The State of Fashion 2019 - The Business of Fashion

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The State of Fashion 2019 - The Business of Fashion
The State
of Fashion
2019
The State of Fashion 2019 - The Business of Fashion
The State of Fashion 2019

2
              2019
              The State
              of Fashion
The State of Fashion 2019 - The Business of Fashion
Contents

                            Executive Summary                                         10

                                                                                            Executive Summary
                            Industry Outlook                                          12

                            Global Economy                                         18—37
                            Trend 1: Caution Ahead                                     19
                            Executive Interview: Joann Cheng                           22
                            Trend 2: Indian Ascent                                    24
                            Executive Interview: Darshan Mehta                         28

                                                                                            Global Economy
                            Trend 3: Trade 2.0                                         31
                            Global Value Chains in Apparel: The New China Effect      34

                            Consumer Shifts                                        38—69
The State of Fashion 2019

                            Trend 4: End of Ownership                                 39
                            Executive Interview: Jennifer Hyman                        42
                            Trend 5: Getting Woke                                     45

                                                                                            Consumer Shifts
                            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

                                                                                            Fashion System
                            Fashion System                                         70—91
                            Trend 8: Self-Disrupt                                      71
                            The Explosion of Small                                     74
                            Trend 9: Digital Landgrab                                  77
                            Executive Interview: Nick Beighton                        80
                            Trend 10: On Demand                                       83
                            Is Apparel Manufacturing Coming Home?                     86

                                                                                            MGFI
                            McKinsey Global Fashion Index                          92—99

                            Glossary                                                  100
                            End Notes and Detailed Infographics                       102
The State of Fashion 2019 - The Business of Fashion
Foreword
                                                                                                        The year ahead is one that will go down
                                                                                               in history. Greater China will for the first time in
                                                                                               centuries 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 at
                                                                                               opportunities, not just challenges. In the US and
                                                                                               in 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

                            Thomas Lohr
                                                                                               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 the
                                          The State of Fashion 2019 marks the third            whole picture.
                                          year of an ongoing partnership between The
                                                                                                        In short, it’s going to be a bumpy ride. But
                                          Business of Fashion and McKinsey & Company,
                                                                                               whatever your role — from boardroom executive
                                          bringing analytical rigour and evidence to better
The State of Fashion 2019

                                                                                               to start-up founder to informed consumer — read
                                          understand the rapidly changing global fashion
                                                                                               on, and we’ll cushion the impact and tell you
                                          industry and providing an authoritative point of
                                                                                               everything you need to know about the state of
                                          view on the state of fashion in the year to come.
                                                                                               fashion in 2019.
                                                   Once again, our team of global experts
                                          has conducted fresh research and analysis to bring
                                          clarity and precision to a fragmented and complex             — Imran Amed & Achim Berg
                                          landscape of countries, companies, categories and
                                          segments. Our research establishes a common
                                          understanding of the forces at work in fashion;
                                          sets out how well the industry is performing; and
                                          identifies where the top priorities, both business
                                          and 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 and
                                          interview many of the industry’s thought leaders
                                          and pioneers.
                                                    The 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 public
                                          companies allows us to analyse and compare the
                                          performance of individual companies against their
                                          peers 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 - The Business of Fashion
Contributors                                                                                                                                                                      Acknowledgements

                                                                                                                                                                                                              The authors would like to thank all the members of The Business
                                                                                                                                                                                                              of Fashion and McKinsey community for their contribution to
                                                                                                                                                                                                              research and participation in our State of Fashion Survey and the
                                                                                                                                                                                                              many 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
                                        Imran Amed                                   Achim Berg                             Anita Balchandani                              Marco Beltrami                     and the McKinsey Senior Advisors Adrienne Lazarus, Ali Horowitz,
                                                                                                                                                                                                              Colin Henry and John Hooks.
                            As founder, editor-in-chief and CEO of      Based in Frankfurt, Achim Berg leads        Anita Balchandani is a Partner in             Based in London, Marco Beltrami is
                            The Business of Fashion, Imran Amed         McKinsey’s Global Apparel, Fashion          McKinsey’s London office, and leads           part of McKinsey’s Apparel, Fashion         The wider BoF team have also played an instrumental role in
                            is one of the fashion industry’s leading    & Luxury Practice and is active in all      the Apparel, Fashion & Luxury Practice        and Luxury Practice. He has supported       creating this report — in particular, Vikram Alexei Kansara,
                            writers, thinkers and commentators.         relevant sectors including clothing,        in the United Kingdom. Her expertise          apparel and beauty companies in the UK      Victoria Berezhna, Nick Blunden, Kati Chitrakorn, Emma Clark,
                            Fascinated by the industry’s potent blend   textiles, footwear, athletic wear,          extends across fashion, health and            and Europe, on topics including strategy,   Amanda Dargan, Michael Edelmann, Casey Hall, Yara Heine,
                            of creativity and business, he began BoF    accessories and retailers spanning          beauty, department stores and specialty       mergers & acquisitions, and retail          Chungaiz Mumtaz, Andres Pajon-Leite, Lauren Sherman, Kate
                            as a blog in 2007, which has since grown    from the value end to luxury. As a global   retail in Europe and North America.           operations.                                 Vartan, Anouk Vlahovic and Yifan Wang.
                            into the pre-eminent global fashion         fashion industry and retail expert,         She focuses on supporting clients in
                            industry resource serving a five-mil-       he supports clients on a broad range of     developing their strategic responses                                                      The authors would like to acknowledge the following McKinsey
                            lion-strong community from over 190         strategic and top management topics,        to the disruptions shaping the retail                                                     colleagues for their special contributions to the report creation and
                            countries and territories. Previously, he   as well as on operations and sourcing-      industry today, especially in areas such as                                               in-depth articles: Colin Britton, Henna Dattani, Jasmine Vogel,
                            was a consultant at McKinsey in London.     related issues.                             customer-led digital transformation.                                                      Jessica Moulton, Karl-Hendrik Magnus, Laura Gallagher, Mac Muir,
The State of Fashion 2019

                                                                                                                                                                                                              Neil Robbins, Sara Hudson, Susan Lund, and Tunde Olanrewaju.

                                                                                                                                                                                                              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,
                                                                                                                                                                                Dale Kim                      Antonio Gonzalo, Benjamin Durand-Servoingt, Claire Gu, Daniel
                                                                                                                                                                                                              Zipser, Ewa Sikora, Fernanda Hoefel, Frannie Li, Georgina Buck,
                                                                                                                                                                  Dale Kim is a consultant in McKinsey’s      Hans-Martin Stockmeier, Heloisa Callegaro, Jan Mischke, Jean-
                                                                                                                                                                  London office, specialising in Apparel,     Baptiste Coumau, Jennifer Schmidt, Jihye Lee, Kanika Kalra, Kate
                                                                                                                                                                  Fashion and Luxury. He has served global    VanAkin, Lan Luan, Laura Boege, Marie Strawczynski, Martine
                                                                                                                                                                  companies ranging from fine jewellery       Drageset, Mekala Krishnan, Nakul Banga, Neha Nangia Ojha, Peter
                                                                                                                                                                  to beauty, on topics such as strategy,      Stumpner, Purvi Gupta, Pritesh Zala, Raj Shah, Sophie Marchessou,
                                                                                                                                                                  operating models and M&A.                   Silvana Mueller, Susan Nolen Foushee, Tom Skiles, Tomohiko
                                                                                                                                                                                                              Funaishi, Yasuhiro Ishida, and Younghoon Kang. We also thank
                                  Johanna Andersson                               Saskia Hedrich                                Robb Young                                                                    David Honigmann and David Wigan for editor support and Katie
                                                                                                                                                                                                              Smith from Edited for analytical support.
                            Johanna Andersson co-leads the              As global senior expert in McKinsey’s       As global markets editor of The Business
                            Scandinavian Apparel, Fashion and           Apparel, Fashion and Luxury Group,          of Fashion, Robb Young oversees content                                                   In addition, the authors would like to thank Joanna Zawadzka for
                            Luxury goods hub and has supported          Saskia Hedrich works with fashion           from Asia-Pacific, the Middle East, Latin                                                 her creative input and direction into this State of Fashion report,
                            companies in the sector ranging from        companies around the world on strategy,     America, Africa, the CIS and Eastern                                                      Andreas Samuelsson for our cover illustration and Getty Images for
                            luxury to value around the globe.           sourcing optimisation, merchandising        Europe. He is an expert on emerging                                                       supplying imagery to bring our findings to life.
                            Johanna focuses on strategy, growth         transformation, and sustainability topics   and frontier markets, whose career as a
                            and digital/omnichannel related topics.     — all topics she is also publishing about   fashion editor, business journalist, author
                                                                        regularly. Additionally, she is involved    and strategic consultant has seen him lead
                                                                        in developing strategies for national       industry projects around the world.
                                                                        garment industries across Africa, Asia,
                                                                        and Latin America.                                                                                   Felix Rölkens
                                                                                                                                                                  Felix Rölkens is part of McKinsey’s
                                                                                                                                                                  Apparel, Fashion & Luxury Group
                                                                                                                                                                  and works with apparel, sportswear,
                                                                                                                                                                  and pure play fashion e-commerce
                                                                                                                                                                  companies in Europe and North America,
                                                                                                                                                                  on a wide range of topics including
                                                                                                                                                                  strategy, operating model and merchan-
                                                                                                                                                                  dising transformations.

                            8                                                                                                                                                                                                                                                       9
The State of Fashion 2019 - The Business of Fashion
Executive Summary

                                                          After a year of reckoning — time for an
                                                          urgent awakening

                                                          For fashion players, 2019 will be a year of             expressed in last year’s global fashion survey.
                                                          awakening. The ones who will succeed will have          But even with this more positive backdrop,
                                                          to come to terms with the fact that in the new          executives are now fully acknowledging the
                                                          paradigm that is taking shape around them, some         changing nature of the industry, using words such
                                                          of the old rules simply don’t work. Regardless of       as “changing,” “digital,” and “fast” to describe it.
                                                          size and segment, players now need to be nimble,        In a year of reckoning, for which the McKinsey
                                                          think digital-first and achieve ever-faster speed       Global Fashion Index predicts growth of 4 to
                                                          to market. They need to take an active stance           5 percent for 2018 (up from 2.5 to 3.5 percent
                                                          on social issues, satisfy consumer demands for          in 2017), fashion players have begun to look
                                                          ultra-transparency and sustainability, and, most        proactively at opportunities rather than just
                                                          importantly, have the courage to “self-disrupt”         focusing on challenges ahead.
                                                          their own identity and the sources of their old
The State of Fashion 2019

                                                          success in order to realise these changes and win       According to McKinsey
                                                          new generations of customers.
                                                                                                                  FashionScope, Greater China is
                                                                    They also need to invest in enhancing
                                                                                                                  expected to overtake the US as
                                                          their productivity and resilience, as the outlook
                                                          is increasingly uncertain. External shocks to the       the largest fashion market in
                                                                                                                  the world in 2019.
                            For fashion players,
                                                          system continue to lurk around the corner,
                                                          and growth cannot be taken for granted: the
                                                          McKinsey Global Fashion Index (MGFI) forecasts                    However, recovery continues to be

                            2019 will be a year of        growth of 3.5 to 4.5 percent for 2019, slightly below
                                                          2018 growth, predicted at 4 to 5 percent. Optimism
                                                                                                                  unequal, with most of the growth coming from
                                                                                                                  luxury and emerging markets in Asia. According

                            awakening. The ones who
                                                          can be found only in pockets, notably in North          to McKinsey FashionScope, Greater China
                                                          America and in the premium and luxury segments,         is expected to overtake the US as the largest
                                                          aided by their strong performance in 2018.              fashion market in the world in 2019. Mid-market
                            will succeed will have to     The majority of executives in the remaining
                                                          segments and geographies are pessimistic, citing
                                                                                                                  companies and mature economies continue to lag,
                                                                                                                  with the exception of North America, which saw

                            come to terms with the fact   “dealing with volatility, uncertainty and shifts
                                                          in the global economy” as their primary concern
                                                                                                                  higher than expected growth supported by
                                                                                                                  an expansive fiscal policy. Meanwhile, polarisation

                            that in the new paradigm
                                                          for the year ahead. Risks of trade disruptions and      persists: the top 20 companies in the industry
                                                          slowing economic growth, even in key growth             account for 97 percent of economic profit, while
                                                          markets in Asia, could undermine global growth          an increasing proportion of publicly-traded

                            that is taking shape around   prospects, as could uncertainty over other major
                                                          events such as Brexit or the possible onset of a
                                                                                                                  fashion companies struggle to create any economic
                                                                                                                  value. The prizes for those who can adapt may be

                            them, some of the old rules
                                                          global economic slowdown.                               greater than ever — but so are the penalties for
                                                                                                                  those who fail.
                                                                   All this comes against a backdrop of a

                            simply don’t work.
                                                          fashion industry that turned a corner in 2018,
                                                          with increased growth justifying the optimism

                            10
                            11                                                                                                                                       11
The State of Fashion 2019 - The Business of Fashion
Industry Outlook                                                                                             Executives describe 2018 with the words “changing,”
                                                                                                                                        “digital,” and “fast”

                            Sunny intervals — but storms ahead
                                                                                                                                                                                                                                                             New

                                                                                                                                          Exhibit 1:
                                                                                                                                          Top 3 words to describe                                          2016          2017                        2018
                                                                                                                                          the industry
                            After strong performance in 2018, the industry                  Still, better industry conditions on          Top 3 words; % of respondents who
                                                                                                                                          mentioned word, n=274
                            will slow slightly in 2019. The McKinsey Global        aggregate have brought an overall change                                                            First           Uncertain      Uncertain                 Changing
                            Fashion Index predicts industry growth of 3.5 to       in attitudes. Now used to uncertainty after                                                                                  54        53                          34

                            4.5 percent in 2019 compared with a 4 to 5 percent     living with it for so many years, in 2018 fashion
                            estimate for 2018. The weaker forecast reflects        executives have begun to think less about survival
                            economic predictions for slightly slower global        and much more actively about their strategic
                            growth and potential disruption to trade rela-         agenda. When asked in the BoF-McKinsey State                                                      Second            Changing      Challenging                   Digital
                            tionships. We see Latin America, Middle East and       of Fashion Survey to describe the industry, the                                                                              31        32                          26

                            Africa and Russia experiencing more economic           word that comes to the minds of most executives
                            and political challenges, which will likely dampen     (34 percent) is “changing.” The second and third
                            consumer spending. Europe is facing a slowdown         most common words are “digital” and “fast.”
                            and US growth may have peaked in 2018. Emerging        The implication is that change has become a key
                                                                                                                                                                                      Third           Challenging    Optimistic                     Fast
                            Asia Pacific countries and much of emerging            priority among industry leaders, with a particular                                                                           29        21                          25
                            Europe, on the other hand, will continue to see        focus on digital and speed-to-market.
                            strong spending growth with more global players
                                                                                                                                          Question: What are the 5 adjectives you
                            entering these markets.                                Much of emerging Europe will                           would use to describe how you feel about
The State of Fashion 2019

                                                                                                                                          the fashion industry in 2018 so far?                                         Source: BoF-McKinsey State of Fashion Survey

                                      The caution in the economic outlook          continue to see strong spending
                            is also reflected in our BoF-McKinsey State of
                                                                                   growth with more global players                      Executives generally viewed consumer shifts enabled by
                            Fashion Survey, with 42 percent of respondents
                            expecting conditions to become worse in 2019.          entering these markets.                              technology as the most important trends in 2018
                            Dealing with volatility, uncertainty and shifts in
                            the global economy are seen as the top challenges               The attitudes of executives also reflect      Exhibit 2:                                                                 Technology related              Consumer shifts

                            for the third straight year. This pessimism could      evolving consumer behaviours that are forcing          Perceived impact of
                                                                                                                                          2018 trends
                            be driven by fears of an accelerating trade war        industry players to “self-disrupt” (the #1 trend                                                      Mobile obsessed
                                                                                                                                          Average rating of respondents (1-10)
                            as China and the US react to each other’s tariffs,     identified by executives for 2019.) Footfall in
                            uncertainty over how Brexit will play out (still       the physical environment continues to decline,
                            unclear as we go to press), or just a feeling that a   which is driving the need for brands and retailers
                                                                                                                                                                                         Start-up thinking
                            10-year boom is now overdue to tip into recession.     to develop their omnichannel strategies. Social
                                                                                   media has an increasingly important voice in
                                      Over the past year, the global fashion                                                                                                             Getting personal
                                                                                   dictating consumer demand, and it is helping small
                            industry has reached new heights. We see growth
                                                                                   brands grow explosively. Across the industry,                                                               Sustainability
                            of 4 to 5 percent in 2018, slightly ahead of our                                                                                                                      credibility
                                                                                   speed-to-market and responsiveness to consumer
                            projections for 2018, and a considerable uplift
                                                                                   needs are becoming critical success factors.                                                                  Predictably
                            on the 2.5 to 3.5 percent seen in 2017. Better                                                                                                                     unpredictable
                            performance has been driven by strong demand                     When asked to reflect on the importance
                                                                                                                                                                                         Asian trailblazers
                            for luxury and value brands, sales growth in the       of the trends we predicted in last year’s State
                            US amid tax cuts and growth in emerging markets.       of Fashion report, executives identified tech-                                                              Globalisation
                            However, as we describe in the McKinsey Global         nology-related issues as their top four choices.                                                                  reboot

                            Fashion Index, this recovery has been polarised.       Consumer shifts enabled by technology were
                            Most of the economic gains have accrued to the top     particularly salient, with “mobile obsessed” cited
                            20 “winners,” most notably in the luxury segment,      as the most important of the trends we predicted.
                                                                                                                                          Question: Looking back at 2018 so                      AI gets real
                            while a growing number of players are struggling       The second- and third-most important are               far, how much have the following
                            to create economic value.                              “platforms first” and “start-up thinking,”             trends impacted your business?
                                                                                                                                                                                                                           Source: BoF-McKinsey State of Fashion Survey

                            12                                                                                                                                                                                                                                        13
The State of Fashion 2019 - The Business of Fashion
Volatility, uncertainty and shifts in the global economy is                                                                                                                                                                                          Industry Outlook
                            still foreseen as the industry’s #1 challenge
                                                                                                                                                                                New

                                 Exhibit 3:                                              2017                       2018                                  2019
                                 Main challenges for                                                                                                                                    again highlighting companies proactively dealing          investing in e-commerce and digital marketing)
                                 year ahead                                              Dealing with               Dealing with                          Dealing with volatility,      with digital disruption in the fashion system.            is their number one priority for 2019 for the third
                                                                                         volatility,                volatility, uncertainty               uncertainty and shifts
                                                                                         uncertainty and            and shifts in the                     in the global economy                                                                   year running.
                                                                            1st          shifts in the              global economy
                                                                                                                                                                                                  We were surprised to find artificial intel-
                                                                                         global economy                                                   15% of respondents            ligence (AI) less highly ranked. This shift may not                From an operational perspective,
                                                                                                                                                                                        have reached critical mass in 2018, but we predict        another persistent trend has been the desire to
                                                                                         Sales and                  Competition                           Competition
                                                                                                                                                                                        it will continue to affect the industry in 2019           address cost structures at an organisational level,
                                                                                         profitability              from online and                       from online and               and beyond. Players including Amazon, Alibaba,            including efforts to improve productivity. This
                                                                            2nd          growth                     omnichannel                           omnichannel
                                                                                                                                                                                        Myntra and Stitch Fix have made progress across           remains a key priority in 2019 with 29 percent
                                                                                                                                                          13% of respondents            various areas of the value chain and others will          of the BoF-McKinsey State of Fashion Survey
                                                                                                                                                                                        follow suit. Ananth Narayanan, chief executive            respondents saying they wish to “review organisa-
                                                                                         Competition                Value chain                           Speed of changing
                                                                                         from online and            improvement and                       consumer preferences
                                                                                                                                                                                        of Myntra, remarked that, “for curation and               tional structures and focus on increasing employee
                                                                            3   rd
                                                                                         pure-play players          digitalisation                                                      assortment, we are using a lot more data science          productivity.” This underlines the need to adapt
                                                                                                                                                           7% of respondents
                                                                                                                                                                                        to tell what will sell. I think that could extend a lot   operating models and create a more agile organisa-
                                                                                                                                                                                        more into manufacturing and the back-end system           tion that can thrive in the digital world.
                                                                                         Supply chain               Decreasing foot                       Need to achieve               and we are doing parts of that already at Myntra.”
                                                                                         improvement                traffic and offline                   greater sustainability
                                                                            4th                                     retailing pressure                    and transparency                       An increasingly important priority               In 2018, fashion executives have
                                                                                                                                                           7% of respondents            is sustainability and transparency, reflecting            begun to think less about survival
The State of Fashion 2019

                                 Question: What do you think will be the
                                 single biggest challenge for the fashion                                                                                                               rising concerns on the part of consumers and              and much more actively about
                                 industry next year?                                                                                     Source: BoF-McKinsey State of Fashion Survey
                                                                                                                                                                                        companies about how to alleviate their impact on
                                                                                                                                                                                        the environment. Sustainability, which for the first      their strategic agenda.
                                                                                                                                                                                        time breaks into our respondents’ list of the most
                            While the premium/luxury segment expressed overall optimism,                                                                        Become worse
                                                                                                                                                                                        important challenges, is evolving from a tick-box                  Overall, the fashion industry continues
                            value and mid-market players appear to be more cautious                                                                             Remain the same
                                                                                                                                                                                        exercise into a transformational feature that is          to hover in a state of flux and the fortunes of
                                                                                                                                                                Become better
                                                                                                                                                                                        engrained in the business model and ethos of many         individual players can turn with frightening
                                 Exhibit 4:
                                                                                                         Market segment 2019F                                                           recent success stories.                                   speed. As our 10 trends indicate, new markets,
                                 Outlook for industry
                                 conditions in 2019
                                                                                                                                                                                                                                                  new technologies and shifting consumer needs
                                                                                                                                                                                                 By geography, the most optimistic about
                                                                                Premium/luxury                 32                   12                          56                                                                                present opportunities but also risks. We predict
                                                                                                                                                                                        the coming year are executives in North America.
                                 % of respondents                                                                                                                                                                                                 that 2019 will be a year shaped by consumer shifts
                                                                                                                                                                                        By segment, the most positive are executives
                                                                                                                                                                                                                                                  linked to technology, social causes and trust issues,
                                                                                        Mid-market                         58                                        42                 from luxury brands, reflecting their strong
                                                                                                                                                                                                                                                  alongside the potential disruption from geopoliti-
                                                                                                                                                                                        growth trajectory in 2018. In all other regions
                                                                                                                                                                                                                                                  cal and macroeconomic events. Only those brands
                                                                                                                                                                                        and segments, executives are notably pessimistic,
                                                                                                                         54                               19               27
                                                                                                                                                                                                                                                  that accurately reflect the zeitgeist or have the
                                                                                              Value                                                                                     reflecting the potential challenges ahead.
                                                                                                                                                                                                                                                  courage to “self-disrupt” will emerge as winners.
                                                                                                                                                                                                  Not surprisingly, executives are looking
                                                                                                         Geography 2019F
                                                                                                                                                                                        to invest where they see the most need to add
                                                                                                                                                                                        value. For the third year straight, the top sales
                                                                                                              30                6                              64
                                                                                     North America                                                                                      growth investment priority remains developing
                                                                                                                                                                                        omnichannel capabilities. This reinforces our
                                                                                            Europe                  47                           9                   44                 perception that executives have finally come to
                                                                                                                                                                                        terms with the fact that the industry is
                                                                                                                                                                                        digitising, but are not yet satisfied with their own
                                                                                                Asia                  51                             19               30                response. Some 54 percent of the BoF-McKinsey
                                 Question: How do you expect conditions                                                                                                                 State of Fashion Survey respondents said
                                 for the fashion industry to develop over
                                 the course of the next 12 months?                                                                       Source: BoF-McKinsey State of Fashion Survey   increasing omnichannel integration (alongside

                            14                                                                                                                                                                                                                                                                          15
The State of 						 Fashion 2019
                                           GLOBAL ECONOMY                                                                  CONSUMER SHIFTS                                                                                    FASHION SYSTEM

                                 01.                     02.                      03.                         04.                     05.                       06.                    07.                         08.                     09.                          10.

                                 Caution                 Indian                   Trade 2.0                   End of                  Getting                   Now or                 Radical                     Self-Disrupt            Digital                      On Demand
                                 Ahead                   Ascent                                               Ownership               Woke                      Never                  Transparency                                        Landgrab

                                 Downward                India becomes a          All companies will          The lifespan of the     Younger                   In the mobile          After years of having       Traditional brands      As the race to be            Automation and
                                 movements in            focal point for the      need to prepare             fashion product         generations’              consumer               personal data               are beginning to        the platform of              data analytics have
                                 key economic            fashion industry         contingency plans           is becoming             passion for social        journey, the gap       owned and handled           disrupt their own       choice for both              enabled a new
                                 indicators and          as its middle-           to face a potential         more elastic            and environmental         between discovery      by businesses, a            business models,        customers and                breed of start-ups
                                 other potentially       class consumer           shake-up of global          as pre-owned,           causes has reached        and purchase           more distrusting            image and offering      brands intensifies,          to achieve agile
                                 destabilising           base grows and           value chains. On            refurbished,            critical mass,            has become a           consumer now                in response to          e-commerce                   made-to-order
The State of Fashion 2019

                                 forces will             manufacturing            the one hand,               repair and rental       causing brands            pain-point for a       expects companies           a new breed of          players will                 production. Mass
                                 conspire to create      sector strengthens.      the apparel trade           business models         to become more            more impatient         to reciprocate with         small emerging          continue to                  players will begin
                                 a more cautious         Fashion players          could be reshaped           continue to evolve.     fundamentally             fashion consumer,      radical transparency        brands that are         innovate by adding           to experiment next,
                                 mood. With the          must redouble their      by new barriers,            Fashion players will    purpose driven            who seeks to           and sharing of              accelerating thanks     profitable value-            responding more
                                 possibility of a        efforts in this highly   trade tensions              increasingly tap        to attract both           purchase exactly       information. For            to decreasing           added services.              rapidly to trends
                                 global economic         fragmented and           and uncertainty             into this market        consumers and             the products           companies to                brand loyalty and       Whether through              and consumer
                                 slowdown by 2020,       challenging market       and, on the other           to gain access to       talent. Consumers         they discover,         meet a new bar for          a growing appetite      acquisitions,                demands,
                                 companies will turn     where an educated        hand, by new                new consumers           from some, but            immediately.           consumer trust, they        for newness.            investments or               achieving just-in-
                                 more prudent and        and tech-savvy           opportunities from          seeking both            not all markets           Players will focus     will need to offer a        We expect more          internal R&D,                time production
                                 start to look more      demographic rub          growing South-              affordability and a     will reward players       on bridging this       heightened level of         brands to follow        those players who            and reducing
                                 aggressively into       shoulders with the       South trade and             move away from          that take a strong        gap through            transparency along          suit on this path       diversify their              overstock and
                                 opportunities to        poor and upwardly        the renegotiation of        the permanent           stance on social          shorter lead           dimensions such             of self-disruption,     ecosystem will               making short,
                                 boost productivity      mobile.                  trade agreements.           ownership of            and environmental         times, improved        as value for money,         which will have a       strengthen their             small-batch
                                 compared to                                                                  clothing.               issues beyond             availability           creative integrity          significant impact      lead over those              production cycles
                                 previous years.                                                                                      traditional CSR.          of advertised          and data protection.        on their operating      who remain pure              the new norm.
                                                                                                                                                                products and new                                   models.                 players relying
                                                                                                                                                                technologies such                                                          solely on retail
                                                                                                                                                                as visual search.                                                          margins.

                                       70%                                                   62%                44%                          6.3x
                                                                                                                                                                24h
                                                                                                                                                                                       65%                               #1                                             2018         2025

                                                         690m                                                                                                                                                                                      4x
                                 Percentage of survey    Projected number of      Percentage of survey        Percentage of           The number of times       In 2018, customers     Percentage of survey        Top ranked trend that   Revenue CAGR of              Aspiration level for a
                                 respondents that were   smartphone users in      respondents that            survey respondents      the word “feminist” is    of Amazon in the US    respondents that cited      fashion executives      fashion e-commerce           shift to nearshoring
                                 concerned about         India by 2022, 2.3x      believe changes in          that believe the        forecast to appear on     expected deliveries    “consumer needs             predict will shape      retailers over traditional   will double between
                                 the overall global      the usage in 2017.       trade policy will pose      pre-owned business      retailer homepages        within 24 hours,       for trust in product        the fashion industry    fashion retailers from       2018 and 2025.
                                 macroeconomic                                    potential risks to global   model will be more      and newsletters in 2018   as opposed to a        authenticity and creative   in 2019, included       2013 to 2017.
                                 outlook in 2019.                                 economic growth             relevant in 2019 than   compared to 2016.         9-day delivery time    originality” in their top   in top 5 by 80% of
                                                                                  (Q2 2018 sentiments,        in 2018.                                          expectation in 1995.   5 trends for 2019;          respondents.
                                                                                  +8% from Q1).                                                                                        ranked 2nd out of 12.

                            16                                                                                                                                                                                                                                                                   17
Global
                                                                                01. CAUTION AHEAD

                            Economy
                                                                                A potential turn in the economic cycle is
                                                                                prompting 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 and
                                                                                boosting productivity.
The State of Fashion 2019

                                                                                While last year was characterised by cautious                    In addition, advanced economies are
                                                                                optimism in the face of uncertainty, this year         struggling to lift labour productivity, which has
                                                                                various indicators point towards clouds on the         remained basically flat over the past eight years,
                                                                                horizon which could somewhat dampen global             dampened by after-effects from the financial crisis,
                                                                                economic growth prospects. Global growth has           while significant advances in automation and
                                                                                averaged above 2.5 percent in the years since the      digitisation come with lag effects and transition
                                                                                financial crisis, but there are signs of a plateau.1   cost. China and India have bucked the global
                                                                                Additionally, after a long period of accommoda-        trend and continue to see sharp productivity
                                                                                tive monetary policy, the US Federal Reserve and       increases, measured by GDP per person employed.
                                                                                other central banks are starting to raise interest     (Productivity growth and increases in the number
                                                                                rates, increasing the cost of borrowing for many       of employed people are the key drivers of
                                                                                companies and consumers. The European Central          economic growth.)
                                                                                Bank is also signalling tightening monetary policy
                                                                                                                                                These official forecasts are also reflected
                                                                                in the coming months, increasing the chance that
                                                                                                                                       in sentiment among industry leaders. In a survey
                                                                                global economic growth could start to slow.
                                                                                                                                       of more than 1,000 international executives and
                                                                                         Forecasts from the World Bank,                chief executives across industries published by
                                                                                IMF and OECD predict slower growth in developed        McKinsey in September 2018, some 41 percent
                                                                                markets through 2020, and a flattening of the          expect global economic conditions to worsen,
                                                                                growth curve in developing markets. Looking            compared with 35 percent in June 2018 and just 15
                                      Frédéric Soltan/Corbis via Getty Images   ahead to 2019, there are signs that Europe,            percent in December 2017.2 This sentiment echoes
                                                                                Latin America and the Middle East could be             the views of the IMF, whose managing director
                                                                                most vulnerable to a deceleration. The US and          Christine Lagarde said during a Bretton Woods
                                                                                China could also face a slowdown, with fears of a      Committee meeting in October 2018 that “It’s not
                                                                                potential bubble in the former, and trade dynamics     just clouds on the horizon that we see, but some of
                                                                                could impact consumer spending and fashion             the clouds have started opening up, and it’s a bit
                                                                                sector growth in both.                                 more than a drizzle.”3

                            18                                                                                                                                                            19
Global Economy                                                                                                                                                                                                      01. Caution Ahead

                                     None of this has gone unnoticed in             period. Several companies have already taken           percentage points respectively), compared                              over the longer term, fashion players should
                            the fashion industry. Executives view economic          steps, implementing cost reduction and restruc-        with those in the bottom 80 percent, suggesting                        seek to couple productivity enhancements with
                            conditions as a potential challenge, citing it as       turing programmes. As a result, SG&A ratios have       a strong link between keeping costs low and a                          necessary innovation efforts, such as automation
                            the third biggest trend for 2019 in the latest          become more fragmented, with leading companies         strong bottom line.                                                    of production, analytics-driven decision making,
                            BoF-McKinsey State of Fashion Survey. Forty-two         seeing a slower rate of cost increase than laggards.                                                                          review of omnichannel footprint and reorganisa-
                                                                                                                                                    As the macroeconomic landscape
                            percent expect industry conditions to worsen in         Among companies to act are hosiery and bodywear                                                                               tion for better agility. Those that are successful are
                                                                                                                                           shifts, we expect companies will seek to protect
                            2019. Excluding respondents from North America          specialist Wolford, which launched a restructur-                                                                              most likely to reap rewards in terms of outsized
                                                                                                                                           themselves from slower growth by implementing
                            and the luxury segment, which are the main              ing programme in late 2017,4 J.Crew, which said                                                                               performance.
                                                                                                                                           “shock proofing” measures. These will primarily
                            pockets of optimism, the majority of executives         in 2017 it aimed to cut costs and rebrand,5 and
                                                                                                                                           be aimed at boosting productivity through
                            are even more pessimistic about the year ahead.         H&M, which said in 2017 that it was aiming to
                                                                                                                                           greater efficiency and cutting costs. To ensure
                                                                                    reduce costs by 5-6 percent.6 More recently, Under
                                                                                                                                           these interventions deliver sustainable benefits
                            “It’s not just clouds on the                            Armour announced plans to continue to focus and
                                                                                    drive productivity in September 2018.7
                             horizon that we see, but some
                             of the clouds have started                                       Looking at the year ahead, 17 percent of     Among executives of all industries, there’s an increasing view that the
                                                                                    respondents to the BoF-McKinsey State of Fashion
                             opening up, and it’s a bit more                        Survey said they would focus more on improving
                                                                                                                                           economy will worsen
                             than a drizzle.”
The State of Fashion 2019

                                                                                    costs rather than growing sales. The main cost
                                                                                    improvement areas cited include reviewing organ-       Exhibit 5:
                                      The strong performance of the global          isational structure (11 percent increase compared
                            economy over recent years has been accompanied          to 2018), diagnosing end-to-end efficiency             Expected change in global economic conditions, next 6 months
                            by rising investments by fashion industry players.      opportunities and reducing product assortment          % of respondents
                            Sixty-eight percent of companies’ cost bases have       complexity. Still, the proportion of executives
                            risen over the past five years, while only 22 percent   planning to focus on cost efficiency is not substan-                                                              Global economy
                            have seen a decrease. Average selling, general and      tially higher than the 16 percent of respondents
                                                                                                                                                                                                           Dec         Mar            Jun             Sep
                            administrative expenses (SG&A) were 36 percent          that said the same in the previous year, suggesting                                                                    2017        2018           2018            2018
                            of sales in 2017, compared with 34 percent in 2013,     that, while executives are concerned about                                                                              3
                            according to analysis from McKinsey’s Global            economic development, cutting costs is not yet                             Substantially better
                                                                                                                                                                                                            48          5
                            Fashion Index. Priority investments in sales            a top priority on fashion executives’ agendas.
                            growth named for this year were omnichannel                                                                                                                                                38
                                                                                                                                                                                                                                       3
                            and e-commerce, developing CRM capabilities,            Executives view economic                                                                                                                                            2
                            improving in-store experiences and investing in                                                                                                                                                            29

                            brand building.
                                                                                    conditions as a potential challenge,                                         Moderately better                                                                     23

                                                                                    42 percent expect industry
                                      For costs of goods sold (COGS), on the
                            other hand, the picture is more nuanced. Over           conditions to worsen in 2019.
                            the last five years, COGS to revenue increased by
                                                                                                                                                                 Moderately worse
                            0.5 percentage points or more for 43 percent of                   Our “winners and losers” analysis in
                                                                                                                                                                                                            14
                            companies in the MGFI and by over 2 percentage          the McKinsey Global Fashion Index may serve
                                                                                                                                                                                                            1
                            points for 25 percent of companies, often due to        as additional inspiration to take a step towards                                                                                   24
                                                                                                                                                               Substantially worse
                            markdown pressure.                                      efficiency: on average over the past five years,
                                                                                                                                                                                                                        1
                                                                                                                                                                                                                                       32
                                                                                    firms in the top 20 percent of economic profit
                                     To offset the impact of slower growth                                                                                                                                                                             37
                                                                                    have seen significantly lower SG&A and COGS as         Respondents who answered “the same” are not shown.                                          3
                            and rising costs, companies need to set a strategic                                                            In Dec 2017, n=1,648; and in Sep 2018, n=1,158.
                                                                                    a proportion of revenue (4 percentage points and 6                                                                                                                 4
                            agenda to boost productivity over the coming                                                                   Source: McKinsey Economic Conditions Snapshot, September 2018

                            20                                                                                                                                                                                                                                        21
Executive Interview                                                                                                                                                      01. Caution Ahead

                            Joann Cheng                                                                      but as long as our portfolio has
                                                                                                             [such diversity,] the impact can
                                                                                                                                                   the force on fast-changing social
                                                                                                                                                   media to really integrate the
                                                                                                                                                                                         and the winning spirit amongst
                                                                                                                                                                                         teams. So, the whole organisa-
                                                                                                             be mitigated.                         multi-social [experience]. Finally,   tional chart needs to support our
                            Chairman of Fosun Fashion Group & Lanvin                                                                               [we are focusing on] improving        future growth.
                                                                                                             BoF: How do you think                 the brand shopping experience
                                                                                                             Western luxury brands                 using O2O omnichannel.
                                                                                                                                                                                         BoF: How will your invest-
                                                                                                             like Lanvin and St. John                                                    ment scope and target
                                                                                                             can enhance their appeal to           BoF: At Lanvin, you‘ve                strategy change in 2019?
                                                                                                             Chinese consumers?                    recently brought on a new
                                                                                                                                                                                         JC: At Fosun Fashion Group
                                                                                                             JC: China is quite a unique           chief executive. What do you
                                                                                                                                                                                         we consider ourselves as the new
                                                                                                             market and also very crucial          see as his priorities to revive
                                                                                                                                                                                         kid on the block. Our strategy in
                                                                                                             for the luxury fashion business.      the brand?
                                                                                                                                                                                         both investment and operations
                                                                                                             Sometimes people think of             JC: Yes, Jean-Philippe Hecquet        could well be dynamic in view of
                                                                                                             Greater China as one business,        is super strong. The first priority   the development of the whole
                                                                                                             [but] actually, in my view, you       is to recruit the right design        group and the whole industry.
                                                                                                             have different cities and different   team to create appealing and          However, whatever changes we
                                                                                                             provinces across a very large         well-balanced collections to          make, it’s a broader core vision
                                                                                                             geography, so if you handle           reinterpret the brand DNA and         that’s consistent with what
                                                                                                             China it‘s not only handling one      the clothes in a powerful and         Fosun Group has been doing for
                                                                                                             market region. You also handle        modern way. Then we‘ll focus on       years, which is to focus on the
                                                                                                             different cultures, different         the collections.                      consumer lifestyle.
The State of Fashion 2019

                            The chairman of the fashion group          BoF: If there is a deepening
                                                                       of the trade conflict between
                                                                                                             demands in the system, different
                                                                                                             tiers of cities.                      “For our portfolio, balance and diversity are
                            of Fosun International, an $80 billion     China and the US, how would
                                                                       Fosun be impacted?
                                                                                                             However, one thing is true:
                                                                                                                                                    very important. When I refer to diversity,
                            Chinese conglomerate which owns            JC: I don’t think that the fashion
                                                                                                             Chinese consumers are
                                                                                                             becoming more internation-             it’s not only a category diversification but also
                            Lanvin, St. John Knits and Wolford,        industry is the area that will
                                                                       be hit by trade wars. My own
                                                                                                             al. They are more awakened;
                                                                                                             they’ve learnt self-expression.
                                                                                                                                                    a geographic and demographic diversification...
                            talks about global trade tensions,         portfolio is worldwide including      The young generation are digital      We’re never able to omit all the risks, but as
                                                                       the US, but the core market of        natives; they are global citizens.     long as our portfolio has [such diversity,]
                            China’s slowing growth and future          the portfolio is in Europe.           Connecting better with our
                                                                                                                                                    the impact can be mitigated.”
                                                                       I don‘t think we will be very         Chinese audience is one of the
                            investment opportunities.                  much impacted.                        priorities for brands like Lanvin,
                                                                                                             St. John and Wolford. We have         In terms of the retail network,       One of the keys for Fosun Group
                            — by Casey Hall                            BoF: And what about the               to go digital and offer offline
                                                                                                             channels so people in China
                                                                                                                                                   I think he will focus on growing
                                                                                                                                                   the key markets, including
                                                                                                                                                                                         is happiness, so this has also
                                                                                                                                                                                         become our consistently-applied
                                                                       potential for further
                                                                       economic slowdown within              [can] use their smartphone to         Europe, yes, and Greater China.       strategy — around the happiness
                                                                       China? Is that something that         shop [in a seamless way.]             Another priority will be the store    [aspect of ] the consumers’
                                                                       concerns you?                         Also we need to create our brand      concept, so that we can keep          lifestyle.
                                                                                                             narrative and tell the story in       delivering a consistent message
                                                                       JC: China is still a large economy    their own language and how that       in the brand expression. Digital      This interview has been edited and
                                                                       with very strong internal con-        relates to our brand DNA. Of          is [central] to that so we need       condensed.
                                                                       sumption power. Anyway,               course, we need to optimise the       to accelerate brand digitisation,
                                                                       for our portfolio, balance and        product portfolio to reflect the      invest heavily on communication
                                                                       diversity are very important.         consumers’ needs, so product          and the e-commerce platform.
                                                                       When I refer to diversity, it’s not   is key. Customised events and         In terms of the culture and the
                                                                       only a category diversification       products will make our products       people, I think it’s quite clear
                                                                       but also a geographic and demo-       more appealing to Chinese             that we need to bring back the
                                                                       graphic diversification... We’re      consumers. And we have to drive       confidence, the positive tones
                                                                       never able to omit all the risks,

                            22                                                                                                                                                                                                23
02. INDIAN ASCENT                                                                                                                                                                                                                               02. Indian Ascent

                            India is increasingly a focal point for the                                                                                                             country of 1.2 billion people and only 45 million
                                                                                                                                                                                    using the Internet.12 These figures have since
                                                                                                                                                                                                                                            labour cost is significantly lower than China’s and
                                                                                                                                                                                                                                            comparable with Vietnam’s. There is also a high
                            fashion industry, reflecting a rapidly growing                                                                                                          increased to 355 million and 460 million respec-        availability of raw materials (e.g., cotton, wool, silk,
                                                                                                                                                                                    tively (2018) and are expected to double by 2021,       and jute), which enable participation in the entire
                            middle-class and increasingly powerful                                                                                                                  when more than 900 million Indian consumers             fashion value chain.
                            manufacturing sector. These, together with                                                                                                              will be online.
                                                                                                                                                                                                                                                      Still, players looking to enter the
                                                                                                                                                                                             E-commerce leaders are moving to               Indian market should recognise several inherent
                            strong economic fundamentals and growing                                                                                                                AI-based solutions. “Personalisation and curation,      challenges. First, India is a mosaic of climates and
                            tech-savvy, make India too important for                                                                                                                based on personal taste will become a lot more
                                                                                                                                                                                    important,” says Ananth Narayanan, chief
                                                                                                                                                                                                                                            tastes. “If you break [India] up into four parts, i.e.,
                                                                                                                                                                                                                                            north, east, south and west, North India is the only
                            international brands to ignore.                                                                                                                         executive of Myntra, a fashion e-commerce player        region which is going to have winter, where you
                                                                                                                                                                                    acquired by Flipkart in 2014. “It’s not about having    have mild to severe winter for eight weeks,”
                                                                                                                                                                                    the largest selection, it’s about presenting the most   says Kapoor.
                                                                                                                                                                                    appropriate selection to the customer involved.”
                                                                                                                                                                                                                                                     “Brands that are successful in India have
                                                                                                                                                                                             The supply side of the industry is equally     understood that, how [Indians] consume, what
                                                                                                                                                                                    robust, and the growth of textile and apparel           colour they consume, what kind of designs work,
The State of Fashion 2019

                            Economic expansion is happening across Asia,           good, happy to feel good and are expanding the                                                   exports is expected to accelerate. According            what touch points and personalisation work may
                            but we expect that 2019 will be the year in which      consumption of today.”                                                                           to a 2017 McKinsey survey, 41 percent of chief          be very different from a consumer living in New
                            India will take centre stage. The country is being                                                                                                      procurement officers expect to increase their           York or Hong Kong,” Kapoor adds. “Indian women
                                                                                             Given these dynamics, it is little surprise
                            propelled by strong macroeconomic tailwinds                                                                                                             sourcing share from India.13 India’s average            have kept a lot of their traditional sensibilities alive
                                                                                   that more than 300 international fashion brands
                            and is predicted to grow 8 percent a year between
                                                                                   are expected to open stores in India in the next two
                            2018 and 2022. The Indian middle class is forecast
                                                                                   years. But India remains a complex market, which
                            to expand at 19.4 percent a year over the same
                                                                                   presents challenges as well as opportunities.
                            period, outpacing China, Mexico and Brazil.8
                                                                                   The apparel business is still largely “unorganised,”
                            As a result, India is set to move from being an
                                                                                   with formal retail accounting for just 35 percent of
                            increasingly important sourcing hub to being one
                                                                                   sales in 2016. Its share is likely to reach around 45
                            of the most attractive consumer markets outside
                                                                                   percent by 2025,10 still a relatively low proportion.
                            the Western world.
                                                                                            To build momentum around conventional
                                      India’s apparel market will be worth $59.3
                                                                                   stores, Indian players are innovating the retail
                            billion in 2022, making it the sixth-largest in the
                                                                                   experience. Retailers are leveraging technology
                            world, and comparable to the UK ($65 billion) and
                                                                                   to enhance the in-store experience with digital
                            Germany ($63.1 billion), according to data from
                                                                                   marketing displays and improved check-out.
                            McKinsey’s FashionScope. The aggregate income
                                                                                   For instance, Madura Fashion & Lifestyle launched

                                                                                                                                           Brian Sokol/Bloomberg via Getty Images
                            of the addressable population (individuals with
                                                                                   the “Van Heusen Style Studio,” which uses
                            over $9,500 in annual income) is expected to triple
                                                                                   augmented reality to display outfits on customers.
                            between now and 2025.9 According to Sanjay
                                                                                   Malls have increased their share of food service
                            Kapoor, founder of Genesis Luxury, an Indian
                                                                                   and entertainment.
                            luxury retail conglomerate, higher incomes are
                            likely to create a whole new class of consumer:                 The growth in the apparel sector is also
                            “We are moving on towards the ‘gold collar’            being driven by increasing tech-savviness among
                            worker. It’s a term that defines the well paid,        consumers. Ten years ago, technology was for
                            highly paid professionals, who are happy to look       the few, with just five million smartphones11 in a

                            24                                                                                                                                                                                                                                                                    25
Global Economy                                                                                                                                                                     02. Indian Ascent

                            and you see a beautiful mix of both Indian and            and the middle class is at its highest level in 92
                            Western sensibilities across the spectrum.”               years.18 Another consideration is the possibility        Of the top emerging markets, India’s GDP is expected to grow at the
                                                                                      of corruption. According to Transparency
                                       International companies considering
                                                                                      International, India ranks 81stout of 180 countries
                                                                                                                                               highest rate
                            an entry into India should heed this important
                                                                                      on its Corruption Perception Index (versus China
                            message. Traditional clothing is still very much the
                                                                                      at 77).19 A significant number of licences is required
                            default choice for women, making up an estimated                                                                   Exhibit 6:
                                                                                      for new entrants, so executives should beware of
                            70 percent of women’s apparel sales in 2017.
                                                                                      the potential for complicated negotiations.              India powers ahead of other major emerging markets
                            Appetite for Western styles is likely to increase,
                            but it is expected that traditional wear will still                Still, many brands are determined to            Real GDP CAGR 2018-22 forecast, %
                            account for a 65 percent market share by 2023.14          take advantage of India’s blossoming growth.
                                                                                      The majority are likely to choose one of three
                            “We are moving on towards the                             routes. First, players can partner with existing
                                                                                      e-commerce platforms. This is most suitable              India                                                                         8.0
                            ‘gold collar’ worker. It’s a term                         for players with little brand awareness and with
                             that defines the well paid, highly                       relatively low capital to invest, and offers a good      China                                                         6.1
                             paid professionals, who are                              way to test demand and customer preferences.
                                                                                                                                                                                                       3.7
The State of Fashion 2019

                                                                                      Second, brands that have little local knowledge          Turkey
                             happy to look good, happy to                             and are looking for fast entry can enter with a
                                                                                                                                                                                                 3.0
                             feel good and are expanding the                          franchise model, developing brick and mortar             Mexico

                             consumption of today.”                                   retail spaces. Finally, players that have significant
                                                                                                                                               Brazil                                      2.3
                                                                                      local knowledge and capital resources can create
                                                                                      fully owned and operated stores.
                                      Another challenge is the low quality                                                                     Russia                                1.5
                            of India’s infrastructure, which continues to                        Indian authorities are certainly keen to
                            lag behind that of many other Asian countries.            promote investment. Relaxed FDI regulations
                            Nearly 40 percent of the Indian road network was          (e.g., allowing 100 percent foreign-owned single
                            unpaved as of 2016.15 Poor infrastructure can make        brand retail operations), will likely lead to more
                                                                                                                                               Source: Economist Intelligence Unit
                            last-mile delivery difficult. In addition, retail stock   overseas-originated activity through the value
                            is also often below expectations.                         chain. We expect more outsourcing and more
                                                                                      brand-owned stores without Indian partners in
                                     However, there are signs of improvement.
                                                                                      the years ahead. Most activity is likely to be
                            “We have two fantastic luxury malls coming up
                                                                                      focused on major urban centres, reflecting
                            in Bombay at the Bandra Kurla Complex along
                                                                                      demographic trends, rising urban consumer
                            with the convention centre,” says Darshan Mehta,
                                                                                      spending power and improving infrastructure
                            founder and chief executive of Reliance Brands,
                                                                                      in those areas.
                            which operates over 500 stores for international
                            brands. “So there is a whole new fantastic retail                  In short, the Indian market offers
                            ecosystem.”16                                             great promise. Despite structural challenges that
                                                                                      include inequality, infrastructure and market
                                      One sign of India’s challenges, and also
                                                                                      fragmentation, we expect strong economic growth,
                            an indication of latent demand, is the growing
                                                                                      scale and rising tech-savviness will combine to
                            level of inequality in the country, which follows a
                                                                                      make it the next big global opportunity in fashion
                            broader global trend of rising income inequality.17
                                                                                      and apparel.
                            The gap between the top one percent of earners

                            26                                                                                                                                                                                                27
Executive Interview                                                                                                                                                           02. Indian Ascent

                            Darshan Mehta                                                                        out of within a kilometre distance
                                                                                                                 to each other and Bandra Kurla
                                                                                                                                                        DM: I think mid- to the high-end
                                                                                                                                                        because there is natural pro-
                                                                                                                                                                                              Trump government and their
                                                                                                                                                                                              approach [to] trade wars [are
                                                                                                                 Complex, are going to increase         gression upwards. It’s what I call    another concern].
                            President & Chief Executive of Reliance Brands                                       competition.                           [going from] the hundred dollars      The second is the rise of oil
                                                                                                                                                        to the thousands of dollars.          prices, especially given that India
                                                                                                                                                                                              produces negligible amounts
                                                                                                                 “Every time you look at India through the                                    of its own oil and is largely
                                                                                                                                                                                              dependent on oil imports. This
                                                                                                                  Chinese lens you will not see [the opportunity]                             is [worsened by] a rupee-dollar
                                                                                                                  correctly. India is a whole different ball game.                            exchange rate which has eroded
                                                                                                                  In India, it is not about the traditionally rich                            by close to six to seven percent
                                                                                                                                                                                              since the beginning of 2018.
                                                                                                                  Indians — they shop all over the world. It is                               From a consumer [spending]
                                                                                                                  about the 999 others who are the customers                                  point of view, it’s not always easy.
                                                                                                                                                                                              You can either pass on the impact
                                                                                                                  of tomorrow.”                                                               in volume shrink or you can
                                                                                                                                                                                              have… deeper and more frequent
                                                                                                                 BoF: Indeed. One of the                BoF: What we hear about               discount on the product — both
                                                                                                                 biggest challenges for fashion         most are the middle classes           of which erode the margin.
                                                                                                                 in India has been the lack of          swelling resulting in a               The [other issue] is… the price
                                                                                                                 retail infrastructure. Is this         massive boost in more                 value equation, which is getting
The State of Fashion 2019

                                                                                                                 changing? Could 2019 be a              affordable fashion segments.
                            The chief executive of the fashion               BoF: If you look at most
                                                                             five-year forecasts, growth         watershed year?                        Is it premature for us to
                                                                                                                                                                                              substantially reset [due to the
                                                                                                                                                                                              commoditisation of our sector
                            division of Reliance Industries, India’s         projections for India’s
                                                                             apparel market and the
                                                                                                                 DM: Absolutely, I think in the
                                                                                                                                                        expect the Indian middle
                                                                                                                                                        classes to make a big impres-
                                                                                                                                                                                              by] the likes of Amazon and
                                                                                                                                                                                              Flipkart. After the US, India is
                                                                                                                 same way that 2008 was. In 2008,
                            largest private sector conglomerate with         broader economy are quite           the Emporio Mall started but
                                                                                                                                                        sion in lower end brands?             seen as possibly the next [market
                                                                             impressive. But just how            the challenge with the Emporio         DM: There are some categories         where this will happen], so that’s
                            consolidated turnover of $63 billion,            upbeat do you feel about            was that unfortunately it was the      where marketers and brands            a worry.
                                                                             business opportunities
                            talks about seizing opportunities in the         in 2019?
                                                                                                                 same year the terrorist attacks
                                                                                                                 happened in Oberoi and the Taj
                                                                                                                                                        already reaped what we call the
                                                                                                                                                        democratic dividend of the rich       BoF: Let’s talk more about
                            fastest growing major economy                    DM: Very upbeat. Last quarter       Hotel in Bombay. It took away
                                                                                                                 some of the wind from the sails
                                                                                                                                                        middle class. In a lot of these
                                                                                                                                                        categories, individual players
                                                                                                                                                                                              that. There is so much
                                                                             our GDP grew 7.7 percent.                                                                                        dynamism happening
                            in the world.                                    So, we continue to retain the       but nonetheless the Emporio            have worked very hard to create       in Indian e-commerce
                                                                             highest GDP growth in the           marked a bit of a turning point.       the [right] price-value equation.     market; how bullish are you
                                                                                                                 I think 2019 is going to be similar,   Fashion spending and trading up
                            — by Robb Young                                  world and everything prime
                                                                             minister Narendra Modi is doing     we are going to see a very big         in the category should become
                                                                                                                                                                                              about e-commerce as an
                                                                                                                                                                                              opportunity for a business
                                                                             — barring currency pressure —       change. Quest Mall in Calcutta         a habit and it is, but I think the    like yours, which is skewed
                                                                             looks very good.                    is doing well; Palladium Mall          fashion industry overall has not      more toward luxury?
                                                                                                                 in Chennai, early days, but you        done enough.
                                                                             For a very long time, the Emporio   can see the traction is building;                                            DM: Very bullish. We’ve created
                                                                             Mall in Delhi became a bit of       in Saket [an upmarket suburb                                                 very clever software where
                                                                             torch bearer of luxury [moving]                                            BoF: Despite the upbeat
                                                                                                                 of Delhi], the DLF mall is going                                             all our stores’ inventories are
                                                                             out of five-star hotel lobbies                                             climate, India is still not
                                                                                                                 through a complete overhaul                                                  parallelly given digital exposure.
                                                                             into the mainstream consumer                                               an easy place to do business.
                                                                                                                 [and then you have the new                                                   Last year a significant portion of
                                                                             mindset. Ten years later we now                                            What sort of pain-points
                                                                                                                 Mumbai malls so] we are going                                                our brick-and-mortar sales [were
                                                                             have two fantastic luxury malls                                            worry you most?
                                                                                                                 to see quite a bit of activity.                                              driven by] online. It also doesn’t
                                                                             opening in Bombay so there                                                 DM: One of the biggest worries,       [impair] the price-value equation
                                                                             is a whole new fantastic retail     BoF: Which categories or               which could become a substantial      because it is one inventory, one
                                                                             ecosystem. The Jio World Centre     segments do you think will             pain-point, is the forex situation.   image and one price. For a place
                                                                             and Maker Maxity, both coming       reap the most benefits?                The economics of the Donald           like India, which has pockets of

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Executive Interview                                                         03. TRADE 2.0
                            wealth, I am able to have access      understanding do Western
                            to that because those pockets of      executives now have of the
                            wealth may still not be ready for     Indian luxury consumer?
                            a fully-fledged store, [but] the
                            customers that exist in the town
                                                                  DM: The singular mistake that
                                                                  they make is that the European
                                                                                                        Companies should make contingency plans
                            can still shop through my store.
                                                                  mindset comes from a few              for a potential shake-up of global value chains.
                                                                  centuries of inherited riches.
                            BoF: Reliance recently upped
                            its stake in Genesis Luxury
                                                                  In India we’re now looking at         The apparel trade could be reshaped by new
                                                                  the first wave of what I call first
                            Fashion, the Indian group
                            that distributes brands like
                                                                  generation wealth, which spends       barriers, trade tensions and uncertainty.
                            Bottega Veneta, Giorgio
                                                                  very differently than inherited
                                                                  wealth. On the one hand, it is a      However, there may also be new opportunities
                            Armani, Michael Kors and
                            Coach and has a joint venture
                                                                  very rich and powerful consumer
                                                                  movement because new wealth
                                                                                                        from growing South-South trade and the
                            with Burberry for the Indian
                            market. Does Reliance have
                                                                  has an innate need to announce
                                                                  itself in many ways and fashion
                                                                                                        renegotiation of trade agreements.
                            ambitions to become a luxury
                                                                  is clearly one of the ways. Yet,
                            conglomerate along the lines
                                                                  on the other hand, first genera-
                            of an Indian LVMH?
                                                                  tion wealth also has very sharp
                            DM: We’re certainly not trying        and recent memory of how that
                            to clone anyone else. When            wealth was created and hence          Fashion is inherently sensitive to the policies                 Still, while the US and China are
The State of Fashion 2019

                            the Genesis opportunity came,         they spend differently because it     and politics that shape cross-border trade.           raising tariffs against each other, China is at the
                            we knew that they had a whole         is the wealth creator [himself or     Recent talk of trade shifts between the US and        same time trying to make some imports cheaper.
                            bunch of private equity players       herself ] who is spending it.         some of its key trading partners has brought the      A Chinese government decision to cut import
                            who were not so strategic in their    Second, because geographically        issue to the fore. At the same time the axes of       duties led LVMH to reduce prices by 3-5 percent
                            approach. We saw a good oppor-        we are juxtaposed to China, every     global trade are shifting, amid a surge in commerce   in July on some items sold in China.22 In September
                            tunity when L Catterton wanted        time you look at India through        between emerging economies in the Global South.       2018, China announced it would reduce tariffs for
                            to exit and bought out all the        the Chinese lens you will not         The dynamics may lead to a rethink of sourcing        textiles and construction materials from 11.5 to 8.4
                            other private equity players.         see [the opportunity] correctly.      and pricing strategies in the year ahead.             percent. Any reduction of tariffs usually must be
                            [Genesis Luxury founder] Sanjay       India is a whole different ball                                                             offered to all countries equally under World Trade
                            Kapoor had created a good pool        game. In India, it is not about                 As 2018 ends, fashion companies find
                                                                                                                                                              Organization rules, but China said US goods would
                            of talent, a good entrepreneurial     the traditionally rich Indians —      themselves in a cross current of trade-related
                                                                                                                                                              still be subject to retaliatory tariffs.
                            ecosystem, some high-quality          they shop all over the world. It      news flow. A sharp rise in trade tensions between
                            real estate, and a great brand        is about the 999 others who are       the US and other large economies seems set to                   Despite some of the positive develop-
                            portfolio, all of which sat well      the customers of tomorrow, who        increase costs for some players and increase the      ments in trade, the dominant theme over 2017
                            [with us]. We will never be           will find it too intimidating to go   risk of disruption. At the same time, new trade       has been tightening of trade conditions between
                            predatory in nature, so having        into the five-star hotel lobby or a
                                                                                                        agreements promise better trading conditions in       specific partners. For the G20 economies, there
                            bought the first 40 percent           gallery to shop there. So [former
                                                                                                        certain instances.                                    were $74 billion of restrictive measures in May
                            [stake] our intention was to sit as   Burberry chief executive] Angela
                            a new partner along with Sanjay       Ahrendts came and took the                                                                  2018, compared with $47 billion in May 2017, a
                                                                                                                  In the US, the fashion industry accounts
                            and his other partners to create      bold decision to set a Burberry                                                             rise of 58 percent. Trade-facilitating measures,
                                                                                                        for 6 percent of imports but pays 51 percent of
                            more value.                           opposite a Zara store [because]                                                             which include eliminating or reducing tariffs and
                                                                                                        tariff receipts, so the tariffs issue is critically
                                                                  a woman coming out of the Zara                                                              simplifying customs procedures, meanwhile, fell
                                                                                                        important.20 In addition, with new tariffs coming
                            BoF: Through Reliance’s               store will feel less intimidated                                                            from $163 billion to just $83 billion, a 49 percent
                                                                                                        into force on goods from China (including leather
                            direct partnerships with              to go window shopping at the                                                                drop.23 Consumers are also noticing more gloomy
                                                                                                        clothing, woven fabrics and wool yarn), there is a
                            brands like Zegna, Diesel             Burberry store.                                                                             trade sentiments: Google searches for the words
                            and Bally, you have daily                                                   direct feed-through to the consumer. Companies
                                                                                                                                                              “trade war,” “trade tensions” or “tariffs” are at the
                            contact with many Western                                                   such as Samsonite and Gap, which have large
                                                                  This interview has been edited and                                                          highest level for at least five years, after growing
                            luxury executives. Generally          condensed.                            manufacturing operations in China, have said they
                                                                                                                                                              by a factor of 10 this year.24 The IMF, meanwhile,
                            speaking, how good of an                                                    plan to raise their consumer prices.21

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