According to the eighth annual fashion report by McKinsey & Co, The State of Fashion 2024, 70% of chief procurement officers responding to the survey, believe that improving demand transparency with suppliers through systems and processes is critical in navigating market turmoil.

Cultivating strategic partnerships with key suppliers could also be considered and could include longer-term contracts with not only direct suppliers, but also tier two, tier three and tier four partners that are vital to a business.

“The upheavals of recent years have made clear that fashion companies and their suppliers not only depend on each other to succeed, but also endure challenges together. 2024 will likely provide further evidence as to why,” the report reads.

McKinsey Fashion report outlines supplier-brand relationship in 2024

Changes in consumer demand have resulted in the “bullwhip effect,” where cuts to orders increase in magnitude at different parts of a supply chain, putting pressure on fashion’s suppliers. If supply is to keep pace with anticipated renewed demand, brands and retailers should consider focusing on transparency and bolstering strategic partnerships.

The bullwhip effect reached fashion in 2020 and 2021 as retailers contended with pandemic related disruptions when products arrived late and overcompensated for inventory shortages by ordering too much stock. When post-pandemic inflationary pressures and economic uncertainty arose in the second half of 2022, making consumers more cautious than anticipated, retailers were left with billions of dollars in unsold goods.

As a result, many orders for the upcoming 2023 season were reduced or cancelled. The pullback has disproportionately impacted upstream suppliers. Across seven of the world’s biggest textile-exporting countries, fabric exports dropped nearly 20% in the last quarter of 2022 compared to the year prior, followed by a 40% drop in yarn exports in the first quarter of 2023. Factories that were at full capacity in 2021 may have been operating at 30-40% below capacity in 2023, according to industry experts.

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73% of chief procurement officers cited demand volatility as a dynamic that may impact supplier relationships in the next five years.

The issue is exacerbated by humanitarian crises within producer countries such as the Türkiye earthquakes and the flooding of cotton crops in Pakistan, resulting in lower exports and a production shift that led to over a million workers losing jobs. This is also true of employment levels in Bangladesh, Sri Lanka and Cambodia. Increased stress on factories is increasing the risk of labour abuses such as wage theft, union busting, and worker strikes over poor pay.

While at some point the effects are expected to balance out, the consequences of the bullwhip effect may continue to linger. Layoffs and delayed investments may mean the industry is insufficiently prepared to scale up capacity quickly. Worker displacement and skills loss may create major challenges for the industry.

Factories short on staff and dealing with hiring and training new employees could face longer production timelines. Brands and retailers not prepared for these shifts could incur higher expenses to compensate for the potential delays. For example, they may need to pay for expedited shipping, overtime work or additional warehouse space. Those that try to rush production face other costs, such as increased quality issues that can damage a company’s reputation with consumers.

Many companies are rethinking their supply chains to de-risk manufacturing.

54% of executives expect to increase reshoring or nearshoring in 2024.

Others are thinking about rebalancing their sourcing footprint by sourcing from multiple countries.

“However, these approaches are not without challenges. Finding and contracting new suppliers, or partnering more closely with existing strategic ones, can be costly. Companies can also run into manufacturing limitations compared to traditional sourcing hubs or face new regulatory and compliance factors,” reads the McKinsey State of Fashion 2024 report.

“Another consequence of the slowdown is that suppliers have fallen behind in critical investments in new infrastructure for both speed and sustainability.”

The general mood around 2024

“Uncertainty” is the most prominent sentiment among fashion leaders according to the State of Fashion 2024 Executive Survey with causes for concern including geopolitical events, weakened economies and the continuing impact of high interest rates.

Consumers net intent to spend on apparel is down 16% across the US, Europe and China in Q4 2023.

But there is still a sense of subtle optimism with sales expected to grow by 2-4% for the fashion industry over 2024.

• 26% of respondents to the survey conducted in early September expected conditions to improve year on year in 2024
• 37% expected conditions to remain the same
• 38% expected the situation to worsen.

Geopolitics ranks high in the table of factors keeping industry executives up at night with 62% of the respondents in the survey citing it as the top risk to growth. economic volatility is another concern, though inflation appears to be less of a concern – 55% of respondents expect it to be an issue compared to 78% last year.

In a bid to combat inflation, intent to raise prices is high among industry executives, with 69% of them saying the plan to do so compared to 58% a year earlier. A quarter of them plan increases of more than 5%.

“Companies that succeed in driving growth through price rises will likely take a precise, carefully tailored approach.”

There is also likely to be a concerted effort across the industry to cut costs, but the report warns that with the industry already seeing widespread cost cutting, the focus should be on stricter controls instead.

Executives do however expect to feel pressure around costs ease, with just 18% expecting cost of goods sold (CGS) to grow more then 5% next year and 19% expecting selling, general and administration costs (SG&A) to rise more than 5%.

This is in contrast to last year, when 55% expected COGS growth of more than 5%, and 40% expected SG&A growth of more than 5%. One of the primary reasons for the difference is concerns over inflation abating.

Sustainability, AI key focus areas for execs in 2024

If the climate crisis goes on unaddressed it could put at risk an estimated $65bn worth of apparel exports by 2030, with inaction “no longer an option” the McKinsey & Co State of Fashion 2024 report reads.

The annual report’s key message this year is that fashion brands and retailers can no longer ignore the climate crisis with extreme events already placing the lives and livelihoods of fashion workers in danger. With sustainability regulations coming into effect in the EU and elsewhere that mandate companies disclose environmental impacts in their supply chains, and the push from investors for companies to disclose data about scope three emissions, the risk may only increase for brands and retailers.

• 87% of fashion executives think sustainability regulations will impact their businesses in 2024
• 12% of respondents citing it as a principal opportunity for the year.

“The era of the fashion industry self-regulating sustainability is drawing to a close around the world. Across jurisdictions, new rules could have a widespread impact on both consumers and fashion players. Brands and manufacturers need to revamp business models to align with the changes ahead.

“Finding a balanced way to implement sustainability improvements and risk-reduction programmes with competitive advantages is likely to be a key challenge for fashion executives in 2024,” reads the McKinsey State of Fashion 2024 report.

Sustainability can have a large and positive impact for brands if tackled at the early production stages.

Upstream supply chain activities account for the majority of carbon emissions in apparel and so there may be a sharper focus on decarbonising material and garment production.

“In the production process, main decarbonisation levers include energy efficiency and energy transition initiatives. As brands shift to more sustainable materials, they may look for new suppliers or join strategic alliances. Kering, for example, has established supplier-focused sourcing standards and created the Material Innovation Lab dedicated to the sourcing of sustainable materials and fabrics, while Hermès has partnered with start-up MycoWorks’ to secure access to its engineered mycelium.”

Will fast fashion go away as the pressure to be more sustainable grows?

In a nutshell, no. In fact competition is expected to become fiercer with challengers, led by fast fashion brands Shein and Temu, changing tactics around price, customer experience and speed.

“Success for disruptors and incumbents will likely hinge on their ability to adapt to evolving consumer preferences, while navigating regulations that may impact the industry.”

Meanwhile, AI and generative AI are another priority focus area for industry executives in 2024.

73% of fashion executives think generative AI is a 2024 priority for their companies, but only 5% believe they have the capabilities to fully leverage it.

“Given its application across the fashion value chain and among functions, fashion companies are already starting to experiment cautiously. Those efforts are likely to continue in 2024, with a view to scaling use cases where there are demonstrable performance upsides.”

Leveraging the advantage of AI in 2024 will require fashion players to move beyond automation and explore its potential to augment the work of human creatives.

“In the face of an uncertain future marred by continued macroeconomic challenges, fashion executives may need to make bold decisions: leading players cannot allow an ambiguous outlook to cloud decision making when seeking to capture growth opportunities ahead, the report reads.

Ten key themes in fashion for 2024 according to McKinsey

The Mckinsey State of Fashion 2024 report says to prepare for challenges and be alert to opportunities, leading fashion companies will likely “prioritise contingency planning for the coming year”.

“A key theme will be companies keeping a firm grip on costs and inventories while driving growth by precisely managing prices. Brands and suppliers can expect an increasingly competitive environment. But they will also have opportunities, with consumers discovering new styles, tastes, and priorities — all presenting routes to value creation.”

• Fragmented future. In 2024, the global economic outlook will continue to be unsettled, as financial, geopolitical, and other challenges weigh on consumer confidence. Fashion markets in China, Europe, and the United States will likely face headwinds, some of which reflect individual regional dynamics. Suppliers, brands, and retailers may need to bolster contingency planning and manage for uncertainty.
• Climate urgency. The frequency and intensity of extreme weather-related events in 2023 mean the climate crisis is an even more urgent priority than in previous years. With physical and transition risks rising across continents, the industry must not delay in tackling emissions and building resilience into supply chains.
• Vacation mode. Consumers are gearing up for the biggest year of travel since before the pandemic. But a shift in values means expectations are evolving, even as shopping remains a priority. Brands and retailers should refresh distribution and category strategies to reflect the new reality.
• The new face of influence. It’s time for brand marketers to update their influencer playbooks, as a new guard of creative personalities wins fans. Working with opinion leaders in 2024 will require a different type of partnership, an emphasis on video, and a willingness to loosen the reins on creative control.
• Outdoors reinvented. Technical outdoor clothing and “gorpcore” are in demand as consumers embrace healthier lifestyles. In 2024, more outdoor brands are expected to launch lifestyle collections. At the same time, lifestyle brands will likely embed technical elements into collections, blurring the lines between functionality and style.
• Generative AI’s creative crossroads. After generative AI’s (gen AI) breakout year in 2023, more use cases are emerging across the industry. Capturing value will require fashion players to look beyond automation and explore gen AI’s potential to enhance the work of human creatives.
• Fast fashion’s power play. Fast-fashion competition is set to be fiercer than ever. Challengers, led by Shein and Temu, are bringing new tactics on price, customer experience, and speed. Success for disruptors and incumbents could hinge on adapting to new consumer preferences while navigating the regulatory agenda.
• All eyes on brand. Brand marketing is expected to be back in the spotlight as the fashion industry manages a switch away from performance marketing. Brands may benefit from forging emotional connections with consumers as marketers rewrite playbooks to emphasise long-term brand building.
• Sustainability rules. The era of fashion industry self-regulation is drawing to a close. Across jurisdictions, new rules will have significant effects on both consumers and fashion players. Brands and manufacturers may consider revamping business models to align with the changes ahead.
• Bullwhip snaps back. Shifts in consumer demand have created a “bullwhip effect,” by which order volatility reverberates unpredictably through supply chains. Suppliers will likely face pressure as brands and retailers focus on transparency and strategic partnerships.
  
  By Just Style