The State of Fashion 2017, BoF and McKinsey & Company’s in-depth report on the global fashion industry, can be summarised in three words: uncertain, changing and challenging.
LONDON, United Kingdom — As fashion executives around the world reported to us in the first BoF-McKinsey Global Fashion Survey, 2016 can be summarised in three words: uncertain, changing and challenging.
Indeed, this has been one of the toughest years ever for the global fashion industry. Terrorist attacks in France, the Brexit vote in the UK and the volatility of the Chinese stock market have created shocks to the global economy, which has not been this volatile since the depths of the financial crisis of 2009. Meanwhile, consumers have become more demanding, more discerning and less predictable in their purchasing behaviour, which is being radically reshaped by new technologies.
But the shockwaves have not only been external. Fashion companies have also been looking inward, implementing changes to their core operations — from shortening the length of the fashion cycle to integrating sustainable innovation into their core product design and manufacturing processes — re-evaluating the entire fashion system itself.
Perhaps unsurprisingly then, 67 percent of the executives surveyed reported that conditions for the fashion industry have worsened over the past 12 months, a fact that is clearly borne out in the industry’s financial performance this year. Sales growth is on track to slow to just 2-3 percent by the end of 2016, with stagnating profit margins. Speculation and uncertainty over the impact of the outcome of the election in the United States could further impact sales if consumer sentiment dampens. This is in stark contrast to the fashion industry’s performance over the previous decade, which saw the industry grow at 5.5 percent annually according to the McKinsey Global Fashion Index, outpacing overall GDP growth.
Terrorist attacks in France, the Brexit vote in the UK and the volatility of the Chinese stock market have created shocks to the global economy, which has not been this volatile since the depths of the financial crisis of 2009.
It is important to note that industry performance in 2016 has not been even across all market segments and categories. This year was particularly difficult for the luxury and mid-market players, who were hit by the slowdown in China and the US, and are expected to grow at rates below the industry average at 0.5-1 percent and 2-2.5 percent, respectively. One category that is experiencing significant deceleration is watches and jewellery. While it was the fastest growing category between 2005 and 2015 — having enjoyed a compounded growth rate of 11 percent according to the MGFI — watches and jewellery is expected to grow just 1.5-2 percent this year. The luxury end of the category suffered an especially hard blow.
But in spite of these and other challenging circumstances, fashion remains one of the key value-creating industries for the world economy. If it were ranked alongside individual countries’ GDP, the global fashion industry would represent the seventh-largest economy in the world. Moreover, 2016 also saw many exciting changes: the advance of digital, the launch of “see-now, buy-now” and a thorough creative shake-up at fashion houses.
Outlook for 2017: Glimmers of recovery
In 2017 we expect the fashion industry to see the glimmers of a rebound.
This recovery has several foundations. First macroeconomic indicators, including GDP growth forecasts, are projected at 3.4 percent compared with 3.1 for 2016, however these have not been adjusted to reflect the ongoing impact of important political shifts in the United States and the United Kingdom.
Second, the investment community and the fashion brands themselves forecast improvement across the industry next year. Some 40 percent of executives we interviewed for this report expect conditions for the fashion industry to improve in 2017, compared with the 19 percent who reported improving conditions in 2016. This is particularly true for the major players within each of the market segments and product categories. Many of them have already undertaken significant cost-cutting and restructuring exercises, and are now primed to capture the benefits. All things considered, fashion industry growth could increase from 2-2.5 percent in 2016 to 2.5-3.5 percent in 2017, although the days when the industry outpaced GDP growth by more than 1-2 percentage points, as it has done over the past decade, seem to be over.
Performance will vary according to the individual dynamics of specific market segments and categories. Value and affordable luxury are likely to be the big winners, both outpacing the industry average at a projected 3.0-4.0 percent and 3.5-4.5 percent growth, respectively; however, all of the market segment — except for the discount market — should see a slight sales growth improvement of 0.5-1.5 percentage points.
Product categories are expected to grow in line with the overall industry average, but the biggest winners will be those companies with coherent channel strategies and clear value propositions. Athletic wear is positioned to be the absolute category winner, maintaining 6.5-7.5 percent sales growth, albeit no longer growing at a double-digit rate overall. The affordable luxury segment seems likely to continue benefitting from consumers “trading down” from luxury, while signs point to the continued growth of the value segment in line with the international expansion of large global players.
In short, the industry now has the opportunity to stabilise and reset. Next year’s success stories are most likely to come from those that are already planning for the year ahead. They should do this in the context of the following trends that we believe will shape the fashion industry in 2017.