World of Fashion
McKinsey Outlook Pessimistic: On a Solid Foundation into a Turbulent 2023
by Yvonne Heinen-Foudeh, Senior International Correspondent
McKinsey & Company's annual report "The State of Fashion" paints a less than rosy picture for 2023. 56% of fashion executives surveyed expect conditions to worsen in 2023 compared to the previous year, according to the consultancy's global study. Although the consulting company’s global panel found the fashion industry recovered noticeably as the pandemic subsided, with sales up 21% in 2021, it said. In the first half of 2022, sales at the players considered continued to rise by as much as 13 percent, it said. However, the year's recovery slowed due to a series of previously "unprecedented challenges" from issues within supply chains, the global fallout from the war in Ukraine, the energy crisis, and inflation. At least fashion companies were able to build a solid foundation in 2021 and the first half of 2022, so they are better equipped to weather the current turmoil.
Given the current overall situation, 85 percent of the intercontinental fashion executives who took part in the survey believe that inflation will be the biggest challenge of all this year. That rising energy prices will continue to weigh on the market is believed by 58 percent.
The Favorable Wind in which the luxury sector and also the sportswear segment apparently sail even in stormy weather is also evident when the fashion companies with the highest average profits between 2019 and 2021 are compared. Sportswear manufacturer Nike, for example, tops the list of the top 20 most profitable companies, followed by luxury groups LVMH, Kering, and Hermes in second, fourth, and fifth place. Competitors Adidas and Anta ranked seventh and ninth, respectively, in the McKinsey-BoF study.
Yvonne Heinen-Foudeh
Product segments: winners and losers
The field in the global fashion industry is divided essentially into two groups: According to the report, sales of luxury fashion will grow between 5 and 10 percent worldwide in 2023, while revenue expectations for the remaining segments range between minus two percent and plus three percent. "2023 could be particularly challenging for the mid-market segment, which has been hit hard by economic downturns in the past," Dr. Achim Berg, senior partner in McKinsey & Company's Frankfurt office, tells us. Berg, also head of the Global Apparel, Fashion & Luxury Group there, continues, "Consumers with lower incomes will limit their spending in the face of macroeconomic challenges. More likely to reach for lower price points and discounted items." Higher-income consumer groups, which are less affected by the economic downturn, are likely to continue spending money on luxury goods, it is believed.
Ergo, a continuation of the development - merely at a lower level: Because even during the pandemic, two fashion sectors, in particular, shone: The luxury sector generated an average of 79 percent more profit from 2019 to 2021 than in the eight previous years. Active and sportswear even generated an average of 121 percent more profit in the period than in the years 2010 to 2018.
Interestingly, 39 percent of executives in the fashion industry as a whole expect the occasion wear segment to be among the top three growth categories in 2023. For mid-market brands, this could in turn be an advantage, as consumers allow themselves a higher budget for special events.
According to the consultants, segment-related shifts are increasingly being joined by shifts in sales and production. The report is rather cautious about a forecast of the time frame. McKinsey points to the high complexity of any kind of regional changes in manufacturing. "These cannot be changed from one day to the next. Rather, they are strategic steps that manufacturers take with their long-term goals and customer base in mind." As a result, due to the current economic situation, some plans are likely to be delayed as manufacturers and brands postpone major investments, the statement told the newsroom. However, the company said it expects these trends to resume after the economy slows.
Regional shifts
Retail sales will not only develop in different directions by segment in 2023 but also regionally.
Forecasts for the U.S. market next year are slightly more optimistic than for Europe, for example, with luxury sales expected to increase between five to ten percent and the rest of the market between 1 to 6 percent. In China, expectations are somewhat higher still - at nine to 14 percent in the luxury sector and two to seven in the rest of the market. Because of this forecast, it is not surprising that regions such as North America and the Middle East are rated by the fashion managers surveyed as the most promising for expansion, while Western Europe is becoming less attractive. Here, McKinsey expects growth of between three and eight percent for the luxury segment. By contrast, revenue expectations for the medium and aggressively priced fashion market are between minus four and one percent.
Forecasts for the U.S. market next year are slightly more optimistic than for Europe, for example, with luxury sales expected to increase between five to ten percent and the rest of the market between 1 to 6 percent. In China, expectations are somewhat higher still - at nine to 14 percent in the luxury sector and two to seven in the rest of the market. Because of this forecast, it is not surprising that regions such as North America and the Middle East are rated by the fashion managers surveyed as the most promising for expansion, while Western Europe is becoming less attractive. Here, McKinsey expects growth of between three and eight percent for the luxury segment. By contrast, revenue expectations for the medium and aggressively priced fashion market are between minus four and one percent.
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Yvonne Heinen-Foudeh
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Cost pressure continues to rise
More than 97 percent of respondents foresee rising costs for goods sold as well as higher expenses for sales and administration. Most of them plan to counter rising costs with price increases.
It is therefore hardly surprising that 37 percent of those surveyed want to pay massive attention to costs and 63 percent are focusing on increasing sales. By comparison, even in 2021, when COVID restrictions still plagued the fashion industry, only 33 percent of fashion executives said they wanted to pay more attention to costs. For 2022, only 13 percent were devoting more attention to cost savings.
On the sales side, companies expect increased returns costs in e-commerce with negative effects on profit margins.
And what are the findings regarding the dominant strategies of companies to counter the growing cost pressure? - we hooked up with McKinsey while working on this review article. Sandrine Devillard, senior partner at McKinsey in Montreal answers The Needle's Eye promptly and to the point: "Nearly three-quarters of executives plan to raise prices on goods in the coming year, and ten percent expect prices to rise more than ten percent."
On the sales side, companies expect increased returns costs in e-commerce with negative effects on profit margins.
And what are the findings regarding the dominant strategies of companies to counter the growing cost pressure? - we hooked up with McKinsey while working on this review article. Sandrine Devillard, senior partner at McKinsey in Montreal answers The Needle's Eye promptly and to the point: "Nearly three-quarters of executives plan to raise prices on goods in the coming year, and ten percent expect prices to rise more than ten percent."
Nearshoring is considered by 65% of the survey participants, followed by strategic partnerships along the supply chain on the part of 61% of the decision-makers, as the most important measures to secure the supply chain. Source: BoF-McKinsey State of Fashion Study
Discovering optimization potential, enabling fact-based communication - also in order to be able to counter greenwashing accusations in a well-founded manner: Two aspects out of many that earned the keyword "sustainability" top marks from the study participants when asked about the three most promising strategies. - Inflation and the risk of recession are seen as the greatest threats. [Figures in % of respondents] Source: BoF-McKinsey State of Fashion Study