments both in technology and in the way
in which technology is delivered, it need not bedaunting anymore.

secure application-hosting infrastructure can be
set up in a matter of hours. In addition to the big
public cloud players themselves, companies suchas Twilio, Stripe, HooYu, ProductAI, Wooti and
Shipright (among many others) have built services
that can be integrated into new experiences using
APIs [application programme interfaces]. APIs
allow services to be used in ways that are suited
to machines, rather than people. The cost of using
APIs has reduced significantly, making it much
simpler for companies to “plug in” capabilities andswap them out for a different service when desired.
APIs are also becoming easier to use. Historically,
API design emphasised dependability and security;
however, as they have grown in popularity,
designers have begun to make pragmatic trade-offs
between technical concerns and ease-of-adoption to appeal to developers. Finally, open-source
libraries, freely shared by companies such as
Netflix, Google, Airbnb, Microsoft, Facebook andothers, have now become mainstream, leading to adramatic reduction in the time it takes to develop
custom applications.

Two related factors enable companies to deliver
experiences such as these. The first is growth insimple services, platforms, and components which
can be used to deliver sophisticated new capabilities. The second is the ongoing upgrade of legacy
IT systems, and the range of technologies that can
support modernising the core of a business.

Most companies will build new capabilities using
existing systems, many of which may not haveextensive, high quality APIs, or be built to support
the volume of traffic arising from public use (ascompared to internal use). To create new customer
experiences and modernise their IT systems,
a company in this situation will need to implement
APIs where they are missing and look to pragmatically modernise at least some of their systems to
support higher levels of use. Unlike when Amazon.
com set out on its journey to modernise its systems
back in 2001, there are now established approaches,
technologies and tools that can support this.

The growth in public cloud space has led to anincrease in the availability of both softwareas-a-service (SaaS) and platform-as-a-service.
Using public cloud platforms, highly scalable,

But, what does all of this mean for a business? If
you’re like most businesses in the fashion industry
your e-commerce sites have a traditional interface
and you are struggling to evolve your business in

58

line with technology advances. True omni-channel capabilities are likely absent, customer
experiences are mostly not personalised, and if
there are digital recommendations then these willtend to produce poor results. Behind the channels,
there is often a lack of real-time information on
the performance of the business, for example nothaving real-time awareness of local stock levels.
Producing experiences of the kind that Asos or Zara
are offering would mean a major software delivery
project, requiring significant time and resources tobring it to market.
Using the approaches outlined here, combining
best-of-breed technology with lean productdevelopment approaches, similar experiences canbe brought to market in just a few weeks. So, whatshould a business do to make this happen? Firstly, itneeds to approach this not as delivering individual
projects, but as building a real capability that candeliver and own digital experiences. This means
putting together cross-functional teams
and empowering them. Realistically, across-functional scrum team should be
able to create a market-ready solution
using technologies such as these in just a
few weeks, and then continuously improve
it multiple times a day. A typical teamwould consist of approximately ten people,
including roles such as a product owner,user experience (UX) and user interface(UI) designers, web developers, mobile
developers, systems engineers and data
scientists. The team should be co-located,
empowered to make rapid decisions, andfunded as a mini-business with their own
P&L so that they can set direction by thebusiness metrics that matter. Importantly,
an enduring capability should be built todo this within the business, rather thanoutsourcing it as a one-off project.
The technical building blocks alreadyexist; a company does not need to build theintegrated solution from scratch. These
existing capabilities can be rapidly stitched
together using SaaS capabilities. Somecustom building will still be required,
but this can focus on those distinctive
aspects that make the end service noveland focused. Tackling the legacy of existing
systems will require top-notch architectural

skills that can take a pragmatic, progressive
approach that continuously transforms thetechnology of the business.
Customers’ expectations are always rising, andsometimes companies struggle to keep up. But by
taking the time to invest in new technology andcapabilities, companies can rapidly create valuable
new customer experiences, manage them cost-effectively and continue evolving them to keep pacewith a rapidly changing world.
The authors are part of Digital McKinsey, which brings
together all of McKinsey’s technology and digital capabilities in
one cohesive organisation.

An example of how existing softwareand platform services can be integrated totransform the customer experience:

Source: Digital McKinsey

5907. RADICAL TRANSPARENCYThe State of Fashion 2019

Fashion companies must come to terms withthe fact that a more distrusting consumer
expects full transparency across the value chain.
Given the need to regain that trust, fashion
players cannot afford not to examine longstanding practices across their businesses.

The fashion industry suffers from a rising trust
deficit. Recent high-profile data breaches at anumber of online fashion companies, and in otherindustries, have left consumers wondering whether
they should share information with brands andretailers. As a result, they are demanding to knowmuch more about a range of issues, from where andhow items are made to the design provenance andthe item’s quality.
As Mike Smith, chief operating officer ofStitch Fix, asserts, “If you don’t have trust, you
don’t win the customer over time.” Yet surveys
suggest that trust in businesses fell in 40 percentof countries in 2017, with more than two in fiveconsumers saying they didn’t know which brands
to trust. It makes sense that as trust has eroded,
consumers have become more active in scrutinising the brands they do business with.
Millennials are at the vanguard, with 52
percent agreeing that they always research forbackground information before buying, comparedwith 45 percent of Gen Z consumers and 41
percent of baby boomers. Reviews and articles arecommon sources of information.77 “Social media
has enabled a certain transparency,” says Farfetch
chief strategy officer Stephanie Phair. “You can
no longer control your luxury messaging within
60

borders.” We expect the critical dimensions inwhich fashion players will be most scrutinised
include: creative integrity, sustainable supply
chains, value for money, treatment of workers,
data protection and authenticity.
From a creative standpoint, brands needto show they bring something to the table that isbased on their own intellectual property. Copycats
are increasingly called out on social media. For
example, @DietPrada, an Instagram account thatboldly names brands that have lifted styles fromother designers, has over 830,000 followers at thetime of printing. Cases of cultural appropriation— described by The Economist as instances wherea “‘dominant culture’ wearing or using thingsfrom a ‘minority culture’ is inherently disrespectful because the objects are taken out of theirnative context”78 — have gained instant notoriety
on social media. Consumers are increasingly
demanding that the products produced by fashion
brands are original, reflecting their own desire for
their fashion choices to be reflections of their senseof style, self-image and values.
Transparency has become an important
issue further upstream in the supply chain, with
consumers increasingly concerned about issues
including fair labour, sustainable resourcing and

07. Radical Transparency

the environment. Consumers want to support
brands that are doing good in the world, with 66
percent willing to pay more for sustainable goods.
Some 42 percent of millennials say they want toknow what goes into products and how they are
made before they buy, compared with 37 percentof Gen Z.79

Brands are responding by trying
to become more transparent, inmany cases specifying costs ofmaterials, labour, transport, duties
and mark-up.
In response, several brands havealready moved towards “radical transparency”
in manufacturing, hoping to regain the trustof disillusioned customers. This might include
information about product origins or the environmental impact of manufacturing. One mass market
player example is H&M-owned Arket, which lists
where each product is made, showing picturesfrom the manufacturing floor.80 Designer Martine
Jarlgaard, meanwhile, has launched a pilot to track
clothing from raw material to consumer using
blockchain.81 The retailer Reformation applies its“RefScale” methodology to measure the environmental impact of every garment it sells, anddiscloses the results to customers. RefScale tracks
pounds of carbon dioxide and gallons of water usedin production.82 Other supply chain tracking technologies include analysing dust samples and using
AI to trace the geographic history of a product.
Another increasing concern among
consumers is value for money. This reflects
increased product saturation, proliferation of
product information and reviews and the risingability to compare prices. Brands are respondingby trying to become more transparent, in manycases specifying costs of materials, labour,transport, duties and mark-up. San-Francisco

apparel company Everlane offers its customers
insight into all these costs, alongside informationon the factory that produced the products.83
Given consumer demands for greatertransparency through the value chain, we see three
key dynamics in the coming period. First, players
will rigorously audit their business practices to
identify potential areas that may erode consumer
trust. The lens for this analysis could be,“What would my customers think if this was on
the front page of a newspaper?” Brands will invest
to address any problem areas. As a result, more
players will highlight their best practices to create
a competitive edge. Some will use new technologies such as blockchain, in which each node of the
network sees the whole history of transactions, toboost transparency in the supply chain. We also
expect more rigorous reporting of social and environmental impact. Finally, brands are likely to be
more transparent in the event of a crisis. They will
respond more quickly, admit when they are at fault
more often and be willing to apologise.

Exhibit 11:

Fashion executives anticipate
consumers’ need for transparency

65%

Survey respondents thatcited “consumer needs
for trust in productauthenticity and creative
originality” in their top 5
trends for 2019; ranked
2nd out of a possible 12.

Source: BoF-McKinsey State of Fashion Survey

61

In-Depth

Dealing With the Trust Deficit
Unless fashion brands adopt best practices from outside the industry and improve
supply chain transparency from within, consumers will begin to wonder what they
have to hide.
by Kati Chitrakorn

The State of Fashion 2019

They say it takes years to earn trust but only an
instant to lose it. With trust in very short supply
among today’s consumers, some companies aregoing to extraordinary lengths to claw it back.
As one of the most traditionally opaque industries
out there, fashion faces an especially challenging
future in this regard, but instead of grappling toinvent new ways to beat the trust deficit, it could
look to other industries for inspiration andbest practice.

Radical transparency is coming
soon across the supply chain.
Unless fashion brands adopt bestpractices from outside the industry
and improve measures from within,consumers will begin to wonder
what they have to hide.
62

Chris Ratcliffe/Bloomberg via Getty Images

The kind of radical transparency that some fashion
players will embrace tomorrow is being playedout in the supermarkets today. Arguably, nowhereis traceability more important than in the foodindustry and since Europe’s horsemeat scandalof 2013 — which exposed a sector where someproducts advertised as 100 percent beef contained
undeclared meat from other animals including pig
and horse — more and more consumers are asking
whether we really know what we’re putting on
our plates.
The more complex that global supply chainsbecome, the more vulnerable they are to fraud
and error. Sensing that customers were still very
distrustful of the supermarket giants, Marks &Spencer (M&S) recently introduced complete
traceability of all its beef products. One motivation
for M&S would have been to implement a system
to prevent it from meeting the fate of one of its
rivals, Tesco, which in the dark days after thehorsemeat scandal saw hundreds of millions ofdollars wiped off its value.
Initially M&S’ upgrade was met with scepticism
but, as it turns out, the firm’s high-tech investment
is gradually improving consumer trust. It took
years of R&D and operational restructuring, buttoday the retailer can trace the origins of a single
beef patty with such detail that it can name thebreed, age and even the name of each individual
cow. Individual identities using a series of lettersand digits based on a DNA profile taken at theabattoir that can, in turn, be traced back to thefarm of origin.
By partnering with Dublin-based tech firmIndentigen, M&S uses a genetic samplingtechnique that analyses the molecular signaturefound in the smoke emitted when a tiny sample ofthe meat comes into contact with a laser. The movehas been viewed by some as a benchmark whenit comes to radical transparency, as consumers
increasingly demand to know the provenance of
their food.

“An apparel company might thinkthat they only have 1,000 to 2,000
suppliers, but the reality is they
have 20,000 to 50,000 when you
count all the sub-suppliers.”
But beyond groceries, the question of precisely
where our goods come from remains as pertinent
as ever — and one that the fashion industry has not
yet been able to solve at scale.
“[What] only a few leading brands are doing is[offering] full traceability [of their supply chain].
That means that in theory, you can scan a barcode
on a shirt and know the actual supply chain forthat particular garment,” says Leonardo Bonanni,founder and chief executive of Sourcemap, whichhelps brands trace the journey of their products.
63

In-Depth“It’s been well established in food, pharmaceuticals and other industries for years. We need to getthere with apparel.”Long Legacy of Bad Habits

The State of Fashion 2019

“The idea of mystique is one that is so engrained
into the fashion culture of total exclusivity [that]brands hid what they’re doing from everybody,”
says Tamsin Blanchard, a veteran journalist
focused on sustainability and ecological issues
in fashion.

“Apparel is one of the mostvolatile and fast-changing supply
chains that I know of.”For Neliana Fuenmayor, founder and chief
executive of A Transparent Company, which
advises brands on sustainable innovation, theluxury end of fashion is especially problematic,“[Consumers] don’t question luxury because if it
has that high price ticket [then] you want to thinkit’s been done in the best way possible.”
However, news in summer 2018 that Burberry
had burned $37.6 million worth of unsold clothes
and accessories, instead of selling it off cheaply,
to protect its brand, shocked consumers. It’sa practice notably not exclusive to the British
fashion brand but the secretive nature of theindustry makes it difficult to accurately quantify
the scale of the problem.
The public outrage and negative media attention
prompted Burberry chief executive Marco64

Gobbetti to address the issue with a plan thatwould see a complete turnaround. “We are now ina position to [stop] destroying finished products,
which we think, frankly, is just not modern,” hetold BoF in September.
It is clear there has been a shift in the way
consumers view transparency. In today’s world of
post-truth politics and “fake news,” consumers’
distrust of governments and media has extended
to every aspect of their lives, from food to medicine
and fashion. Surveys suggest that trust in
businesses fell in 40 percent of countries in 2017,with more than two in five consumers saying they
didn’t know which brands to trust.
The fashion industry, in particular, has been
suffering from a rising trust deficit. After morethan 1,100 people died in a garment factorycollapse in Bangladesh five years ago, pressure has
mounted on Western retailers to be transparent
about their supply chain. Other horror stories
of garment sweatshops, abuses, child labourand deadly industrial disasters have put brands
under scrutiny by shoppers who are increasingly
demanding to know if their products were madeethically and sustainably.
Yet transparency remains a major challenge
for the global fashion industry, one that wasworth $2.5 trillion in 2017, according to the
McKinsey FashionScope, which relies on very
fragmented supply chains often spread acrossmultiple countries.
Following the Rana Plaza disaster in Bangladesh,it took weeks for retailers to figure out why theirlabels had been found among the ruins in the firstplace and which purchasing deals had been madewith those suppliers. As a great number of retailers
do not own their own manufacturing facilities or
use a system of agents and subcontractors known
as “indirect sourcing,” it makes it difficult forcompanies to monitor conditions across their
supply chain.

“Some brands are doing fast fashion, others
are doing four collections a year, but there is acontinuous turnover. With food, you don’t changethat often. Apparel is one of the most volatile andfast-changing supply chains that I know of.”Trade Secrets and Tokenistic Gestures
M&S was one of the first mass-market companies
to take tighter control of its supply chain byputting a factory map up on its website, sharing
what happens where in the world for many of its
categories, including clothing, homeware andfood. According to the Global Fashion Agenda(GFA), 12.5 percent of the global fashion market,
including big names like Nike, Adidas, Levi’s andGap, have signed up to 2020 sustainability targets,
which include publishing lists of all the suppliers
producing for them.

Frédéric Soltan /Corbis via Getty Images

In the not too distant fashion past, a lack of transparency in a company’s supply chain could actually
be seen as a competitive advantage. Businesses
wanted to keep insight into their suppliers andmanufacturers as opaque as possible. After all,if nobody knew where the products were coming
from, or how they were being made, it was harderfor competitors to create identical apparel.

07. Radical Transparency“An apparel company might think that they only
have 1,000 to 2,000 suppliers, but the reality isthey have 20,000 to 50,000 when you count all the
sub-suppliers. It’s a real challenge [for brands] to
map their supply chain because there are too many
third parties involved,” says Bonanni.
What often happens is that a factory may take anorder, only to find that it doesn’t have the capacity
to do all the work and, without notifying the brand,
the factory owner may then delegate the work out
to other factories, which could be unregistered andtherefore the kind of place where labour and safety
violations occur. “Many larger fashion brands don’t
have visibility on suppliers more than one degree
removed,” says Jessi Baker, chief executive ofProvenance, which helps brands track their supply
chain using blockchain.
The speed in which fashion operates also poses achallenge. “The apparel industry is in an unusual
conundrum, because it has the highest turnoverin supply chain of any industry,” adds Bonanni.

H&M says it mandates that all suppliers sign asustainability commitment. In 2017, the company
also launched a moderately higher-priced brandcalled Arket, which focuses more on staple pieces
than trends. Each item of clothing purchased
online or in-store comes with information on thelocation and name of the factory where it was
made. “When we communicate that, customers
have the option to make more sustainable choices,”says Karin Brinck, sustainability manager at
Arket. “We see transparency as one of the meansfor our industry to drive positive change throughincreased openness.”
Meanwhile, retailers like Maiyet have approachedtransparency by stocking only what it considerssocially conscious “positive impact” brands in its
recently opened London concept store. According
to co-founder Paul van Zyl, the aim is to “promotetransparency by sharing the provenance of eachbrand and creating an environment [for] founders,designers and certifying bodies to come together inan open and honest way.”
While this degree of transparency in the fashionindustry is a positive change, it still raises some65

In-Depth

07. Radical Transparency

important questions: what is a shopper supposed
to do with that information?
“I think it’s a bit tokenistic,” says Rachael
Stott, senior creative researcher at The Future
Laboratory. “If you’re given the name of a factoryor the provenance of a garment, it’s too vague
to really help [the consumer] at that point ofpurchase. I still have to go away and research thesefactories and names. There’s no guarantee for me
as a consumer that what I’m buying is ethical.”Jan Sochor/Getty Images

The State of Fashion 2019

“We see transparency as one of
the means for our industry todrive positive change throughincreased openness.”“There has to be a corporate
culture shift within the company
so that sustainability andtransparency can be achieved
across all departments.
The problem is that companies
are split into departments andthat causes fragmentation andsilos. We need to move from acentralised system to a more
decentralised one.”
66

There’s also the debate of how much a factory has
to be in compliance. Several experts agree that nocompany is perfect, so should consumers hesitate
to buy a T-shirt or pair of jeans if 80 percent of afactory is up to standards? Is anything less than
100 percent acceptable? Sourcemap’s Bonanni
points out that there are currently no uniform
standard on what constitutes as an ethical orsustainable factory. “There are different levelsof transparency but we need a standard in theindustry, so that the consumer understands,”
agrees Fuenmayor.
Another challenge with rising levels of transparency is it can lead to the over-sharing of company
affairs and potential conflicts with the need toprotect trade secrets, information and privacy.
In the workplace, for example, business owners
have a responsibility to their employees to disclose
problems that might lead to employee dismissals,
but discussing every loss, financial struggle oremployee salary could lead to unrest, loss ofconfidence and detrimental competition among
employees. The same applies to fashion.
“Fashion companies are very careful with how theyshare information [and] that’s one of the blockers

for why radical transparency is challenging,”
Fuenmayor continues. “If you’re a brand choosing
which supplier to make a product, you’re trying
to push down the price as much as possible.
That’s where the secretive part comes in because
suppliers might offer certain brands a better
price than their competitors and so it becomes agrey area.”
Using Technology to Improve Disclosure
But as impossible as full transparency may seem,it’s clear that the pendulum has swung too far in
the other direction for far too long. “In the future,
not being transparent raises a red flag. Consumers
will question… what are you hiding?” Fuenmayor
continues. “What is luxury today? Is it a logo or isit a product that I know has not cost someone’s lifeor the environment? We have to understand that
we have more power as consumers, because we’re
paying with our wallets every day when we choosea brand or service.”“Increasingly there are vegan customers who wantto know what materials are in [their clothes, forinstance] and not just what they’re eating,” says
Blanchard. She argues, however, that transparency
is especially important for fashion because, “food,you eat it, then it’s gone, whereas with fashion, youwear it and it’s still going to be there. It’s either
going to be in your wardrobe or in a landfill.”
Radical transparency doesn’t only apply to
production; it can be applied to pricing too. Oneof the early pioneers of this was Bruno Pieters,
who started his own label Honest By in 2012 after
stepping down from a leading role at Hugo Boss.
So meticulous was the Belgian maverick thatshoppers could not only trace the manufacturer
and composition of the garment, fabrics and lining
but also that of the zippers, buttons, thread andeven the safety pin holding the hang tag to theitem’s care label.
Whenever he could persuade textile suppliers toreveal details about origins and sources, Pieters
67

The State of Fashion 2019

In-Depth

07. Radical Transparency

created a painstaking “pedigree” that traced thefabric through the supply chain of raw materials,
yarn spinners, weavers, printers and dyers.
More surprising was — disclosed on the productdetail pages of the brand website — an itemised
break-down of the garment’s cost to the very last
penny, including his wholesale and retail mark-up
percentages. When news broke in October 2018suggesting that Honest By might be closing down,some saw it as a sign of how hard it is to sustain
a business in fashion without compromisingon transparency.

the food chain — producers, suppliers, retailers or
consumers — can access so-called “tamper-proof”
data about their product at any stage in its supply
chain life cycle.

Transparency is also important in terms of
disclosing how companies operate. Fitness
technology firm Fitbit, for example, has accessto extremely valuable customer data, which may
leave people feeling uneasy. It hopes to quellthese concerns by being completely open about
which data points they collect and how they shareit. Meanwhile, charity services like BitGive and
AidCoin use technology to provide greater transparency to donors by sharing real-time financial
and project information.

Meanwhile, De Beers, the world’s biggest diamondproducer by the value of its gems, said it planned tolaunch the first industry-wide blockchain this year,
to track gems each time they change hands fromthe moment they are dug up from the ground.
The technology could be used to verify the authenticity of diamonds and ensure they are not fromconflict zones where gems could be used tofinance violence.

What’s clear is that while technology has played apart in generating much of today’s mistrust, it canalso be leveraged to restore trust and confidence.
Blockchain, for one, has the potential to fix this.
The underlying technology driving cryptocurrencies such as Bitcoin, blockchain is a decentralised
and distributed digital system of records thatcannot be altered once they have been added.
The global blockchain technology market wasestimated by Statista to be worth $339.5 million in2017, and is forecast to grow to $2.3 billion by 2021.
This technology is already being slowly
implemented in a number of industries. Swisstech firm Ambrosus offers blockchain for the foodindustry, making it accessible to both emerging
start-ups and billion-dollar brands. The firm uses
high-tech sensors and blockchain technology torecord the entire history of food and pharmaceutical products. By using a smartphone, anyone in
68

The fashion industry, however, seems more
reticent. Martine Jarlgaard’s pilot programme
to track clothing from raw material to consumer
using blockchain is a start. However, it will takemuch bigger developments from blockchain
specialists like VeChain, whose chief executive
Sunny Lu is the former chief information officer
of Louis Vuitton China, to move the needle.

“Fashion companies are very
careful with how they share
information [and] that’s oneof the blockers for why radicaltransparency is challenging.”
If something similar were adopted by fashion
brands, retailers could garner greater trust
through the product lifecycle, as it could tellconsumers not just where an item was made,but also who it was made by, the conditions
they worked in, how much they were paid, thecomposition of the garment, where the fabric wasgrown and what chemicals had been used.
While critics of blockchain claim that it has several“Achilles heels” including problems as diverse
as scalability, securing privacy and its powersource, observers like Scott from The Future
Laboratory are more enthusiastic. “Blockchain

powers transparency and allows brands to not only
communicate their values, but also hold all of their
supply chain partners and producers accountablefor each step,” she says.
Clear Standards and User-Generated Insight
While full transparency remains an elusive andsomewhat controversial concept, many see theimmediate goal as understanding better what othersteps a company can take to implement aspects ofradical transparency into their operations.
Collaboration, says Fuenmayor, is the way forward— and it starts from within. “There has to be a
corporate culture shift within the company so thatsustainability and transparency can be achieved
across all departments.” The problem, she says, isthat “companies are split into departments andthat causes fragmentation and silos. We need tomove from a centralised system to a more decentralised one.”
Fuenmayor adds that “giving power” to employees
to “make decisions” was an important step. Scottagrees, suggesting that the solution could go as far
upstream in the supply chain as giving autonomy
to garment workers. “It’s about putting powerin their hands [and could mean] letting themupload their own conditions onto a cloud-based
platform, so companies can track labour patterns
a bit more honestly and authentically,” she said.
“When brands want to control their supply chain
and do quality control visits, a lot of [what they see
through audits] is staged and not a realistic view ofwhat’s happening.”
Meanwhile, in industries such as beauty, somemanufacturers have embraced a switch to “clean
label” ingredients or use of ethical certification
logos, such as Fairtrade or non-GMO, to indicatethat ingredients have been sustainably sourced
based on explicit and established standards.

“In the long term we’re heading towards brands
having to ingrain the idea of transparency into
their DNA. With every new product they bring out,
they’ll have to ensure that they can give all theinformation they can on sourcing and production,”
said Blanchard. “This is going to be the future of
how people shop, as more consumers are educatedabout the industry and will put their money in thebrands they feel they can put their trust in.”

Blockchain powers transparency
and allows brands to not only
communicate their values, butalso hold all of their supply
chain partners and producers
accountable for each step.
Forward-looking fashion leaders now believethat we are headed toward a future where trust
becomes an exceptionally powerful currency and,extending the metaphor further, transparency
then becomes as indispensable to upholding trust
as the modern banking system is for managing
our money.
“We mustn’t forget that transparency [itself] is not
the goal. Transparency is just one step towards theaim, which is sustainability,” reminds Bonanni.
“Positive change is what we should look for in thenear future, which is not just for companies to betransparent, but to commit to standards acrossimproving the supply chain.”
The author works in the editorial division of The Businessof Fashion

69

Fashion
System08. SELF DISRUPT

Technology and social media are enablinga new breed of ‘challenger’ brands that disrupt
a sector or category where incumbent players
have rested on their laurels. Meanwhile, tocompete and stay relevant among demanding
young consumers, traditional brands are echoing
this dynamic and disrupting their own brands,
offerings and business models.

The State of Fashion 2019

Fashion brands, and luxury houses in particular,
are often successful because of their heritage.
While this continues to be a key advantage, it is nolonger enough. In this year’s BoF-McKinsey Stateof Fashion Survey, self-disruption is top of mindfor 2019, with 79 percent of executives placing it in
the top five trends impacting the industry.

Lisi Niesner/Bloomberg via Getty Images

There are two key forces driving
self-disruption: younger consumers’ preference
for novelty and advancements in both digitaltechnology and social media.

70

According to the McKinsey Millennial
Survey, younger generations are more willing to
set themselves apart through brands and they
are also more likely to follow up-and-coming
brands.84 The latter will typically challenge fashion
conventions through either branding, communication or distribution. At the same time, social
media has dramatically levelled the playing field,
allowing these “challenger brands” to disrupt themarketplace. Their emergence partly explains
the 50 percent annual growth of Instagram
advertising spend.
Challenger brands disrupting a sector
are characterised by rapid growth, social media
fluency and e-commerce focused distribution.

Clothing brand Reformation, for example,
has 1.1 million Instagram followers, as of printing
this report, and makes 80 percent of sales online.
It pushes its green credentials and has a roster ofcelebrity endorsers, including Emily Ratajkowski,
Selena Gomez and Rihanna. Another disruptor
brand I.AM.GIA (which has created an Instagram
It-girl persona called Gia) has a similar profile,with over six hundred thousand Instagram
followers and a strong celebrity following.
Both companies are growing sales at highdouble-digit rates.
If performance were measured by social
media growth alone, the big incumbent fashion
players would already be in trouble. Brands suchas H&M, Dior and Zara grew their Instagram
fan base by less than 30 percent in the year to
September. Many disruptors saw their Instagram
following expand by more than 130 percent overthe same period, and some by more than 300
percent.85 Earned Media Value (EMV) levels
are much higher among the challenger group.
Challenger brands also boast more impressive
engagement; the like/follower ratio for Supremeand Everlane is 1.9 and 1.4 respectively, versus
0.3 for Dior and 0.5 for Louis Vuitton.86

71

Fashion System

Established brands recognise thatchallenger brands are often more nimble andeffective at reaching young audiences. In response,
the former are now turning to a series of levers to“self-disrupt.”

The State of Fashion 2019

Some established brands areembracing disruption by launching
accelerators and incubators totest new approaches in a more
controlled environment.
The primary lever is to conduct brandmakeovers, overhauling their approach to create
the impressions of having their finger on the pulse
by refreshing their image. Burberry, for example,
developed a new logo and monogram under
Riccardo Tisci. After appointing Hedi Slimane ascreative director, Celine debuted a new logo on
Instagram and took a notable pivot away from thesignature aesthetic to which consumers had grownaccustomed and loyal.
More heritage brands are turning tostreetwear brands to create a cooler image andhave reflected that ethos in their talent strategies.
Louis Vuitton in 2018 appointed Virgil Abloh,known for his disruptive streetwear brand
Off-White, as its creative director. The origin of
this type of self-disruption can be traced back to
the flurry of collaborations between high fashionand streetwear players in 2017, through which a
new kind of experimentation became the norm.
This tendency to collaborate and flex a brand’s
identity has now reached critical mass, and we
expect it to persist in the future.
Other forms of disruption we see infashion include exclusivity, faster fashion andnew channels. Numerous established brands
are rethinking their business models to reflect
these evolutions. For instance, some are moving
away from the traditional fashion calendar and72

08. Self-Disrupt

imitating the “drop” approach commonly usedby streetwear labels to release smaller and more
frequent collections that create rarity value
and elevate anticipation. Moncler’s launch of its“Genius Project” is an example, with Hiroshi
Fujiwara’s first drop driving a 43 percent monthon-month increase in earned media value (EMV)
in June 2018 according to Tribe Dynamics.87
More recently, Burberry announced is launch of“B Series,” a new series of monthly productreleases on the 17th of each month.
Established luxury brands are also
increasingly embracing digital channels as a
primary, at times exclusive, route to market.
Following the early disruptors Warby Parker andEverlane, Comme des Garçons will launch its first
direct-to-consumer (D2C) only brand later in 2018
to expand its customer base.88 We expect moreestablished brands to follow suit.
Some established brands are embracing
disruption by launching accelerators andincubators to test new approaches in a more
controlled environment. These are more
flexible and less risky than mergers and acquisitions, enabling experimentation and offering
the opportunity to accelerate business model
innovation where necessary.

In an increasingly fickle fashion
environment, market leaders will
also need to take more risks tostay ahead.
Kering’s second wave of Plug and Play,an accelerator focused on sustainability, isone example. Another is LVMH, which in 2018
launched its La Maison des Start-Ups accelerator
programme at its Station F campus in Paris,promising to offer work stations and support for 50
start-ups each year.89 These initiatives help major
players support innovators and absorb or adapt

some of their most pioneering practices and ideas.
Others are creating dedicated internal units tostreamline the innovation process. Gucci Artlab,
also launched this year, is an innovation hub
focused on leather goods and footwear.
Looking forward, we see three key
disruptive developments. To compete withchallengers, established brands will continue
to innovate, leveraging their scale to fast-trackcapability building through M&A, accelerators andinnovation labs. The latter will help companies
remain at the forefront of business model
innovation and respond to new fashion trends
more quickly. It will be increasingly importantto adopt agile ways of working and depart fromthe traditional operating model. Players will also
work to streamline supply chains, enabling fastertime to market. In an increasingly fickle fashion
environment, market leaders will also need to takemore risks to stay ahead. Sub-labels will continue
to proliferate, enabling brands to experiment while
maintaining the authenticity of the parent brand.
Fashion brands must learn to be more
willing to adapt themselves, embracing a more
flexible approach to doing business in areas fromcommercial models to the supply chain anddistribution.
Tiffany chief executive Alessandro
Bogliolo summarised the mood perfectly: “We all
share the same challenge — a continuous demandfor change — of newness, of communication,
product, everything. And this is a huge challenge
because we must do it right, but we have to do it in
a way that is not going to erase your personality.
Constant change, but you still have to be yourself.”

Exhibit 12:

Followers of challenger brands are more
active and engaged than those of legacy
brandsInstagram like/follower ratio (LFR)

Average number of likes on each post in proportion to number of followers overfour weeks in August 2018.
Source: McKinsey & Company analysis based on Instagram data73

In Depth

08. Self-Disrupt

The Explosion of Small
Consumers are increasingly drawn to small brands with compelling andauthentic narratives. In order to keep pace, larger companies must learn
how to think small.

“It’s the smaller brands thathave been better at genuine
innovation — and that’s what
consumers want.”

The State of Fashion 2019by Jessica Moulton, Sara Hudson and Dale Kim

Conventional wisdom says that success inbusiness is all about growth, and that in the longrun Goliaths beat Davids. However, while scalecontinues to be an important driver of long-run
value creation (see also our section on “Winners
and Losers” in McKinsey Global Fashion Index),
these days it does not in itself guarantee consumer
appeal — so Goliaths need to find their inner David.
In many sub-sectors small brands are capturing
two to three times their “fair share” of revenue
growth, while the largest brands are struggling,
and in some cases even shrinking. In the US,
between 2016 and 2017, small brands rang up
just 19 percent of 2017 FMCG sales but generated
53 percent of growth. In Europe and Australia,
the figures were 33 percent and 59 percent
respectively.90
Consumer preferences and retailers’ needs bothfavour small. So does financing. Venture capitalists
have spotted these small brands: across thewhole of the consumer sector, more than 4,000
small companies have received $9.8 billion ofventure funding over the past ten years — $7.2
billion of it in the past four years alone, a major
jump from previous years.91 This funding isenabling the growth of challenger brands in niches
across categories.
Fuelling the Explosion
Why are small brands growing so fast? They
are capitalising on three trends — millennial
74

Retailer Requirements. It’s not just consumers
who love small brands. Because they arethreatened by e-marketplaces and discounters thatexert strong pressure on price, mass retailers areturning to small brands for differentiationand margin.

preferences, digital marketing and retailer
requirements for differentiation and margin.
Millennial Preferences. Because they havebecome the largest consumer segment worldwide,
millennials’ strong preferences are ignored bybrands at their peril. Millennials crave the new,different, and authentic, while often scorning
traditional brands. Millennials are four times more
likely than baby boomers to actively avoid buying
products from big food companies and three times
more likely to see new brands as better or moreinnovative. In their fashion choices, millennials
are almost twice as likely as baby boomers toprefer up-and-coming designers. These attitudes
are spilling over into other generations as well,magnifying the impact of millennial preferences.92
Digital Technology. Digital technology
gives small brands an easy way to engage with
consumers, who are increasingly glued to theirsmartphones and the internet. E-commerce
provides access to the “endless aisle” that features
many more brands than traditional TV advertisingor store visits could. In the UK, for example,
the typical superstore lists 160 SKUs of cereal;
Amazon lists 1,000. The typical superstore lists 80
SKUs of shampoo; Amazon lists 2,000.93
Digital also creates a host of new, cost-effective
marketing channels that small brands havebeen especially quick to tap in order to reach andexcite consumers.

Grocers in the UK, for example, have little wiggle
room on price as the top 2,000 items generatesome 40 percent of sales, and retailers charge
comparable prices. Enter small brands. As a UK
grocer said, “It’s the smaller brands that have been
better at genuine innovation – and that’s what
consumers want.”
Small brands offer the differentiation that builds
traffic (in the store, not just online), and they
boost margin because they tend to be premiumand rarely promote. In the US, 44 percent ofsmall-brand sales are premium, versus 34 percent
for other brands, helping to boost average selling
prices. Similarly, only 27 percent of small-brandsales happen on promotion, versus 44 percent oflarge-brand sales.94 As a result, US retailers are
giving small brands double their fair share of
new listings.
The Future of Small
What learnings can be captured from observing
the explosion of small in the consumer sector?
First, small is here to stay. Small brands fit thepreferences of millennials, who will increasingly
constitute the market, and the culture they havecreated. For example, millennials love craft beer,
which they see as offering more flavour, differentiation, and authenticity — the category grew from
6 percent of total US beer volume in 2009 to 14
percent in 2017.95
Small brands are better able to target specificmarket niches (e.g., vegans who require clothes

made without animal products) and respond to
new market trends (e.g., free-from, athleisureor even athluxury). Moreover, digital technologies have made it easier for small brands to build
awareness and sell to customers, helping themcapture a disproportionate share of growth.
Second, small brands are not just froth. Some
small brands will grow into sizable brands, as Kind
Bars (revenue of $727 million,)96 Halo Top ($347
million,)97 and Fever Tree ($220 million)98 aredoing. Other brands will be short-lived. Still others
might cater successfully to a niche and thrive as
small brands but never grow into mass brands.
This mixed outlook calls for larger companies
having enough small brands in their portfolios toreplace those that languish with new brands thatcan compensate for the lost sales.
Global Beauty Players Are Leading
The Charge
Fashion can learn lessons from the beauty
industry, which is a trailblazer in this regard.
Over the last decade, legacy brands such as MAC
and Lancôme (at the prestige end of the market)
or L’Oréal and Revlon (at the mass end) havecollectively struggled to achieve 5 percent growth;challengers such as Benefit, Becca and Urban
Decay have together grown at 16 percent and
now have a 10 percent share of the global
cosmetics market.99
Successful small beauty companies do four things
well. First, they offer high-quality, innovative
products with stories that appeal to millennials.
Second, they have an omni-channel presence —sometimes including subscriptions. Third, they
focus on differentiating capabilities in branding,marketing and sales — often outsourcing manufacturing, distribution and even innovation.
And fourth, they claim a disproportionate shareof social media. For example, Anastasia Beverly
Hills has nearly 18 million Instagram followers,
thanks to more than 60 posts a week and working
with over 600 influencers. It aims to have a new
post every three hours at peak times. This digital75

09. DIGITAL LANDGRABIn Depth
strategy generated earned media value of $90
million in May 2017 alone. Its level of engagement— an average of 68,000 interactions per post —is equal to the combined interactions of the next
top five brands (Tarte, Benefit, NYX, MAC and
Too Faced). Social media firepower of this ordertranslates into business success: Anastasia has
used this Instagram presence as a springboard
for explosive growth — from retail sales of just
$2 millionin 2012 to current annual net revenue
estimated at $340 million.100

The State of Fashion 2019

Digital technologies have madeit easier for small brands to build
awareness and sell to customers,
helping them capture a
disproportionate share of growth.
The global beauty leaders are responding ininteresting ways. They are snapping up challenger
brands — Estée Lauder, for example, bought
Smashbox, Too Faced and Becca; L’Oréal acquired
Urban Decay, Nyx and IT. They are increasing theirspending on digital and social media, including
augmented reality and contracting millennial
brand ambassadors and founding incubators.
Fashion May Be Well Suited to Follow
So what lessons can fashion learn from the
explosion of small across the rest of the consumer
sector? We see signs that the explosion of small
will soon impact fashion in the same way it has
transformed beauty. It is too early to say that
small brands are capturing market share,
but small companies are already on the rise.
First, venture capital investment in apparelcompanies is growing. The last decade has seen
1,050 deals in clothing (more than many othersectors). VC investment in apparel and footwear
has risen steadily from $43.5 million in 2007
to $560.6 million in 2017.101 But the medianinvestment is small — private equity investment
in fashion comes in at just $500,000 (a third of themedian investment in beauty, for example).
76

The retail mix is shifting as well. At Nordstrom,
for example, small brands classified as “young”
or “hot” are taking shelf space from “heritage,”“established” and “proven” brands. The small
challengers make up 13 percent of the overall mix— but account for 31 percent of brand additions
made in 2018.102 The playbook adopted by small
beauty companies is directly adoptable by small
fashion companies, particularly the emphasis on
omnichannel and social media excellence.
US swimwear brand Solid and Striped appears
to have been made for the social media age, with
about 265,000 Instagram followers (at the timeof publishing), and products donned by influencers
and celebrities alike. At the time of publicationof this report, they are the most stocked brand inswimwear, for retailers such as MatchesFashion
and Revolve.103 Small players are also ideallysuited to win by putting values at the core of theirnarratives (see “Getting Woke,” page 45), so that
consumers can wear their hearts on their sleeves —fashion is an even better vehicle for such signallingthan beauty. Online manufacturer Everlane
discloses the profit on each item and how it was
manufactured in a commitment to“radical transparency”.
So, if these are potential advantages for small
players, can large fashion companies respond,in the same way that the large beauty conglomerates have? Again, many of the same tactics arepotentially fruitful for large players — we are
already seeing them buying up smaller brands
to build a balanced portfolio, upping their social
media game and enlisting millennial brandambassadors. Above all, they are acknowledging
the need to stay close to their new consumers.
Gucci, for example, uses reverse mentoringby a group of millennial employees to inform
innovation. In fashion, small is also beautiful —but you don’t have to be small to behave small.
The authors work in McKinsey & Company’s Consumer practice.

As the race to be the platform of choice for bothcustomers and fashion companies intensifies,
e-commerce players will continue to innovate byadding profitable value-added services and focusing
on new technologies. Whether through acquisitions,investments or internal R&D, players that diversify
their ecosystem will strengthen their lead over thoseremaining pure players who rely solely on retailmargins and existing offerings.
In last year’s State of Fashion report,
we emphasised the importance of platforms as
entry point of choice for consumers into their
shopping journey. Their growing dominancethrough superior convenience, growing segment
coverage and the launch of private labels continues
to be a theme this year for both fashion pure
players and multicategory platforms. For example,
Amazon is on course to become the leading apparelretailer in the US, with over 8 percent estimatedtotal share, and Flipkart has 40 percent shareof online fashion sales in India.104,105 However,potential for profitable growth fuelled by user
acquisition is starting to saturate due to market
maturity and increased competition. The next
horizon in platform evolution is business model
diversification through proprietary technology andknowledge to enrich the offering to consumers andbrands. The race is underway.
Evolution presents platforms with anopportunity to generate higher margins while
growing scale, as opposed to the recent experienceof fast growth without significant profitability.
E-commerce players consistently post lower profits
than their physical counterparts, with average
EBITDA margins of ~4 percent in 2017, comparedwith ~8 percent at traditional retailers, according
to the analysis from McKinsey’s Global Fashion
Index. Three of sixteen publicly listed e-commerce
players with revenues of more than $100 million
made a loss. A series of private e-commerce players
are also operating unprofitably, with Farfetch(pre-IPO), for example, reporting an EBITDA
margin of approximately -14 percent in 2017,
despite significant revenue growth of 74 percent.106
While investors in leading players have often
shown patience for profitability, weak performancehas been reflected in the valuations of some small
to mid-sized private players. Fab.com, once valued
at $900 million, was reportedly sold to PCH in2015 for between $15 and 30 million.107 In 2018,
Rue La La reportedly acquired Gilt Groupe
for under $100 million, far below its one-timevaluation of $1 billion.108
In the context of such cautionary tales,
large e-commerce players are strategically adding
new services. They are venturing in areas where
they have a competitive advantage, for example
Farfetch and Zalando with white-labelling,or where they spot a structural opportunity,
as in Alibaba’s XPressBees logistics company.
They are also investing heavily in technology
77

The State of Fashion 2019

Fashion System

across the value chain, aiming to boost efficiency
and streamline the customer experience. Alibaba’s
expansion is effectively powering the digitisationof a country’s entire retail sector. This is reflected
in investments in various payment solutions(Paytm, Kakaopay), logistics (XpressBees), andquantum computing cloud services (SenseTime).
Among other recent initiatives, Flipkart’s AI for
India initiative reflects its internal use of machinelearning and other advanced technologies tomonitor products and spending. The initiative
aims to encourage data science and promises
hundreds of millions of dollars of investment
to build new AI solutions.109 In other examples
of diversification, in 2016, Flipkart-owned
Myntra acquired Cubeit, a mobile-based content
aggregator, and in 2017 bought start-up InLogg,
which brings together logistics vendors.

“Smaller players will continue tohave their role to play as longas they differentiate on emotion,
curation and trust. Not everyone
needs to fit the large platformbusiness model based on logistics,
speed and search.”
In Europe, Zalando is expanding
marketing and fulfilment solutions, building out
its partner programme, and has acquired
AI start-ups. The company, which says it wants
to become the “Spotify for fashion,” is focusing
its strategy on four key areas — assortment,
demand generation (for example, through localised
merchandising and data driven marketing), digital
experience and convenience. “We want to buildthat one destination which is the entry point for
consumers and the most relevant platform forbrands,” Zalando co-founder David Schneider told
BoF in September. Non-core services are expected
to contribute around 10 percent of Zalando profits
78

09. Digital Landgrab

in five years’ time, compared with 2 percent atpresent, and will add at least 250 basis points
to EBIT margins in the long term, according toanalyst reports.110
Finally, Farfetch’s longstanding
flagship example is its Black&White offering,an e-commerce white-label solution for luxury
fashion brands. This allows Farfetch to leverage
its technology capability beyond its core offering.
More recently, the company launched its Dream
Assembly technology accelerator in April 2018
and acquired Curiosity in July to expand its social
media efforts in China. “One [area] that I findinteresting — and we’ve made a move into this —is around conversational commerce and reallythinking that customers are increasingly going tohave a one-to-one relationship with their shopping
through text message and through one-to-one
requests,” says Farfetch chief strategy officer
Stephanie Phair, referring to the company’s recent
acquisition of a business called Fashion Concierge.
Some common threads tie these many
initiatives together. Most major players havelaunched data and analytics offerings, theexpansion of which is supported by the parent’s
scale and ecosystems. The supply chain is acommon area of focus for innovation, as is thepayments process. In addition, many havebolstered their consumer proposition throughexpanded private-label offerings and content
platforms to generate new profitable revenue
streams. Most importantly, they signal a clear
intention to become the platform of choice in an
increasingly competitive segment.
Still, there is room for smaller players.
Stitch Fix chief operating officer Mike Smith says,“smaller players will continue to have their roleto play as long as they differentiate on emotion,
curation and trust. Not everyone needs to fit thelarge platform business model based on logistics,
speed and search.”

Looking ahead to 2019, we are likely to seean accelerated emergence of ecosystems of related
and overlapping businesses. There will likely be an
intensified race for pole position, with the largest
players battling to become the go-to platform for
consumers and brands. The “holy grail” of theindustry will be integration of value-add services
that remove friction in the consumer and supplierjourney through effective use of data analytics atscale. This could lead to a continued wave of M&A
activity in a race to find the best complementaryofferings for existing platforms. There is also arising chance of some kind of shake-out for verticalpure players, catalysed by reduced valuations andthe failures of some smaller companies. Where
generalist e-commerce platforms remain focusedon retail margins rather than ancillary services,
without occupying a niche, the demise is likely tocome sooner rather than later.

“One [area] that I find interestingis around conversationalcommerce and really thinking
that customers are increasingly
going to have a one-to-one
relationship with their shopping
through text message andthrough one-to-one requests.”

Exhibit 13:

Valuations of online retail players are
significantly higher than traditional retail2017 average market capitalisation to EBITDA multiples

20.0

11.1

Online retail

Other fashioncompanies

Based on averages of publicly listed fashion retailers with $100m+ annual revenue.
Source: McKinsey Global Fashion Index (MGFI)

79

Executive Interview

09. Digital Landgrab

Nick Beighton

a picture, with voice, with direct
message, through WhatsApp,
through an email if you want to,and the digital brand responds
to you.’Chief Executive of Asos

The State of Fashion 2019

Other big [factors to watch]will be the impact, certainly
European and UK, on disposable
incomes, post-Brexit. Depending
where we end up [with Brexit],
there’s going to be an impact on
supply chains and there [couldbe] friction and costs associatedwith all of that.

The chief executive of Asos talks about
the race to build the best ‘conversational
interfaces,’ the next big battle between
e-commerce players, Brexit and hischange of heart on AI.
— by Robb Young

BoF: Few sectors of the
fashion industry aredeveloping as fast as yours.
What do you see as yourbiggest challenges andopportunities in 2019?
NB: The market has got too big
a supply and capacity of stores[so] 2019 is going to be the year
when that changes. Demandfor clothing has largely been
flat around Western Europe,
but where people are choosing
to spend their money, theirtime [and] their effort, is going
to move increasingly into a
different channel.
That means digitalisation at anever-increasing pace. There willbe all kinds of different [digital]
interfaces with brands — which
will be AI-driven — throughvoice, through visual, throughdirect messaging. My techpeople call them ‘conversational
interfaces.’ I use the languageof customers and go, ‘Imagine
interacting with your brand24/7 in any way you want, with

80

BoF: In the past, you’ve said
that mobile is the future
and that you’re going to go
wherever mobile goes. Were
you referring to the kind of‘conversational interfaces’
that you just mentioned?
NB: Yes, that’s exactly what
was in my mind. Seven years
ago, we started our mobile
journey. Today we’ve got thebest part of 80 percent of ourtraffic in the UK coming froma mobile device, and the othermajor territories are catching
up quickly. Using your mobile
device to shop and interact
with your favourite brands in adifferent way is going to be thenext new challenge, which is the‘conversational interface.’ The
friction of swiping around withyour thumb on a mobile device isjust as much friction as tapping
around a keyboard. Twentysomethings are looking at theirmobiles between 150 and 200
times a day. It’s a high frequency,
high velocity channel and… aneasier and more intuitive way
for customers to interact with
e-commerce [but] there is
still friction.

BoF: What about ancillary
services? In the context
of retail margins, a lotof the big online players
are diversifying into
complementary services
that are not core to the retailfunction. Is this somethingthat you foresee as part of the
Asos ecosystem of the future?
NB: I don’t yet, actually.
The Asos margin has been 4
percent for four years, and we set
it at four percent EBIT margin
to allow us to invest in customers,
products and innovation andto be experimental, so, I don’tnecessarily see retail margins
falling in my world. Now, I do
believe other businesses thathave set themselves higher EBIT
margin targets, they’re going tohave to respond, because, if, on
average, a clothing retailer has
a 15 percent EBIT margin, andI’m prepared to operate on four,
there’s 11 percent that I caninvest in growth drivers, so I do
think there’ll be some pressure
on EBIT margins, or otherbrands will just have to choose
not to go for growth. It’s certainly
not our model, though, so I don’t
see ancillary services in terms ofAsos, but I see other platforms
and brands doing that.
BoF: You’ve been investing
big in beauty. How do you
manage to differentiate
yourselves from other players
in the beauty space?
NB: Well, let me tell you thewords of a significant chief execof a large beauty business whoturned around to his board andsaid, ‘Asos can redesign the roleof beauty for 20-somethings in
the same way they’ve redesigned
the role of fashion for 20-some-things.’ That’s exactly what we’reaiming to do. When you think
about beauty and grooming with
Asos — we call it Face and Body
now — this won’t be somewhere
you get your functional requirements for cosmetics. This will be
where you get excitement andengagement that is content-rich,brand-rich and also Asos product-rich through great delivery
experiences and great digital
experiences. This is somethingthat hasn’t yet been done.
BoF: When you first took on
your leadership role, you said
that Asos won’t be growing
up with your customers, andthat you want the brandto remain ‘forever young.’
How do you do this but
avoid alienating your older
customers?
NB: Focus is important to us,
and our experience is deliveredby a mostly twenty-somethingaudience. Our 18.4 million active
customers are mostly twenty-somethings. Thirty percent
of our customers have beenover 30 [since the beginning,]
but our tone of voice, product,
price, experience, content, it’s
all driven for twenty-something engagement. That doesn’tmean we’re not interested inover-30s anymore, it just means
we recognise that some of our
products and experiences may
lose relevance as you progress
through your life. If this wasn’t
e-commerce, we would be
looking at a different proposition
for a different demographic.
But because this is e-commerce…
we will stay twenty-something;we will stay ‘forever young.’

8110. ON DEMAND

Executive Interview

The State of Fashion 2019

BoF: A number of your online
peers have been venturing
into physical retail for anumber of years. What isyour take on that and will it
feed into Asos’s future in theyears to come?
NB: It’s not our mission,
currently. We have 85,000
major SKUs on our ecosystem,
that’s 500,000 SKUs at a minor
level. Our proposition is about
content, about technology, it’s
about product. A digital manifestation of that is very clear, butphysical manifestations of thatare less clear, so, I don’t envisagea physical store any time in the
short-term. Never say never,experimentation is always key,
but it’s not something we are
currently looking at to achieve
our mission.
BoF: A lot of the discussion
around artificial intelligencein e-commerce players,
and fashion more broadly,
seems to be around getting
the balance right between AI
and the human touch. Whatis the right balance mean in
Asos’ world?
NB: I used to say, ‘Be carefulwhen you put a machine in frontof a human, because you’ll lose
something.’ But I’ve migrated myview on this a little bit. Now,
I actually think putting amachine in front of the human— with the right context — is agreat thing. It’s something that
we’ll only figure out throughexperimentation. Where I see AI
working for us is in two ways; one,
to enhance and turbo-charge82

customer experience, in termsof recommendations, different
ways of doing search, different
ways of engaging with our
ecosystem, and two, improving
the cost of handling all ourcustomer queries and all our
products through our entire endto-end business.
BoF: What do you think
are the most important
technological advances inthe year to come?
NB: Without a shadow of a
doubt, something that improves
size [and] fit, for customers andbrands would be an absolutegame-changer. It’s about; ‘Here’s
my body shape, how can I match
my body shape to the products
on sale in a way that I don’t
have to worry about returns?’
That will be a game-changing
piece of technology, but I don’tknow what the real deal is, interms of a solution. I’ve looked
at lots of different manifestations that are getting close. I’ve
looked at avatar solutions, I’ve
looked at uploading picturesof yourself, I’ve looked at othersolutions using data analytics torecommend… We’ve got one ofthose live right now. [But it’s got
to be] something that’s engaging,intuitive and helps customers
resolve that simple problem.
BoF: What about the painpoints for customers between
discovery and purchase?
Is your visual search function
part of the solution to
overcome that friction?
NB: There is friction [and] visual
search is one of those things thatwill help it. You go to dinner withyour boyfriend or girlfriends,
take a few snaps of your outfit,
upload, and go, ‘Has Asos got
something similar?’ ‘Yes, it has,available on next-day delivery.’‘Brilliant.’ Visual search is oneof the ways to take away thatfriction, but, by far and away,
the biggest friction is the sizing
debate. Most customers willtell you that they get frustrated
by a size ten being something
different in each and every brand,
and the annoyance of having tosend something back because it
doesn’t quite fit, so, somethingthat assists customers with thatproblem will be pretty big for us.
This interview has been edited andcondensed.

“Using your mobile device to shop and interact
with your favourite brands in a different way
is going to be the next new challenge, which isthe ‘conversational interface.’ The friction ofswiping around with your thumb on a mobile
device is just as much friction as tapping
around a keyboard.”

Automation and data analytics have enabled a new
breed of start-ups to adopt agile made-to-orderproduction cycles. Mass market players will begin
to follow suit, aiming to respond more rapidly totrends and consumer demand. The result is likely to
be a rise in just-in-time production, reduced levels ofoverstock and the rising importance of small-batch
production cycles.

Design and production are typically a long andcumbersome process, sometimes requiring
nearly a year to plan and move products tomarket.111 Technology, analytics and nearshoringare part of the solution, enabling companies to
respond quickly to source and develop products,
squeeze production timelines and streamline
distribution. Start-ups are at the vanguard of this,but some mainstream players are also stepping up
and delivering.
The power of social media means trends
are now more often established by consumers,
as opposed to retailers and editors. In an era of
fast-changing preferences, being able to respondto shifting demand, and tailor production
accordingly, makes a lot of sense. Fashion is seeing
the start of a seismic shift where products are“pulled” into the market based on actual demandrather than “pushed” based on best-guesses andforecasts. The change is significant. Previously,
procurement, production and distribution werepredicated on designer and buyer predictionsof future consumer demand. Products were
produced and marketed in traditional “seasons.”
Under the “pull” dynamic, procurement,
production and distribution are based on

customer demand. There is an accompanying“supermarket” model, by which inventory is only
replenished once consumed.
From an economic perspective there arepositives and negatives to on-demand production.
On the plus side, it requires lower capital
investment, and leads to smaller inventories andmore flexibility and agility. Shorter-turnaroundcycles can reduce demand uncertainty andcontribute to a more sustainable small-batch
production cycle. However, production costs are
generally higher, due to the smaller batch sizes, as
are transport costs if production is nearshore or
offshore. Nonetheless, companies including Zara,
Boohoo and Asos have embraced the model.112
The switch to “pull” can be boosted bymoving production closer toward nearshoringand onshoring, enabling same day production
and next day delivery. This is a far cry from thepast, when lead times from design to retail werecounted in weeks rather than hours. According toa study by Goldman Sachs, there is a direct inverse
correlation between supply chain lead times
and like-for-like sales growth. Equally, industry
executives expect nearshoring to grow. According
to recent survey results published by McKinsey,
83

Fashion System

The State of Fashion 201960 percent of apparel procurement executives
expect that over 20 percent of their sourcing
volume will be from nearshore by 2025.113
A related enabler is automation, which
for some products will offset the cost disadvantage of procuring closer to home. While apparel
manufacturing automation may still be subscale,technologies being developed show its massive
potential. Stand-outs include digital and laser
printing for finishing (allowing for nearshoring
for final touches combined with automation or
low-cost sourcing of the basic garment), knit-innovations (e.g. 3D knitting), semi-automatedsewing and automated logistics.114 These can help
companies reduce labour intensity, do more customisation, improve reliability and cut
process times.

Fashion is seeing the start of aseismic shift where products are“pulled” into the market basedon actual demand rather than“pushed” based on best-guesses
and forecasts.
Another opportunity is in microfactories, which enable high speed, agile garment
production. They are used in the design studioto speed up the prototyping process, or on the
shop floor, to provide high customisation andzero waste. According to Lisa Lang, founder andchief executive of ThePowerHouse, a fashion-techagency, “microfactories will take off on the next
few years and there is evidence of a few players
already developing them.”
Start-ups are taking advantage of thesetechnologies to produce garments “on-demand.”Berlin-based Lesara, for example, produces 90
percent of products in-house, and claims a 10-day
turnaround time from identifying fashion trends
to putting products on the market. Technology
84

10. On Demand

players are also contributing. Companies such as
Softwear and Sewbo have revolutionised garment
production machinery, using robotics to fully
automate sewing. Sharecloth, a New York based
software company, contributes to on-demand bydigitising styles and enabling retailers to placeorders before products are ever manufactured.115
Adidas is one of a group of large brands
that are showing signs of leveraging speed to shift
towards on-demand. Aside from its Arkansas
operation, it operates “Speedfactories” in Atlanta
and Germany that together are expected to
produce around a million pairs of running shoes ayear by 2020, using digital design to enable masscustomisation.116 Superdry launched “Superdry
Preview,” limited-edition collections that will gofrom design to delivery in just 6 weeks.117 In 2017,
Amazon secured patents for a fully automated,“on-demand manufacturing system” forapparel.118 Uniqlo parent company Fast Retailinghas signalled its intent to produce on-demand
knitwear at scale through its partnership with
Shima Seiki.119 Shima Seiki produces 3-D knitting
and technology it labels “Wholegarment,”
which produces seamless knitwear and requires
no post-production labour, and anticipatesthat its tools and machines will enable “masscustomisation.”120
Major players are also leveraging
advanced analytics to revolutionise the planningand production process. In some cases, this isenabling garment customisation on a mass scale.
For example, in late 2017, Japanese online player
Zozotown launched “Zozosuit,” a body scannerthat could take measurements for made-to-fit
jeans, T-shirts and suits. Founder and chief
executive Yusaku Maezawa expects Zozosuit torevolutionise the scale of personalisation. “People
see the Zozo brand as providing clothing specifically tailored to individuals,” he told us, “so we’relooking to create a presence that closely resembles
that infrastructure. We’d like to get to where

people associate us with clothing made to fit theshape of the body.” The company expects to sell six
to ten million suits within the year.121
Strategically, however, there aredifferences between start-ups and leading brands.
Rather than jump into on-demand fashion,
established companies are likely to proceed stepby step. This is partly because there is a high costand disruption to actions such as radical supply
chain transformation.

60 percent of apparelprocurement executives expectthat over 20 percent of theirsourcing volume will be fromnearshore by 2025.
In the coming year we expect to see
continued investment in speed (both throughcapability building and M&A) via more onshoringand nearshoring, virtual sampling, microfactories(rapid prototyping) and automation. Reduced
lead times will be key drivers of competitive
advantage. Small-scale players will likely lead theway, while larger brands pilot in selected markets.
We expect rising take up of on-demand will leadto a spike in personalisation, and a new generationof customised clothing start-ups, creating a new
definition of “made-to-measure.” In the technology
space, automation intellectual property willcontinue to develop, with patent approvals likely to
be a critical success factor in the years ahead.

Exhibit 14:

Survey respondents‘ aspiration level fora shift to nearshoring% of respondents>20% share of total sourcing

33
2018

60

2025
Source: McKinsey & Company

85

In-Depth

10. On Demand

Is Apparel Manufacturing
Coming Home?
To meet customers’ needs, apparel companies need to focus
on nearshoring, automation and sustainability.

The State of Fashion 2019by Johanna Andersson, Achim Berg, Saskia Hedrich and Karl-Hendrik Magnus

Two decades ago, US and European mass-market
apparel brands and retailers rushed to shift
production to Asia to gain a cost advantage. Since
then, they have doubled down on this low-cost
strategy, moving production from China to evenmore cost-efficient frontier markets. Apparel
players that have successfully done this, while still
ensuring high quality, speed and compliance havetraditionally been able to deliver products that
consumers want, at competitive prices.
Now, however, a perfect storm of factors ischanging this calculus by making it critical forcompanies to bring new styles to market more
quickly and switch out lines mid-season.
Internet shopping and stagnation in key markets
have made competition fiercer than ever andconsumer demand more volatile and difficult topredict. Mass-market apparel brands and retailers
are competing with pure-play online start-ups,
the most successful of which can replicate popular
styles and get them to customers within weeks.
Furthermore, apparel companies’ marketing
departments have lost much of their clout in
trendsetting, with today’s hottest trends now
determined by individual influencers
and consumers.
The pressure for smaller batch sizes andon-demand replenishment is driven partly byprofitability, but also by a desire for sustainability.
Consumers are becoming increasingly aware of
the environmental impact of traditional linear
86

apparel production modes, and public outcry
around overstock liquidation is becoming louder(about three percent of unsold apparel is liquidated).122 Some 78 percent of sourcing managers
responding to our survey believe that sustainability will also be a somewhat or highly likely
key purchasing factor for mass-market apparelconsumers by 2025.
Mass-market apparel brands and retailers cannot
win in the next decade without transforming toa demand-focused model. Apparel companies
are optimising and digitising their processes
and rethinking inbound logistics. One newstrategy is to optimise the apparel production
model, including elements such as nearshoring,
automating new delivery models around customisation, and shifts toward sustainable, circularvalue chains.
Nearshoring Opportunities and Challenges
In addition to concerns about the ecologicalfootprint of offshore sourcing, rising wages forfactory workers across Asia mean production in
the Far East is no longer as cost-efficient as it used
to be. For instance, labour costs in China in 2005
were one-tenth of those in the US; today, they areabout one-third. In some nearshore markets, thegap between nearshore and offshore labour costs
has disappeared: today, for example, Mexico offers
lower average manufacturing labour costs thanChina. In nearshore countries for the Western

European market, manufacturing labour costs
are still higher than those in China, but the gap isshrinking: whereas hourly manufacturing labourcosts in Turkey were more than five times higher
than those in China in 2005, in 2017 the gap wasonly 1.6 times.

Digital technologies have madeit easier for small brands to build
awareness and sell to customers,
helping them capture a
disproportionate share of growth.
And that’s before transportation is taken into
account. Today, even from a mere landed-cost priceperspective, nearshoring can be economically
viable in certain cases due to savings in freightcosts and customs duties. For instance, a US
apparel company that moves production of basic
jeans from either Bangladesh or China to Mexico
can maintain or even slightly increase its margin,even without higher full-price sell-through.
For Europe, as another example, reshoring from
China to Turkey can reduce landed-cost prices for
denim by 3 percent. Nearshoring works where fullonshoring doesn’t: bringing production back to the
US or to Germany will not yet result in breaking
even. From a landed-cost perspective it
is becoming more attractive for production tomove closer, but not to come all the way home.
But the real prize is shorter lead times. By reducing
time-to-market, companies can produce moreclosely in line with demand, reducing overstocks
and increasing full-price sell-through.
For example, increasing full price sell-through by
5 percent as a result of shifting to demand-focusedprocesses not only makes nearshoring in Mexico
even more attractive, but also takes US onshoring
to break-even. In this paradigm, sourcing considerations move from a focus on cost alone to a focus

on increasing the net product margin and on
avoiding wastage.
Despite its attractiveness, the apparel manufacturing industry in nearshore countries in theAmericas, Turkey, Eastern Europe or North Africa
still lags the Asian manufacturing powerhouses.
The current import volume from the five biggest
nearshoring markets to the US, for example, does
not even account for half of the US imports from
China. The industry is more fragmented andquality and labour productivity in some nearshore
countries is more volatile.
Nearshoring also creates a new set of trade-offs
and challenges with regards to industry structure,
productivity, operating model, sustainability
and supply. The biggest challenge currently issourcing raw materials, fabrics and ingredientsfor mass-market apparel. Only a co-located value
chain can offer the full speed and flexibility
promised — without it, the longer lead times justshift further up the value chain. However, thecurrent bulk of production and consumption of themain fibre types is still centred in Asia, especiallyChina. In nearshore countries for the US andEuropean apparel markets, existing capacity islimited. Local yarn and fabric supply in Europe,for example, is better suited to upmarket clothes
than to mass-market. Overall, 63 percent ofrespondents believe that fabric production will
likely move toward nearshore locations by 2025
to support regional supply chains. To attract
manufacturers to invest in building the capacity,
apparel brands and retailers will need to act astrue partners and commit to order volumes.
The discussion of regional supply chains is
gaining additional traction in light of innovations
in sustainability and closed-loop recycling,such as re:newcell. Approximately 80 percent ofrespondents from our dedicated survey believethat closed-loop recycling will scale up in
the future.123

87

In-Depth

The State of Fashion 2019

The Potential for Automation
Nearshoring and automation go hand-in-hand.
Nearshoring — and, in some cases, onshoring —will make even more economic sense as technology
develops, because automation will increase labour
productivity and offset higher labour costs innear- and onshore production. Mass-market
apparel brands and retail buyers will consider
automation capabilities when deciding where to
manufacture products in the future, in addition
to the commercial importance of shorter leadtimes and cost efficiencies mentioned above. Local
governments and garment industries in nearshore
and onshore locations will also need to build theskills and capabilities needed for advanced manufacturing among their workforces.

10. On Demand

To date, the apparel industry lags other sectors
when it comes to automation. Neither automation
nor advanced manufacturing have been a priority
for apparel buyers. One reason is that they haverelied on relatively low labour costs in the core
Asian and other low-cost sourcing markets.
Automation also presents technical challenges,
especially in sewing: only recently have fully-automated solutions for sewing become market-ready.
But now, as on-demand production gains
importance and technologies develop, automation
is becoming more relevant for US and European
mass-market apparel players, especially combinedwith near- and onshoring. Recent advances intechnology span the whole gamut from sewing togluing, knitting and finishing to warehousing andintralogistics.

Exhibit 15:

Automation of sewing will be the biggest driverof labour reduction

Our research shows a clear message: for certain
products, automation will not only makenearshoring more attractive for US and European
mass-market apparel brands and retailers, but it
will also make onshoring to the US economically
viable in the future.
The overall impact is considerable: assuming all
key technologies currently in development are
implemented in the future, about 40 to 70 percentof labour time can be reduced through automation.
From a pure cost perspective, automation levels
the playing field and makes Mexico cost-competitive with Bangladesh. Even onshoring from
China to the US achieves breakeven from a purecost perspective if the optimistic 70 percent
labour time reduction can be achieved. For
European markets, the economic viability ofnear- or onshoring also improves with automation.
Onshoring to a higher labour cost country suchas Germany, however, does not break even in anyof the scenarios. When additional commercial
benefits arising from increased speed andflexibility are added to the mix, the case for implementing advanced manufacturing technologies innear- and onshoring markets is even stronger.
The next decade will be critical for the adoptionof automation. Executives are bullish about the
future of automation. In our survey, 82 percent ofrespondents believe that simple garments will befully automated, leading to an 80 percent labour
reduction by 2025. Seventy percent think that it
is highly or somewhat likely that more complex
garments, such as dresses and jackets, will besignificantly automated (resulting in a 40-percent
labour reduction.)
Within five years, semi-automated factories
could enable nearshoring and selected lighthouseprojects of new business models, such as store
factories, that could help build customer
excitement. Within five to ten years, supplierswith fully automated factories could enable fullonshoring. More complex silhouettes will besemi-automated within a decade.
Sustainability
Nearshoring and automation have environmental
and social benefits, in addition to the commercial
benefits described above. By bringing production
closer to home and investing in advanced manufacturing, companies in the apparel sector will
become more sustainable and less wasteful by
reducing overproduction and decreasing theecological footprint from reduction of transport.
Taken together, nearshoring and automation could
enable a circular value chain.
How to Get Started
Looking at the trajectory of both consumer
preferences and the development and adoptionof automation technologies, mass apparelbrands and retailers should embark on thejourney toward a demand-focused value chain
now or risk losing touch with their consumers.
To position themselves for success, they need totake four actions: define their future sourcing andproduction strategy, nurture new skills andcapabilities, build an ecosystem of partnerships
and dig in to accelerate the learning curve.
Strategy. Knowing where they want to go andhow to get there will be crucial for mass-market
apparel brands and retailers. Nearshoring andautomation will not make financial sense for every
single product. Decisions on the future production
footprint of each product type should be based on
two main criteria: the feasibility of nearshoring
and the commercial value of reducing lead times.
Companies should model different financial
scenarios to develop a fact base that guides
their strategy.

Source: McKinsey & Company and ITA at RWTH Aachen

8889

In-Depth

Deep Dive10.
6: On Demand

Exhibit 16:

Nearshoring and automation will be importantenablers to reach a circular value chain

Indirectly enabled by a more closely
integrated chain
Enabled by near-shoring
Enabled by automation

Circular (zero waste)
design process

The State of Fashion 2019

Improved recycling
business case byeliminating shipping

Production ofrenewable andsustainablefibresCo-locatedcollection
and recyclingof textiles

CIRCULARFASHION
VALUE
CHAIN

On-demand
distribution andretail sales

Potential to minimise
waste by reducing
unsold items

New resource
efficient fabricproduction

Automated
production of highquality
garments

New, near-shored fabricindustries could invest
and sustainable
technology

reducesuse of energy, waterand chemicals

Could increase the valueof fast fashion items for
consumers and pro-longgarment life
Source: McKinsey & Company

Labour intensity and automation feasibility vary
greatly between different product and design types
but are mainly driven by the same characteristics: for instance, number of pieces, finishing andintricate details, movement of parts and type of
raw materials. Taking these factors into accountwhen classifying a product helps mass-market
apparel brands and retailers establish a high-levelview of what the future holds when it comes to thesourcing and production footprint.

90

Skills and mindsets. A new, demand-oriented
supply chain requires a very different mindset andskillset — more consumer oriented and more agile.
The traditional approach of cost orientation from
more traditional sourcing optimisation will not
be sufficient.
Access to talent will be a major success factor increating the supply chain of the future. The biggest
talent gap today is likely in digital or advanced
manufacturing and managing intelligent sourcing
decisions in the more complex apparel value chain.
Brands and retailers will need more talent who candevelop or identify winning technologies, making
the decision on where to build new technologies themselves versus forming partnerships or
acquiring new capabilities.
Partnerships. In a world where innovation istaking place at breakneck speed and where there is
still uncertainty about which technologies will
create real value, partnerships will be criticalfor building a sustainable competitive advantage.
Apparel brands and retailers will need to forge
relationships with global mega-suppliers to build
manufacturing capacity and capabilities in newgeographies. They will also need to collaborate
with technology companies to develop innovative
automation solutions since, currently, neither
apparel brands nor (most) manufacturers are likely
best positioned to develop disruptive technologies.

The disruptions ahead are so profound thatmass-market apparel players making big moves
and capturing the advantages of nearshoring andautomation will have a significant first-moveradvantage. The business models they build
will drive growth and be difficult for others to
replicate. As it turns into a source of competitive
advantage, sourcing and supply chain management
has completed its journey from mere savings
generator to focus topic on the chief executive
agenda. Although apparel manufacturing may not
be coming home in the near future, some of the
production will at least be moving ever closer —and mass-market apparel brands and retailers will
want to be prepared.
The authors work in McKinsey & Company’s Apparel,
Fashion & Luxury practice.

Financial partners such as private equity or
venture capital firms can also play a critical rolein the ecosystem, making capital investments tobuild local end-to-end supply chains in frontier
nearshore countries.
Digging in. Starting the nearshoring journey
now, rather than waiting for automation to further
improve the economics, is critical for those whowant to leapfrog the competition. Nearshoringsome product lines and categories already makes
economic sense; even for product lines that are
not yet economically favourable, it could be aworthwhile investment for brands to make aslightly lower profit to gain an edge on competitors.
In addition, apparel companies should place
several bets, e.g., collaborate with manufacturers,
invest in technology firms and recruit talent for
in-house engineering. Technological advances
have pushed automation in apparel manufacturing to the brink of a breakthrough, and further
investment could very soon lead to a disruption.
Apparel companies that are active in driving thedevelopment should expect to see great returns.
91

The State of Fashion 2019

McKinsey
GlobalFashionIndex

McKinsey Global Fashion Index

The McKinsey Global Fashion Index (MGFI) is
composed of over 500 public and private companies
spanning all geographies, segments and productcategories. It was created to track the industry’s
performance through three key variables — sales,
operating profit, and economic profit — providing
a holistic benchmark for the fashion industry.

The MGFI was introduced two years ago in theState of Fashion 2017 report to fill a gap in the
coverage and understanding of performance inthe global fashion industry. While fragments of
the industry — such as particular segments or
categories — had been tracked before, the MGFI
provided the first bird’s-eye view of the wholemarket. The index tracks financial development
across six price segments: luxury, affordable
luxury, premium/bridge, mid-market, value anddiscount (see glossary). It includes six productcategories: clothing, footwear, athletic wear,
bags and luggage, watches and jewellery andother accessories.
The MGFI tracks and forecasts sales andoperating profit. As only source in the industry
MGFI also analyses historical economic profit —a measure of value creation that takes into accounthow much each company had to invest to generate
its performance (see glossary).
For the first time this year, we took acloser look at the drivers of economic successin the sector. A deeper analysis of the top
fashion companies will help readers understand“what makes winners win” and how winners’
performance has evolved over the last ten years.

92

The rise of the ‘super winners’
The good news for the industry is that 2017 wasa record-breaking year for overall value creation
among listed fashion companies, with aggregate
economic profit reaching its highest levels for 10
years, after a steady decline between 2012 and2016. This was driven by a particularly strong
upswing in revenue growth for publicly listedcompanies, resulting in improvements in capitalefficiency as invested capital grew at a slower
pace than revenues. Investors recognised thisstrong performance, driving share valuations toan all-time high. And this was not just part of an
overall stock market trend: between 2008 and2017, fashion sector equity returns have beatenboth the S&P 500 and MSCI world indices.
We observed in past editions of thisreport that fashion is a winner-takes-all industry.
However, after a period of accelerating outperformance, leaders in 2017 gave up some of theiradvantage. The top 20 percent of companies
attracted 128 percent of economic profit in 2017,
compared with 144 percent in 2016. Still, polarisation has clearly not gone away and scale continues
to matter. While a subset of companies continues
to account for the majority of economic profit, the93McKinsey Global Fashion Index

number of “value-destroying” companies (i.e.,companies generating negative economic profit)
has almost doubled between 2010 and 2017.

Exhibit 17:

The State of Fashion 2019

6

-47

-34

-18

Bottom 20%

2016

2017
Source: McKinsey Global Fashion Index (MGFI)

Based on publicly listed companies.

108

Exhibit 18:

Top 20 fashioncompanies‘ contribution
to industry economic
profit 2008-2017

This polarisation has led to an evensmaller group of “super winners.” In fact, overthe long term taking the top 20 companies as a
sub-group, there was a widening disparity with theremaining companies encompassed in the top 20
percent. These “super winners” now account for
97 percent of economic profit, compared with 70
percent in 2010: this suggests they are increasingly
dominating the global value pool. This is a global
phenomenon that can be observed across industry
sectors (beyond fashion), regions and cities, as
outlined in McKinsey Global Institute’s recent“Superstars” study.124

128

144

21 - 80%3

Top 20%100

Fashion companies’ contribution toindustry economic profit 2005-2015
vs. 2016 vs. 2017%18

The top 20 percent
of fashion companies
generated 128 percent ofindustry economic profit

97
10 Years
Average: 88

93

86

70

73

101

97

86

81

97

101

97

2016

2017

2012

2015

81

86

73

2011

2014

70

2010

86

93

2009

2013

108

2008

%

Financial Crisis
Based on publicly listed companies.

94

Source: McKinsey Global Fashion Index (MGFI)

By segment, we also continue to seepolarisation, with luxury and value advancing
and mid-market players falling behind. Companies
able to differentiate on price point/efficiency
or brand have performed best. Outstanding
performers included handbag and luggage
makers and own-brand multi-category players.
Well-known European luxury companies tended
to be overrepresented in the top 20, with North
American companies coming in a close second.
Notably, the top 20 group of companies hasremained stable over time. Twelve of the top
20 have been a member of the group for the last
decade. Long-term leaders include, among others,
Nike, LVMH and Inditex, which have more thandoubled their economic profit over the past ten
years — according to MGFI estimates each racked
up more than $2 billion in economic profit in2017. The most resilient winners included luxury,
sportswear and fast fashion players, reinforcing
the point that brand investment and operational
efficiency are key drivers of sustainable businessmodels. Over time North American department
stores lost out, with none remaining in the top 20,
compared with three 10 years ago — a stark illustration of the fragility of the traditional retailingmodel. Notably, online players have yet to breakinto the elite group, with only two players in the
top 20 percent and none in the absolute top 20.
Their average top-line growth is four times higher
than that of other fashion players, but this tends
to translate only into valuation multiples(twice as high as average) while profitability
still lags behind.
Looking at drivers of long-term success,we find that profitability and capital efficiency
are key: winners all had above-average EBITDA
margins and most exhibited below-average invested-capital-to-revenue ratios, while the percentageof revenue growth was in line with the wider
sample.
Still, the lesson from 2017 is that size
continues to matter. There is a demonstrable
advantage to scale. The one caveat is that if you can’t
be big, be nimble: challengers that have identified
a niche have also found favour. The strategic
implication is that executives must be decisive on
the source of economic value creation. 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.
Sunny intervals but storms ahead
Looking ahead to 2019, we see
many opportunities for the fashion industry —but also many risks. The latter emanate mainly
from the evolving macroeconomic environment
and the potential for disruption from shifting
trading relationships (see trend articles on“Caution Ahead” and “Trade 2.0” for morebackground.) It is useful to view the industry’s
potential future through four separate lenses, eachof which offer a perspective on the most importantdrivers of growth and key topics covered in thisreport. The lenses are industry and regional
performance, market segment performance,
product category performance and overall
operating profit performance.

95

McKinsey Global Fashion Index

Companies consistently in the top
20 from 2008-2017

Exhibit 19:

The “super winners“

The State of Fashion 2019

Top 20 players 2017,
By economic profit, $US million

At adjusted 2017 FX rates.
Based on publicly listed companies.

Source: McKinsey Global Fashion Index (MGFI)

Discount
4
4%

Exhibit 20:

Economic profit
distribution by segment
Total economic profit by pricesegment, 2017
% of all public companies

Value
20
20%

Luxury24% 24

Affordable
4%
luxury4

Due to rounding, numbers presented may not
add up precisely to 100.
Based on publicly listed companies.

96

Mid-market
36
36%

11%
Premium/
Bridge11

Source: McKinsey Global Fashion Index (MGFI)

Industry and regional performance. We
predict industry growth of 3.5 to 4.5 percent in
2019, slightly below our 4 to 5 percent estimate for2018, when the industry was bouncing back froma relatively weak period. Continuing the trendof recent years, players in emerging Asia Pacificand emerging Europe will lead the way; however,
emerging Asia Pacific is likely to continue its strong
performance in 2019, while emerging Europe willprobably slow slightly from 2018. Mature Europe
and North America will also see slightly slower
growth. The overall impact will be slightly lessrobust global industry growth than in 2018. We see
Latin America (in particular Brazil), Middle East
and Africa and Russia experiencing more economic
and political challenges that are likely to dampen
their consumer spending.
Value segment performance. As in previous
years, we expect the best-performing segments
in 2019 to be luxury, fuelled by fast-growing Asia
Pacific economies and the continuing boom inglobal travel, and value, fuelled by strong propositions globally. Prospects for affordable luxury arelikely to be more fragmented, with some regions
expecting above-average growth (e.g., emerging
and mature Europe and China), while others such
as Japan, Latin America and North America underperform. Premium/bridge and mid-market players
are most likely to struggle,
in the face of strong competition from value/
discount players and increasing market saturation.
Product category performance. Similar to lastyear, we expect sportswear to continue its recent
winning performance, boosted by strong demand
from younger cohorts. Handbags and luggage
are also likely to see strong growth, reflecting a
global tourism boom that shows no sign of slowing.
Jewellery and watches, on the other hand, may
struggle in many markets as rental models start
to replace traditional sales. In apparel, the risingsustainability movement may be a slowing factor
in some markets, but the impact will probably beoffset by growth in emerging markets.

Operating profit performance. We expect
margins in aggregate to remain steadythrough 2019, despite caution among industry
players. Some 67 percent of respondents in the
BoF-McKinsey State of Fashion survey areconcerned that margins will decline. Reasonscited include the broad-based move from offline toonline channels, where margins tend to be thinnerand distribution costs are higher, partly driven
by high returns. Increased competition is also afactor, suggesting the need for rationalisation.
Further, rising transparency may increase thepressure on prices, and there is limited room forfurther cost cutting following recent initiatives.
On the other hand, there are several levers players
are using to improve profitability, including
efficiency drives, use of analytics to relieve
markdown pressure and automation enabling
faster speed to market.
At time of printing Brexit negotiations are still
underway. Our forecasts assume that the UK and
the EU will reach a deal enabling an orderly Brexit.
While the fashion sector stands to be impacted under
any scenario, failure to reach a deal (should it occur)
could undermine growth prospects significantly inthe short run. Current trade in finished fashion goods
between the EU and the UK is worth $23 billion(roughly 5 percent of the total European fashion
market and 1.3 percent of the global fashion market).
Including flows with all 67 countries with which the
EU has trade deals, this number rises to $28 billion(1.6 percent of the global fashion market).125

97

McKinsey Global Fashion Index

Exhibit 21:

Fashion industry sales growth by region,
category, and segment, 2018-2019

The State of Fashion 2019%

Source: McKinsey Global Fashion Index (MGFI)

98

99

Glossary
3D knitting
Manufacturing of a piece of clothing in one piecebased on a digital design.
A/B testingExperiments comparing two variants of a pageand determining which performs better forachieving a given goal.
APAC (emerging):
American Samoa, Bangladesh, Bhutan, Brunei,
Cambodia, China, Fiji, French Polynesia, Guam,
Hong Kong, India, Indonesia, Kiribati, Laos,
Macau, Malaysia, Mongolia, Myanmar, Nauru,
Nepal, New Caledonia, North Korea, Papua New
Guinea, Philippines, Samoa, Solomon Islands,
Sri Lanka, Thailand, Tonga, Tuvalu, Vanuatu,
Vietnam.

The State of Fashion 2019

APAC (mature):
Australia, Hong Kong, Japan, New Zealand,
Singapore, South Korea, Taiwan.
Application programming interface (API)Communication protocols and tool for enabling
access to various features or data of anotherservice.
Artificial Intelligence (AI)The theory and development of computer
systems able to perform tasks that normallyrequire human intelligence, such as visual
perception, speech recognition, decisionmaking and translation between languages.
B-Corporations
For-profit companies certified by B-Lab, aglobal nonprofit, which requires them to meetvarious social, environmental, accounting andtransparency standards.
Blockchain
A cryptographic or encoded ledger comprisinga digital log of transactions shared across a
network.
BoF-McKinsey State of Fashion Survey
Proprietary joint survey by the Business of
Fashion and McKinsey. It asks international
fashion executives and experts to rate theirbusiness sentiment, investment plans, andindustry trends. 274 respondents participatedin the State of Fashion Survey for the Stateof Fashion 2019 report between August and
September 2018.
Challenger brands
Brands deploying a non-traditional go-tomarket model (e.g., online direct to consumer,
exclusively digital marketing) competing
against established brands.
Chatbot
An AI-based computer programme that
conducts auditory or text-based conversation.
Compound Annual Growth Rate (CAGR)
Annualised average rate of growth between two
given years, assuming growth takes place at an
exponentially compounded rate.

100

Costs of goods sold (COGS)
An income statement item stating the total costs
used to create a product or service, which has
been sold.
Customer decision journey
The journey of customer decision making,comprised of four primary phases: initialconsideration; active evaluation, or the processof researching potential purchases; closure,when consumers buy brands; and post purchase,when consumers experience them.
Customer relationship management (CRM)
The strategy and processes for managing thecompany’s relationships and interactions withexisting and potential customers.
Earnings before interests and taxes (EBIT)
An income statement item that is calculated
by deducting operating costs and the costsof running the business from total revenue.
EBIT is the income a firm makes from its core
operations.
Earnings before interests, tax, depreciation
and amortisation (EBITDA)
An income statement item that deducts
depreciation and amortisation from EBIT. An
alternative measure of income a firm makes
from its core operations.
Earned media value (EMV)Media exposure gained through meansother than paid advertising or owned media.
Commonly used to measure influencer andsocial media marketing.
Economic profit
Measure for value add created by businesses,
whereby opportunity costs are deducted fromrevenues earned. A company creates value
when its operating profit exceeds the dollar costof capital. Economic Profit is defined as Net
Operating Profit, less Adjusted Taxes (NOPLAT)
minus Capital Charge (WACC multiplied by
Invested Capital).
Europe (Emerging)
Albania, Andorra, Armenia, Azerbaijan,
Belarus, Bosnia-Herzegovina, Bulgaria, Croatia,
Cyprus, Czech Republic, Estonia, Georgia,
Hungary, Kosovo, Latvia, Lithuania, Macedonia,
Moldova, Montenegro, Poland, Romania, Russia,
Serbia, Slovakia, Slovenia, Turkey, Ukraine.
Europe (Mature)
Austria, Belgium, Denmark, Finland, France,
Germany, Gibraltar, Greece, Iceland, Ireland,
Italy, Liechtenstein, Luxembourg, Malta,
Monaco, Netherlands, Norway, Portugal, Spain,
Sweden, Switzerland, United Kingdom.
Foreign direct investment
An investment made by a firm or individualin one country into controlling interests of anentity in another country.
Full-price sell-throughThe proportion of inventory that a retailer sells
at the full (non-discounted) price to consumers.

Generation Z (Gen Z)
Demographic cohort born circa 1995–2014,
following the millennial generation.
Gross Domestic Product (GDP)Macroeconomic measure of the market valueof all final goods and services produced in acountry within a defined period.
International Monetary Fund (IMF)
A global organisation with a stated mission to“foster global monetary cooperation, secure
financial stability, facilitate international trade,
promote high employment and sustainableeconomic growth, and reduce poverty aroundthe world.”
Initial public offering (IPO)
Very first sale of stock issued by a company on
public markets.
Invested capital
The total amount of investments made byholders of both a company’s debt and its equity.
Landed cost price
Cost of a garment sourced internationally
including production, transportation fees,
duties and other costs at the time of the arrivalat the target port.
LatAm
Anguilla, Antigua, Argentina, Aruba, Bahamas,
Barbados, Belize, Bermuda, Bolivia, Brazil,
British Virgin Islands, , Cayman Islands,
Chile, Colombia, Costa Rica, Cuba, Curacao,
Dominica, Dominican Republic, Ecuador, El
Salvador, Grenada, Guadeloupe, Guatemala,
Guyana, Haiti, Honduras, Jamaica, Martinique,
Mexico, Nicaragua, Panama, Paraguay, Peru,
Sint Maarten, Suriname, St Kitts, St Lucia,
St Vincent and the Grenadines, Trinidad andTobago, , Uruguay, Venezuela.
Key performance indicator (KPI)
A quantifiable measure used to evaluate thesuccess of an organisation in meeting objectives
for performance.
Machine learning
A form of artificial intelligence that automatesanalytical model building, enabling systems to“learn” with minimal human intervention.
Made-to-measure
A clothing item specifically made to fit anindividual.
McKinsey Global Fashion Index (MGFI)
Proprietary and copyrighted McKinsey toolthat provides a global and holistic industry
benchmark for the entire fashion industry. The
MGFI was first created for The State of Fashion2017 to track the industry performance throughthree key variables: sales, operating profit andeconomic profit. This year MGFI is composedof more than 500 public and private companies
spanning across market segments, productcategories and geographies. The analysis
of public companies is built with data from
McKinsey Corporate Performance Analytics.

MEA
Afghanistan, Algeria, Angola, Bahrain, Benin,
Botswana, Burkina Faso, Burundi, Cameroon,
Cape Verde, Central African Republic, Chad,
Comoros, Congo, Democratic Republic ofCongo, Djibouti, Egypt, Equatorial Guinea,
Eritrea, Ethiopia, Gabon, Gambia, Ghana,
Guinea, Guinea-Bissau, Iran, Iraq, Israel, Ivory
Coast, Jordan, Kazakhstan, Kenya, Kuwait,
Kyrgyzstan, Lebanon, Lesotho, Liberia,
Libya, Madagascar, Malawi, Maldives, Mali,
Mauritania, Mauritius, Morocco, Mozambique,
Namibia, Niger, Nigeria, Oman, Pakistan,
Qatar, Réunion, Rwanda, Sao Tomé e Príncipe,
Saudi Arabia, Senegal, Seychelles, Sierra
Leone, Somalia, South Africa, South Sudan,
Sudan, Swaziland, Syria, Tajikistan, Tanzania,
Togo, Tunisia, Turkmenistan, Uganda, United
Arab Emirates, Uzbekistan, Yemen, Zambia,
Zimbabwe.
Microfactory
Small, typically localised production designed
to handle end-to-end fabrication, leveraging
a variety of capabilities including 3D printing
and welding. Microfactories are often used for
prototyping and small batch production.

Platform-as-a-service
Capabilities extend from container
orchestration, code management andcontinuous deployment, to highly sophisticatedmachine learning platforms that commoditisemuch of what is cutting-edge.
Price segments in MGFIAs definitions of market segments often varyacross sources, all companies in the MGFI
are categorised based on a Sales Price Index,
providing a range of prices for a standard basketof products within each segment and homemarket — thereby relying only on a quantitative
measure, whereby companies in each segment
price their items similarly.
Public cloud
Computing services offered by third-party
providers over the public internet, making
them available to anyone who wants to use orpurchase them.
Pull based supply chain
Supply chain constructed to be responsive tocustomer demands. Products enter the supply
chain only when customer demands justify it.

Millennials (Generation Y/Gen Y)
Demographic cohort born circa 1982–99. Are
also commonly referred to as Generation Y (thisname is based on Generation X, the generationthat preceded them).

Push based supply chain
Supply chain based on forward looking
projections of customer demands. Productions
levels are predetermined and “pushed” to themarket.

MSCIGlobal stock market index of used as a common
benchmark for the “global” stock market.

Selling, general and administrative expenses(SG&A)
An income statement item stating all costs notdirectly tied to making a product or service.

Nearshore
Sourcing markets that are near a base country,
typically sharing a border. Advantages ofnearshore markets include geographic
proximity, shared time zones and cultural andpolitical linkages.
NOPLATNet Operating Profit, less Adjusted Taxes(NOPLAT) is the value a company createdthrough its core operations net of tax, if thecompany had no debt. It is calculated as EBIT
multiplied by 1 minus the tax rate.
North America
Canada, Puerto Rico, United States of America.
Organisation for Economic Co-operation
and Development (OECD)
An intergovernmental economic organisation
with the stated mission to “promote policies thatwill improve the economic and social well-beingof people around the world.”
Omnichannel
Sales approach that provides the customer withan integrated shopping experience across amultitude of online and offline sales channels.

Shoppability
Ease of turning a desire into a purchase from a
consumer’s perspective.
Software-as-a-service
Software distribution model in which athird-party provider hosts applications andmakes them available to customers over theInternet.

User interface (UI)
The intersection where an information devices
and users interact. Most common examples
include interactive aspects of operating systems
and interfaces of digital applications.
Value segments
Segmentation of the fashion markets andparticipating companies used in the McKinsey
Global Fashion Index and the BoF-McKinsey
State of Fashion Survey. The companies are
categorised in 6 segments, which are basedon a price index across a wide basked of goods
and geographies. The segments comprise fromlowest to highest price segment: Discount,
Value, Mid-market, Premium/Bridge,
Affordable Luxury, Luxury.
Visual search
Search tool designed to yield information basedon a visual based input, such as a photograph.
Weighted Average Cost of Capital (WACC)
Calculation of a firms cost of capital in which
each category of capital (debt and equity) is
proportionately weighted. It is the minimum
return that the holders of a company’s debt andequity expect given the risks associated withinvesting in the company.
White label
A product or service, sold from a company toa reseller, that is rebranded and packaged toappear as proprietary to the reseller.
“Woke”A phrase defined as “alert to injustice insociety,” popularised on social media andoften associated with the Black Lives Mattermovement.
World Input Output Database (WIOD)
To assess how the textiles and apparel value
chain is changing in our article “Global Value
Chains in Apparel: The New China Effect”, we
use the 2016 release of the World Input Output
Database (WIOD), which we extended back to
1995 and forward to 2017.

South-South trade
Trade between developing economies, also
known as countries of the Global South.
S&P 500
American stock market index consisting of 500
largest companies by market capitalisation.
Telemetry
An automated process of collecting informationfrom remote points and transmitting to areceiving hub.
Unorganised retail (India)
Retail sector consisting of private commercial
enterprises not registered with the government;
typically self-employed individuals.
User experience (UX)
Overall experience, including emotions,perceptions, and reactions, to the usage of a
product or service. UX design refers to the
optimisation of the experience.
101Endnotes
1 “World Economic Outlook DataMapper - RealGDP growth”, International Monetary Fund,
https://www.imf.org/external/datamapper/
NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD, “GDP growth (annual %)”,The World Bank, https://data.worldbank.
org/indicator/ny.gdp.mktp.kd.zg, and “RealGDP forecast”, Organisation for Economic
Co-operation and Development, https://data.oecd.org/gdp/real-gdp-forecast.
htm#indicator-chart
2 “Economic Conditions Snapshot, September
2018: McKinsey Global Survey results”,
McKinsey & Company
3 Politi, James and Stefania Palma, “IMF
readies for further danger signals in emerging
markets”, The Financial Times, 11th
October 2018, https://www.ft.com/content/
db4c046a-cd3e-11e8-b276-b9069bde0956

The State of Fashion 2019

4 Sandra Halliday, “Wolford speeds up costcuts, axes more jobs”, Fashion Network, 16th
October 2017, http://in.fashionnetwork.com/
news/Wolford-speeds-up-cost-cuts-axes-morejobs,880484.html#.W4Z-FugzaMo
5 Sherman, Lauren, “The Challenging,Emotional Remaking of J.Crew”, The Businessof Fashion, 29th August 2018, https://www.
businessoffashion.com/articles/professional/
the-challenging-emotional-remaking-of-j-crew
6 Wilmot, Stephen, “H&M Gets With the
Fashion for Cutting Costs”, The Wall Street
Journal, June 29th 2017, https://www.wsj.
com/articles/h-m-gets-with-the-fashion-forcutting-costs-1498739966
7 “Under Armour Cuts 400 More Jobs in
Turnaround Push”, The Business of Fashion via
Reuters, September 20th 2018, https://www.
businessoffashion.com/articles/news-analysis/
under-armour-cuts-400-more-jobs-inturnaround-push
8 Economist Intelligence Unit
9 Emerging Trends in the Indian Retail &Consumer Products Market”, McKinsey &Company, February 2018
10 “India Business of Fashion Report 2018 – The
Blending of the Worlds”, Images Group, 2018
11 “Global Smartphone User Penetration
Forecast by 88 Countries: 2007 – 2022”,
Strategy Analytics, 201712 “Digital in 2018 in Southern Asia”, We Are
Social and Hootsuite, 29th January 2018,https://www.slideshare.net/wearesocial/
digital-in-2018-in-southern-asia-86866282
13 “Berg, Achim, Saskia Hedrich, Tim Lange,
and Karl-Hendrik Magnus, “Digitization: The
next stop for the apparel-sourcing caravan”,
McKinsey & Company, September 2018,https://www.mckinsey.com/industries/retail/our-insights/digitization-the-next-stop-forthe-apparel-sourcing-caravan
14 “India Business of Fashion Report 2018 – The
Blending of the Worlds”, Images Group, 2018102

resale_report/2018/2018-resaleReport.pdf

15 “Basic road statistics of India, 2015-16”,
Government of India, http://morth.nic.in/
showfile.asp?lid=3100
16 “Our partnerships with global brands”,
Reliance Retail, https://relianceretail.com/
partner-brands.html
17 “Income Inequality and Poverty”, OECD
Centre for Opportunity and Equality, http://
www.oecd.org/els/soc/inequality-and-poverty.
htm
18 Biswas Soutik, “Why inequality in India
is at its highest level in 92 years”, BBC, 12th
September 2017, https://www.bbc.co.uk/news/
world-asia-india-41198638
19 “Corruption Perceptions Index 2017”,
Transparency International, 21st February
2018, https://www.transparency.org/news/
feature/corruption_perceptions_index_2017
20 Russel, Michelle, “AAFA again calls for swift
resolution to tariff dispute”, Just Style, 22nd
August 2018, https://www.just-style.com/news/
aafa-again-calls-for-swift-resolution-to-tariffdispute_id134314.aspx
21 Donaldson, Tara, “Apparel Prices at Walmart,
Gap Already Set to Rise in the US-China TradeWar”, Sourcing Journal, 21st September 2018,https://sourcingjournal.com/topics/trade/apparel-prices-at-walmart-gap-rise-amidtrade-war-119970/
22 Li, Jane, “With Louis Vuitton bag costing
just US$100 more in China, will mainlanders
still head to Hong Kong for shopping
expeditions?”, South China Morning Post, 4thJuly 2018, https://www.scmp.com/business/china-business/article/2153795/louis-vuittonbag-costing-just-us100-more-china-will
23 “Report on G20 Trade Measures (MidOctober 2017 to Mid-May 2018)”, World Trade
Organization, https://www.wto.org/english/
news_e/news18_e/g20_wto_report_july18_e.
pdf
24 McKinsey & Company analysis based on
Google trends
25 Pinnock, Olivia, “British Fashion Industry
Voices Brexit Concerns in White Paper,
Forbes, 3rd May 2018 https://www.forbes.
com/sites/oliviapinnock/2018/05/03/
british-fashion-industry-voices-brexitconcerns-in-white-paper/#6932a04b803d
26 McKinsey & Company analysis basedon https://www.bloomberg.com/quote/
GBPUSD:CUR and https://www.bloomberg.
com/quote/GBPEUR:CUR – Fall between
the week before Brexit referendum (spot rate
17/06/2016) to end of quarter 3 2018 (spot rate
28/09/2018)27 Fallor, Evan, “Footwear execs worried about
impact of tariffs on prices”, S&P Global 4th
May 2018
28 Berg, Achim, Saskia Hedrich, Tim Lange,
and Karl-Hendrik Magnus, “Digitization: The
next stop for the apparel-sourcing caravan”,

McKinsey & Company, September 2018,https://www.mckinsey.com/industries/retail/our-insights/digitization-the-next-stop-forthe-apparel-sourcing-caravan
29 McKinsey & Company analysis based on UN
Comtrade data
30 Holland, Steve and David Lawder, “Trump
hails Canada, Mexico trade pact as win for U.S.
workers”, Reuters, 1st October 2018, https://uk.reuters.com/article/uk-trade-nafta/
trump-says-trade-pact-with-canada-mexicowill-support-u-s-jobs-idUKKCN1MB28M
31 “World Trade Report 2014”, World Trade
Organization, 2014, https://www.wto.org/
english/res_e/booksp_e/world_trade_report14_e.pdf
32 Gene Tempest, “The president’s new
clothes,” PBS American Experience online,
PBS, 16th February, 2017, https://www.pbs.
org/wgbh/americanexperience/features/presidents-new-clothes/
33 Ayoki, Milton (2017): The impact ofmulti-fibre agreement phase-out on
Sub-Saharan Africa’s textiles and clothingexports
34 Bureau of Labor Statistics, Consumer Price
Index Data (2017)
35 Hsu, Tiffany, “Alibaba’s Singles Day Sales Hit
New Record of $25.3 Billion”, New York Times,
10 November, 2017, https://www.nytimes.
com/2017/11/10/business/alibaba-singles-day.
html
36 Double-clicking on the Chinese consumer:2017 Chinese consumer report, McKinsey &Company, November 2017
37 The apparel sourcing caravan’s next stop:
Digitization, McKinsey apparel CFO survey
2017, McKinsey Apparel, Fashion & LuxuryGroup, September 201738 Donahue, Bill, “China Is Turning Ethiopia
Into a Giant Fast-Fashion Factory”, Bloomberg,
2 March, 2018, https://www.bloomberg.com/
news/features/2018-03-02/china-is-turningethiopia-into-a-giant-fast-fashion-factory
39 “Five Year Plan – The State Council of thePeople’s Republic of China” http://english.gov.
cn/2017npcandcppcc/fiveyearplan/
40 Digitization: The Next Stop for the ApparelSourcing Caravan, McKinsey & Company,
September 201741 Townsend, Matthew, “Is Nike’s Flyknit
the Swoosh of the Future?”, Bloomberg,15
March, 2012, https://www.bloomberg.
com/news/articles/2012-03-15/
is-nikes-flyknit-the-swoosh-of-the-future
42 “Manufacturing-as-a-service? Amazon puts
fast fashion in the crosshairs with new patent,”
CB Insights, October 12, 2017
43 ThredUP 2018 resale report, 2018,https://cf-assets-tup.thredup.com/

44 Remy, Nathalie, Speelmann, Eveline, andSwartz, Steven; “Style that’s suistainable:
A new fast fashion formula”, McKinsey &Company October 2016, https://www.mckinsey.
com/business-functions/sustainabilityand-resource-productivity/our-insights/
style-thats-sustainable-a-new-fast-fashionformula
45 “Once worn, thrice shy – British women’swardrobe habits exposed!”, Barnardo’s, 11th
June 2015, http://www.barnardos.org.uk/news/
press_releases.htm?ref=105244
46 “Coutts Passion Index 2017”, Coutts, 6th
September 2017, https://www.coutts.com/
insight-articles/news/2017/coutts-passionassets-index-2017.html
47 McKinsey analysis based on: Sherman,
Lauren, “The price of transparency”, Businessof Fashion, 17th June 2016, https://www.
businessoffashion.com/articles/intelligence/
the-price-of-transparency; and based on prices
displayed on Louis Vuitton country web pages
in August 201848 “The RealReal – What’s in your closet?”,
CNBC, 22nd May 2018, https://www.
cnbc.com/2018/05/22/the-realreal-2018disruptor-50.html
49 Thomas, Lauren, “Online start-up The
RealReal to open its second luxury consignment
store, as e-commerce brands keep growing”,
CNBC, 31st July 2018, https://www.cnbc.
com/2018/07/31/therealreal-to-open-itssecond-luxury-consignment-store.html
50 “Worn Wear – Patagonia’s hub for keeping
stuff in use”, Patagonia, https://wornwear.
patagonia.com/
51 Reagan, Courtney, “Express is the latest
retailer to launch a clothing rental service”,
CNBC, 3rd October 2018, https://www.cnbc.
com/2018/10/03/express-is-the-latest-retailerto-launch-a-clothing-rental-service.html
52 Bezamat, Bia, “Ba&sh’s new NY store offers
free clothing rentals”, The Currenty Daily,
16th October 2018, https://thecurrentdaily.
com/2018/10/16/bash-free-clothing-rentals/
53 Cone Gen Z CSR study: How to
Speak Z, 2017, http://www.conecomm.
com/2017-cone-gen-z-csr-study-pdf
54 Tabaka, Marla, “Forget Millennial
Purchasing Power. Gen Z Is Where It’s At”,
Inc., https://www.inc.com/marla-tabaka/forget-millennial-purchasing-power-gen-z-iswhere-its-at.html
55 Cone Gen Z CSR study: How to
Speak Z, 2017, http://www.conecomm.
com/2017-cone-gen-z-csr-study-pdf
56 Mulligan Nelson, Erin, “Millennials
Want To Party With Your Brand But On
Their Own Terms”, AdAge, 2nd August 2012,https://adage.com/article/digitalnext/
millennials-party-brand-terms/236444/
57 “Definition of woke in English”, Oxford Living
Dictionaries, https://en.oxforddictionaries.
com/definition/woke
58 EDITED analysis in partnership with
McKinsey & Company, 2018
59 Menkes, Suzy, “#SuzyNYFW: Jeremy Scott
Presents Creative Anger”, Vogue, 7th September

2018, https://www.vogue.co.uk/article/
suzynyfw-jeremy-scott-presents-creative-anger
60 Singh, Supriya, “Uniqlo opens its doors
to job-seeking asylum-seekers at home andabroad”, The Japan Times, 4th January
2018, https://www.japantimes.co.jp/
news/2018/01/04/national/social-issues/
uniqlo-opens-doors-job-seeking-asylumseekers-home-abroad/#.W6uvfmhKg2w
61 Brown, Pamela, Stacey Haas, Sophie
Marchessou, and Cyrielle Villepelet,“Shattering the glass runway”, McKinsey& Company, October 2018, https://www.
mckinsey.com/industries/retail/our-insights/
shattering-the-glass-runway
62 Kochkodin, Brandon, “Buzz From Nike’s
Kaepernick Campaign Now Worth More Than
$163 Million”, Bloomberg, 6th September
2018, https://www.bloomberg.com/news/
articles/2018-09-06/value-of-nike-s-exposurefrom-kaepernick-ad-up-to-163-million
63 Taylor, Steve, “Primark’s Pride Range
Is A Disgrace”, Huffington Post, 24th
May 2018, https://www.huffingtonpost.
co.uk/entry/theres-no-pride-in-primark_uk_5b068b2fe4b01a19d2c96bc3, and Busby,
Mattha and Emma Snaith, “Stonewall andPrimark criticised for Pride T-shirts madein Turkey”, The Guardian, 2nd August 2018,https://www.theguardian.com/world/2018/
aug/02/stonewall-and-primark-criticisedpride-t-shirts-made-in-turkey-lgbt-rights
64 Guilbert, Kieran, “Adidas, Nike urged
to ensure fair wages for Asian workers
making World Cup kits”, Reuters, 11th June
2018, https://www.reuters.com/article/
us-asia-workers-worldcup-idUSKBN1J727J
65 “The instant gratification nation”, Fetch,
October 2017, https://marketing.wearefetch.
com/content/2017/10/Fetch_2017_October_Whitepaper_InstantGratification.pdf
66 Solis, Brian, “Impatience Is A Virtue:
How The On-Demand Economy Is Making
Mobile Consumers Impatient”, Forbes, 20th
November 2017, https://www.forbes.com/sites/
briansolis/2017/11/20/impatience-is-a-virtuehow-the-on-demand-economy-is-makingmobile-consumers-impatient
67 “2017 Millennial Shopper Survey - How
Social Media Influencers Impact Purchasing
Decisions”, dealspotr, Winter 2017, https://dealspotr.com/reports
68 McKinsey & Company Digital Opportunity
Scan of 48 apparel and jewelry retailers covering
12 months of trading in US, UK, Europe, Asia,
September 2018
69 Smith, Craig, “23 Amazing Shazam Statistics
and Facts, Expanded Ramblings, 11th October
2018, https://expandedramblings.com/index.
php/shazam-statistics/
70 O’Hear, Steve, “21Buttons, a socialcommerce app dedicated to fashion, closes$10M Series A”, TechCrunch, 5th October 2017,https://techcrunch.com/2017/10/05/21buttons/
71 “Screenshop – How it works”, Screenshop,
https://screenshopit.com/#howitworks
72 “Live ‘Snap the Look’ results for Marie
Claire during London Fashion Week 2016”,
SnapTech, https://www.snaptechnology.co.uk/
case-studies/marie-claire

73 “Shu, Catherine, Syte.ai’s new API makes
visual search accessible to more online
fashion retailers”, TechCrunch, 7th December
2017, https://techcrunch.com/2017/12/07/
syte-ais-new-api-makes-visual-searchaccessible-to-more-online-fashion-retailers/
74 “ViSenze Unveils Shoppable User Generated
Content Powered by Computer Vision at
Shoptalk 2018”, BusinessWire, 19th March
2018, https://www.businesswire.com/news/
home/20180319006120/en/ViSenze-UnveilsShoppable-User-Generated-Content-Powered
75 “ViSenze, The Global Leader for AI Powered
Visual Shopping, Raises US$10.5 Million
In Series B Funding”, PR Newswire, 15th
September 2016, https://www.prnewswire.com/
news-releases/visenze-the-global-leader-for-aipowered-visual-shopping-raises-us105-millionin-series-b-funding-300327869.html
76 Shannon, Sarah, “Fast Fashion
Slow to E-Commerce”, The Business of
Fashion, 17th August 2017, https://www.
businessoffashion.com/articles/intelligence/
fast-fashion-slow-to-e-commerce
77 “2018 Edelman Trust Barometer Global
Report”, Edelman, 2018, https://cms.edelman.
com/sites/default/files/2018-01/2018%20
Edelman%20Trust%20Barometer%20
Global%20Report.pdf and “Millennials: Burden,
blessing, or both?”, McKinsey & Company,
February 2016, https://www.mckinsey.com/
business-functions/organization/our-insights/
millennials-burden-blessing-or-both
78 “When respect for diversity is taken
to crazy extremes”, The Economist, 15th
May 2018, https://www.economist.com/
open-future/2018/05/15/when-respect-fordiversity-is-taken-to-crazy-extremes
79 “Decoding the Millennial Marketplace”,
McKinsey & Company, 23rd August 2016
80 Bain, Marc, “H&M’s new brand, Arket,
names the factory that made its clothes.
But the name isn’t enough”, Quartz, 30th
August 2017, https://qz.com/1064098/
hms-new-brand-arket-is-fashionstransparency-conundrum-in-a-nutshell/
81 Arthur, Rachel, “From Farm To Finished
Garment: Blockchain Is Aiding This Fashion
Collection With Transparency”, Forbes, 10th
May 2017, https://www.forbes.com/sites/
rachelarthur/2017/05/10/garment-blockchainfashion-transparency/#b8947e674f39
82 Gerdeman, Dina, “The Benefits of Cost
Transparency”, Forbess, 15th December
2014, https://www.forbes.com/sites/
hbsworkingknowledge/2014/12/15/whenretailers-reveal-production-costs-consumersare-more-likely-to-buy/#1fae88c568a1
83 Emerson, Susannah, “Everlane,
Reformation…Why Transparency Matters in
the Fashion Industry”, Mochni, https://www.
mochni.com/everlane-reformation-whytransparency-matters-in-the-fashion-industry/
84 “Decoding the Millennial Marketplace”,
McKinsey & Company, 23rd August 201685 McKinsey & Company analysis based on
Instagram data
86 McKinsey & Company analysis based on
Influencerdb.net data
87 Morency, Christopher, “Is Luxury’s Love103

Endnotes cont.
Affair With ‘Drops’ More Than Marketing?”,
The Business of Fashion, 9th August 2018,https://www.businessoffashion.com/articles/
professional/is-luxurys-love-affair-withsupreme-style-drops-more-than-marketingmoncler-burberry-off-white-celine
88 Wolf, Cam, “Even Comme des Garçons Is
Launching a Direct-to-Consumer Brand”, GQ,
2nd April 2018, https://www.gq.com/story/
comme-des-garcons-new-brand-announcement
89 “LVMH launches accelerator programfor 50 international startups annually at
Station F to contribute to innovation inluxury”, LVMH, 10th April 2018, https://www.lvmh.com/news-documents/news/
lvmh-launches-accelerator-program-for-50international-startups-annually-at-station-fto-contribute-to-innovation-in-luxury/
90 Nielsen Retail Measurement, 201891 McKinsey Start-up and Investment
Landscape Analysis

The State of Fashion 201992 McKinsey millennial survey
93 McKinsey web research and store visits,
February 2018
94 Nielsen Retail Measurement Service, 52
weeks ending April 2017
95 GlobalData craft beer share estimates, 2018
96 “Snack bar company Kind explores
stake sale”, Reuters, July 2017, https://www.reuters.com/article/us-kind-llc-m-a/snack-bar-company-kind-explores-stake-salesources-idUSKBN19S214
97 “How an ex-lawyer built Halo Top into an
ice cream sensation with $347 million in sales”,
CNBC, November 2018, https://www.cnbc.
com/2018/11/01/halo-top-beat-ben--jerrysbrings-in-hundreds-of-millions-in-sales.html
98 “Fever-Tree upgrades forecasts as halfyear revenue rises 45%”, The Drinks Business,
July 2018, https://www.thedrinksbusiness.
com/2018/07/fever-tree-upgrades-forecasts-ashalf-year-revenue-rises-45/
99 Euromonitor brand share estimates, 2016
100 “TPG – Beauty’s Next Big Investor?”,
WWD, May 2018, https://wwd.com/
beauty-industry-news/beauty-features/
tpg-beauty-next-big-investor-1202669250/
101 McKinsey Start-up and Investment
Landscape Analysis, Pitchbook
102 EDITED analysis in partnership with
McKinsey
103 IBID
104 Thomas, Lauren, “Amazon’s 100 million
Prime members will help it become the No. 1
apparel retailer in the US”, CNBC, https://www.
cnbc.com/2018/04/19/amazon-to-be-the-no1-apparel-retailer-in-the-us-morgan-stanley.
html

104

105 Jain, Varun, “Flipkart Fashion looks toextend market share with Big Billion Days”,
The Economic Times, 1st October 2018, https://retail.economictimes.indiatimes.com/news/ecommerce/e-tailing/flipkart-fashion-looksto-extend-market-share-with-big-billiondays/66028974
106 Singh, Prachi, “FarFetch net loss widens
but revenues jump 74 percent”, Fashion United,
15th November 2017, https://fashionunited.uk/
news/business/farfetch-net-loss-widens-butrevenues-jump-74-percent/2017111526787
107 Crockett, Zachary, “Sh*t, I’m F*cked:
Jason Goldberg, Founder of Fab”, The Hustle,
17th October 2017, https://thehustle.co/jason-goldberg-fab
108 Kapner, Susan, “Hudson’s Bay Sells Gilt
Groupe, Will Close Lord & Taylor FlagshipStore”, The Wall Street Journal, 5th June
2018, https://www.wsj.com/articles/
gilt-groupe-sold-to-rival-rue-la-la-1528154398
109 “Flipkart unveils its “AI For India”
program”, India Digital Review, 2018,
http://indiadigitalreview.com/
flipkart-unveils-ai-india-program/
110 “Zalando SE – More than just a retailer;
upgrade to Outperform” RBC Capital Market
report, 12th March 2018
111 Berg, Achim, Saskia Hedrich andKarl-Hendrik Magnus et al., “Is apparel
manufacturing coming home?”, McKinsey& Company, October 2018, https://www.
mckinsey.com/industries/retail/our-insights/
is-apparel-manufacturing-coming-home
112 Hendriksz, Vivian, “Boohoo, Asos &Missguided pave the way for ‘Ultrafast
Fashion’”, Fashion United, 24th May 2017,https://fashionunited.uk/news/fashion/boohoo-asos-missguided-pave-the-way-forultrafast-fashion/2017052424625
113 Berg, Achim, Saskia Hedrich andKarl-Hendrik Magnus et al., “Is apparel
manufacturing coming home?”, McKinsey& Company, October 2018, https://www.
mckinsey.com/industries/retail/our-insights/
is-apparel-manufacturing-coming-home
114 McKinsey & Company analysis based on
expert interviews
115 Crouch, Dorothy, “ShareCloth Streamlines
On-Demand Apparel Manufacturing”,
Apparel News, 12th July 2018, https://www.
apparelnews.net/news/2018/jul/12/shareclothstreamlines-demand-apparel-manufacturin/
116 Wiener, Anna, “Inside Adidas’ RobotPowered, On-Demand Sneaker Factory”, Wired,
29th November 2017, https://www.wired.
com/story/inside-speedfactory-adidas-robotpowered-sneaker-factory/
117 Halliday, Sandra, “Superdry launches fast
fashion youth line, names product chief from
Hilfiger”, Fashion Network, 12th September
2018, https://uk.fashionnetwork.com/news/
Superdry-launches-fast-fashion-youth-line-

Infographics
names-product-chief-from-Hilfiger,1012811.
html#.W7tsG2hKg2w
118 Lee, Tommy, “Amazon goes automatedwith on-demand clothing”, Textile Evolution,
19th April 2017, https://www.tevonews.com/
textile-machinery-news/846-amazon-goesautomated-with-on-demand-clothing
119 Nussey, Sam, “Uniqlo owner aims to makeon-demand knitwear with Japan’s Shima Seiki”,
Reuters, 13th July 2018, https://uk.reuters.
com/article/fast-retailing-shima-seiki/
update-1-uniqlo-owner-aims-to-make-ondemand-knitwear-with-japans-shima-seikiidUKL4N1U92ZW
120 Okutso, Akane, “Uniqlo to debut on-demand
knitwear to counter Zozo”, Nikkei Asia Review,
15th July 2018, https://asia.nikkei.com/
Business/Companies/Uniqlo-to-debut-ondemand-knitwear-to-counter-Zozo
121 “The “ZOZOSUIT” developed by Start
Today Reaches 1 Million Orders, and the Private
Brand “ZOZO” Aims for 20 Billion Yen for its
First-Year Sales”, ZOZ, 1st May 2018, https://corp.zozo.com/en/news/20180501-3849/
122 New textiles economy: Redesigning
fashion’s future, Ellen MacArthur
Foundation, November 2017, https://www.
ellenmacarthurfoundation.org/assets/
downloads/publications/A-New-TextilesEconomy_Full-Report_Updated_1-12-17.pdf
123 Berg, Achim, Saskia Hedrich andKarl-Hendrik Magnus et al., “Is apparel
manufacturing coming home?”, McKinsey& Company, October 2018, https://www.
mckinsey.com/industries/retail/our-insights/
is-apparel-manufacturing-coming-home
124 Manyika, James, Ramaswamy, Sree, Bughin,
Jacques et al., “Superstars - The dynamics offirms, sectors, and cities leading the global
economy”, McKinsey Global Institute, October
2018
125 Based on McKinsey trade flow databasecalculations and McKinsey Fashionscopemarket size estimates

The State of Fashion 2019 infographics:

Infographics:

1. Caution ahead
Source: BoF-McKinsey State of Fashion Survey,
The Business of Fashion and McKinsey &Company, September 2018

Exhibit 1-4. Industry outlook
Source: BoF-McKinsey State of Fashion Survey,
The Business of Fashion and McKinsey &Company, September 2018

2. Indian ascent
Source: “Global Smartphone User Penetration
Forecast by 88 Countries: 2007 – 2022”,
Strategy Analytics, 2017

Exhibit 5. Expected changes in global
economic conditions, in 6 months
Source: Smit, Sven, “Economic Conditions
Snapshot, September 2018: McKinsey Global
Survey results”, McKinsey & Company,
September 2018, https://www.mckinsey.
com/business-functions/strategyand-corporate-finance/our-insights/
economic-conditions-snapshot-september2018-mckinsey-global-survey-results

3. Trade 2.0
Source: Smit, Sven, “Economic Conditions
Snapshot, September 2018: McKinsey Global
Survey results”, McKinsey & Company,
September 2018, https://www.mckinsey.
com/business-functions/strategyand-corporate-finance/our-insights/
economic-conditions-snapshot-september2018-mckinsey-global-survey-results
4.End of ownership
Source: BoF-McKinsey State of Fashion Survey,
The Business of Fashion and McKinsey &Company, September 2018
5. Getting woke
Source: EDITED analysis in partnership with
McKinsey & Company, September 2018
6. Now or Never
Source: ”The urban delivery bet: USD 5 billion in
venture capital at risk?”, McKinsey & Company,
May 2017
7. Radical transparency
Source: BoF-McKinsey State of Fashion Survey,
The Business of Fashion and McKinsey &Company, September 2018
8. Self disrupt
Source: BoF-McKinsey State of Fashion 2018
Survey, The Business of Fashion and McKinsey& Company, 2018
9. Digital landgrab
Source: McKinsey Global Fashion Index 2018
based on McKinsey Corporate Performance
Analytics data, McKinsey & Company, 2018
10. On demand
Source: Andersson, Johanna, Achim
Berg, Saskia Hedrich and Karl-Hendrik
Magnus et al., “Is apparel manufacturing
coming home?”, McKinsey & Company,
October 2018, https://www.mckinsey.
com/industries/retail/our-insights/
is-apparel-manufacturing-coming-home

Exhibit 6. Real GDP CAGR
Source: McKinsey & Company analysis basedon Economist Intelligence Unit CountryData,
https://store.eiu.com/product/countrydata
Exhibit 7. Belief that changes in trade policy
will pose potential risks to global economic
growthSource: Smit, Sven, “Economic Conditions
Snapshot, September 2018: McKinsey Global
Survey results”, McKinsey & Company,
September 2018, https://www.mckinsey.
com/business-functions/strategyand-corporate-finance/our-insights/
economic-conditions-snapshot-september2018-mckinsey-global-survey-results

Exhibit 14. Aspiration level for shift tonearshoring
Source: Andersson, Johanna, Achim
Berg, Saskia Hedrich and Karl-Hendrik
Magnus et al., “Is apparel manufacturing
coming home?”, McKinsey & Company,
October 2018, https://www.mckinsey.
com/industries/retail/our-insights/
is-apparel-manufacturing-coming-home
Exhibit 15. Automation of sewing will be thebiggest driver of labour reduction
Source: Estimates by McKinsey & Company and
ITA at RWTH Aachen
Exhibit 16. Nearshoring and automation will
be important enablers to reach a circularvalue chain
Source: Interviews with experts; McKinsey &Company
Exhibit 17-21. McKinsey Global Fashion
Index (MGFI)
Source: McKinsey Global Fashion Index basedon McKinsey Corporate Performance Analytics
data, McKinsey & Company, 2018

Exhibit 8. Expectations on consumer
appetite for new ownership models
Source: BoF-McKinsey State of Fashion Survey,
The Business of Fashion and McKinsey &Company, September 2018
Exhibit 9. Total fashion, apparel and beauty
B-corps
Source: B Lab , a non profit organization listing
all B-corporations, data provided in August 2018
Exhibit 10. Mobile continues to lag desktop
in sales conversion
Source: McKinsey Digital Opportunity Scan of
48 apparel, jewelry, retailers in US, UK, Europe,Asia, September 2018
Exhibit 11. Fashion executives anticipate
consumers’ need for transparency
Source: BoF-McKinsey State of Fashion Survey,
The Business of Fashion and McKinsey &Company, September 2018
Exhibit 12. Instagram like – follower ratio(LFR) Source: McKinsey & Company analysis
based on Instagram data
Exhibit 13. 2017 average market
capitalization to EBITDA multiples
Source: McKinsey Global Fashion Index 2018
based on McKinsey Corporate Performance
Analytics data, McKinsey & Company, 2018

105

The State of Fashion 2019

Contacts

LONDONNEW YORKSHANGHAI

23-31 Great Titchfield Street
6th Floor
London W1W 7PA

2403 Broome Street
Suite 4a
New York, NY 10013

Unit 5-118, 3F,
No819 West Nanjing Road
Jiang’an District,
Shanghai

FOR COMMERCIAL ENQUIRIES PLEASE CONTACT:

Nick Blunden
Chief Commercial Officer

Kayvan Salmanpour
President, North America

Arsalaan Hyder
Chief Operating Officer

nick.blunden@businessoffashion.com

kayvan.salmanpour@businessoffashion.com

arsalaan.hyder@businessoffashion.com

Christian Layolle
European Business
Development Director

Johanna Stout
US Business Development
Directorchristian.layolle@businessoffashion.com

johanna.stout@businessoffashion.com

Piers Hopkins
Country Manager
piers.hopkins@businessoffashion.com

FOR EDITORIAL ENQUIRIES PLEASE CONTACT:For questions on the report or further discussions, please contact a member of McKinsey’s Apparel,
Fashion & Luxury global leadership team:

FOR REPORT ENQUIRIES:FOR REGIONALLY FOCUSED ENQUIRIES:

Achim Berg
Senior Partner, Frankfurt

Antonio Achille
Senior Partner, Milan

Clarisse Magnin
Senior Partner, Paris

achim_berg@mckinsey.com
linkedin.com/in/achim-berg/antonio_achille@mckinsey.com

clarisse_magnin@mckinsey.com

Vikash Daga
Senior Partner, Delhi

Karl-Hendrik Magnus
Partner, Frankfurt

vikash_daga@mckinsey.com

karl-hendrik_magnus@mckinsey.com

Gemma D’Auria
Partner, Dubai

Althea Peng
Partner, San Francisco

FOR PRESS ENQUIRIES PLEASE CONTACT:

gemma_dauria@mckinsey.com

althea_peng@mckinsey.com

Adriana Clemens
Senior Communication
Specialist, Düsseldorf

Damien HattinghPartner, Johannesburg

Jennifer Schmidt
Senior Partner, Minneapolis

damien_hattingh@mckinsey.com

jennifer_schmidt@mckinsey.com

Naoyuki Iwatani
Senior Partner, Tokyo

Fábio Stul
Senior Partner, Sao Paulonaoyuki_iwatani@mckinsey.com

fabio_stul@mckinsey.com

Sara Kappelmark
Partner, StockholmAlex Sukharevsky
Senior Partner, Moscow

sara_kappelmark@mckinsey.com

alex_sukharevsky@mckinsey.com

Aimee Kim
Senior Partner, Seoul

Daniel Zipser
Senior Partner, Shanghai

aimee_kim@mckinsey.com

daniel_zipser@mckinsey.com

Anita Balchandani
Partner, London
anita_balchandani@mckinsey.com
linkedin.com/in/anita-balchandani/adriana_clemens@mckinsey.com
linkedin.com/in/adriana-clemens

Vikram Alexei Kansara
Editorial Director

Lauren Sherman
Chief Correspondant

Robb Young
Global Markets Editor

vikram.kansara@businessoffashion.com

lauren.sherman@businessoffashion.com

robb.young@businessoffashion.com

106107