The global fashion industry is headed for a global slowdown in 2023, a new report has revealed, with supply chain pressures, the Ukraine war and rising inflation all creating a bleak picture.
McKinsey & Company’s annual The State of Fashion 2023 report published with The Business of Fashion, highlights how over half of global fashion industry executives expect conditions to worsen in 2023.
Indeed, just as the fashion industry was beginning to find its feet after the turmoil of the pandemic, the later months of 2022 seem determined to throw brands and retailers off course again. Deteriorating macroeconomic and geopolitical conditions have weighed heavily on the industry in the second half of the year and continue to leave fashion executives on edge as they look towards 2023.
A bleak outlook for the global fashion industry?
More than 50% of the companies tracked by the McKinsey Global Fashion Index contributed to the industry’s total economic profit in 2021, compared to just 32% in 2020. The proportion of value destroyers (companies generating negative economic profit) has thus fallen to its lowest since 2013.
The report shows global industry revenues in 2021 grew 21% year-on-year, while the average EBITA margin close to doubled, growing 6 percentage points. The industry continued its strong performance in early 2022, with 13% revenue growth in the first half of the year.
Speaking on a media call ahead of the report’s publication, Achim Berg explained: “The profitability of the industry, minus cost of capital, for the first few years of the decade, were quite stable, with some slight growth. We saw a decline towards 2016, which was the most challenging year for the fashion industry since the financial crisis. But also a bit of a recovery in 2017 and 2018. Interestingly, the industry was already fading a bit in 2019 before the pandemic, which then got massively accelerated.
“The decline we have seen in 2020 is the steepest we have ever seen. This is probably only comparable to the Great Depression. What surprised us is the massive rebound we saw in 2021 where the industry generated more than double the average economic profit of the previous ten years.
“While we don’t have any data yet for 2022, we expect this will be more in line with the average of the last decade. It’s quite remarkable to see the rebound, which was faster than what we expected when we were facing the pandemic.”
Looking ahead to 2023, the drivers contributing to a broad state of global fragility are top of mind for fashion executives. In the BoF-McKinsey State of Fashion 2023 Survey, 85% of fashion executives predict inflation will continue to challenge the market next year. Meanwhile, geopolitical tensions, specifically around the ongoing war in Ukraine, have disrupted supply chains and created an energy crisis that 58% of executives also believe will weaken the fashion market.
Sportswear and luxury make industry winners
In aggregate, McKinsey expects global fashion sales growth of 5% to 10% for luxury, and negative 2% to positive 3% for the rest of the industry in 2023, while the dichotomies that previously defined the fashion business are expected to return.
Overall figures from the past three years mask the stark differences in performance across categories. For example, luxury has been showing little sign of the stresses and strains evident in other parts of the industry and, in fact, produced record high results in some cases.
“In luxury and sportswear we have an increase of 80% in economic profit, which was generated on average in those three pandemic years,” explained Berg. “So the luxury industry was actually doing much better than the industry as a whole but was also doing much better than in previous years. So you could argue that luxury was one of those that benefited from the crisis.”
Results at LVMH, Kering, Hermès and Richemont all suggested there were more factors giving them a boost beyond the pent-up demand from the initial lockdown periods. LVMH delivered a particularly impressive performance: its EP grew by a factor of 13 times between 2020 and 2021, the report shows.
Sportswear companies were also standout performers. Led by Nike, Adidas, Anta and Lululemon, the sportswear category also helped drive industry growth in 2021. The category’s EP indexed to 2010 was 121% higher between 2019 and 2021 when compared to between 2010 and 2018. Other categories suffered, however. Affordable luxury saw EP plummet 177%, while premium and mid-market companies also declined, with value and discount companies remaining stable.
Achem described the spread between the top 20 as “quite impressive”, with Nike maintaining its top position despite setbacks in the later part of its fiscal year ended May 2020 as the pandemic set in. The company generated US$3.8bn of economic profit on average.
“It’s quite remarkable how the top players were doing, even throughout the crisis,” Achem added.
Supply chain disruptions impacting growth
Macroeconomic pressures have continued to weigh on fashion’s global supply chains. According to the report, more than half of fashion executives believe supply chain disruptions will be one of the top factors impacting growth of the global economy in 2023.
In an attempt to avoid transport bottlenecks and political or social instability, 65% of fashion executives are considering nearshoring, creating new manufacturing hubs dedicated to serving US and European demand.
The report suggests that navigating supply chain disruptions will require brands to work closely with their manufacturers: about 60% of fashion executives are considering forming strategic partnerships with their suppliers.
Other strategies include investing in tools such as automation and digital end-to-end integration of data.
“The war in Ukraine forced the re-routing of trade and triggered an energy crisis, while ageing port systems across the globe are creating transport bottlenecks,” the report explains. “Global inflation has pushed up input costs — cotton and cashmere prices have increased 45% and 30% year on year in 2021 respectively — and extreme weather is hitting developing economies like Pakistan where, alongside the tragic loss of human life, as much as 45% of the country’s cotton crops were wiped out by floods in August 2022.
As such, more than half of fashion executives in the Survey identified supply chain disruptions as one of the top risks hampering the growth of the global economy in 2023.
To mitigate risks and increase control along supply chains, some manufacturers are joining forces with producers from different specialities. For example, US textile manufacturer Mount Vernon Mills acquired a yarn spinning and weaving facility from Wade Manufacturing Company, also US-based, in a bid to gain more flexibility over its production. In Asia, Sri Lanka-based manufacturer MAS Holdings in August 2022 acquired the assets of Bam Knitting, one of the country’s fabric producing and finishing operations.
One consideration to tackle the challenges of over-production, sustainability ambition and supply chain optimisation is on-demand manufacturing.
“The trifactor of supply chain pressures and resilience needs to be more sustainable but this also needs to be tied in with a sustainable profit and managing capital,” explained Anita Balchandani, senior partner, head of McKinsey’s Apparel, Fashion and Luxury Group for EMEA.
“We featured [on-demand] in our 2019 report, and it’s been frankly much more experimental rather than having fully taken off. We do believe in the long run it will be a big thing and we are starting to see, particularly in some segments where players are pushing for greater verticalisation with their suppliers as a way of getting resilience. And there is probably more of a mechanism also to enable it because when you are more tightly coupled with your supplier you have a greater way to do that. So while we do see that as the direction of travel, it also feels to us that the early action will be focused on the things we can do to reduce our lead time and time to market. A lot of players are putting a lot of attention on digital design and how they take out the critical part of digitalisation, for example.
“Historically we’ve been in an industry where 40% of what the industry produces is then subject to some form of markdown. So this could be a big game changer for the industry.”
The Middle East – a promising market
The uncertain economic landscape means fashion companies will also reassess the geographies in which they operate, potentially deprioritising certain countries or regions while pivoting to others that offer greater potential.
Notably, the economy in China — long considered an industry growth engine — is predicted to slow in 2023, with GDP rising just 3.2% compared to an 8.1% rise in 2021, leading some fashion executives to seek out opportunities elsewhere, at least over the short term.
When identifying markets with the same or more promising growth prospects in 2023 than the previous year, 88% of executives cite the Middle East. The luxury market in the Gulf Cooperation Council (GCC) is expected to generate $11bn of sales in 2023, with 60% of luxury spending among GCC consumers occurring domestically.
In addition, 50% of fashion executives are expected to increase their companies’ footprint in North America next year. Overall US retail is expected to close 2022 with sales at a two-decade high. Meanwhile, Japan and South Korea are renewing their reputations as dependable growth drivers in the Asia-Pacific region.
Themes set to shape the fashion industry in 2023
A sober outlook for 2023
Outlooks for 2023 vary by region and continent. In the US, which is more insulated from the effects of the war in Ukraine and Covid, 61% of executives expected the same or better conditions in 2023 than 2022. European and Asian fashion leaders were the most pessimistic, with 64% and 53% anticipating worsening conditions, respectively.
The sober outlooks are warranted. In 2023, the industry’s sales are expected to grow at a slower rate than in 2022, when the gains from the first half of 2022 were largely diminished by the deceleration in spending in the second half. Industry growth figures in 2023 will also be distorted by inflation, with a significant share of sales affected by rising costs and prices. In this context, 2023 could witness year-on-year volume declines, which has not happened for many years, the report explains.
The luxury segment should show more resilience in the months ahead than other categories. Its sales are projected to grow 1% to 3% in the second half of 2022 and 5% to 10% in 2023, based on McKinsey Fashion Growth Forecasts. For the rest of the industry, growth in 2023 looks likely to be flat or even negative.
European prospects in 2023 are particularly gloomy with GDP expected to grow by less than 1% and inflation expected to remain high, undermining consumer confidence, which is already at levels as low as 2020.
The US fashion industry’s growth will also likely slow, but might show
greater resilience than Europe. The already-strong US dollar is likely to peak
in the first half of 2023, and inflation is projected to cool by the second
half. Non-luxury fashion companies are expected to grow modestly in 2023,
between 1% and 6%, continuing the trend observed in the second half of 2022.
By Just Style