The State of Fashion 2020

…and is built on

thorough researchThe report has 3

main objectives…

THE ANNUAL STATE OF FASHION REPORT DISCUSSES THEMES, ISSUES AND

OPPORTUNITIES INFLUENCING THE GLOBAL FASHION INDUSTRY

In addition, insights are gathered from McKinsey and Business of Fashion proprietary research, insights and publications

400+COMPILED

290+RESPONDED

30+CONDUCTED

Interviews with prominent

industry leaders and experts

The BoF-McKinsey State

of Fashion Survey

McKinsey Global Fashion Index

public & private company data

Study the industry‘s

performance

Set the agenda

for 2020

1 Uncover forces

impacting the industry

2

3

3

SENTIMENT FOR THE YEAR AHEAD IS CAUTIOUS, WITH PESSIMISM

UNIVERSAL ACROSS GEOGRAPHIES AND MARKET SEGMENTS

SOURCE: BoF-McKinsey State of Fashion Survey, September 2019

60%Roughly

of respondents

expect economic

conditions to

worsen in

2020, regardless

of market segment

or geography…

Value

Mid-market

Market segment

Premium/

luxury

Geography

Europe

Asia

North America

9%expect an

improvement

…while only

4

OVERALL, WE EXPECT A SLOWDOWN IN 2020 DRIVEN BY

MACROECONOMIC FORCES

SOURCE: McKinsey Global Fashion Index (MGFI)

Expected Forecast

Year-on-year growth, percent

Losing share

Europe, North America, APAC mature

Footwear, jewellery and watches

Premium/bridge, mid-market

5,5

1,5

3,0

4,5

4,0

3,5

2005-2015

average

2016 20192017 2018 2020

Gaining share

Emerging APAC, Emerging Europe

Sportswear, handbags and luggage

Luxury, Value, Discount

5

TOP OF MIND ISSUE FOR MANY INDUSTRY LEADERS NOW – CORONA VIRUS!

SOURCE: BBC, AFP, Vogue

Luxury goods brands

expect up to $150 m

losses due to slower

sales in Asia – case

in point - Capri

Holdings Ltd. —

parent to Michael

Kors, Versace and

Jimmy Choo –

decreased 2020

sales forecast from

$5.8 to 5.65 billion

―… The Corona outbreak has had negative effect on Q1

2020 numbers, as last 3 weeks have dramatic decrease

in footfall in Asia…‖

Marco Gobetti, CEO of Burberry

―…99% of people I know who are still in China have had

to cancel their trips to New York and Milan Fashion

Weeks…‖

Leaf Greener, one of most famous Chinese Fashion

bloggers

“…the virus could reduce China‘s 2020 gross domestic

product growth by 0.5 to 1 percentage point — off of its

baseline estimate of 5.9%, representing a loss of roughly

$7.2 billion to $14.3 billion, mostly supply chain disruption in

apparel and general merchandise industries…‖

QuotesImpact

example

6

172010 151211 1413 16 2018

Luxury + Affordable luxury

Luxury has been driving the

economic profit rebound

66

77

100

75

104103

91

103

53

SOURCE: McKinsey Global Fashion Index (MGFI), based on public companies

LOOKING BACK ON THE PAST YEAR, INDUSTRY

ECONOMIC PROFIT CONTINUES TO RISE

Premium/Bridge, mid-

market, value, discount

Total industry

economic profit

Indexed to 2010

economic profit as 100

7

198185 177

132

-43

-95-83 -76

20182011 - 2015

-211 -1-3

1716

Top 20 percent of companies Middle 60 percent Bottom 20 percent

SOURCE: McKinsey Global Fashion Index (MGFI). Economic profit has been adjusted for IFRS16 standards

Fashion companies’

contribution to industry

economic profit

by ranked quintile, %

contribution

THE TOP QUINTILE OF COMPANIES DISPROPORTIONATELY CONTRIBUTE TO

THE INDUSTRY’S TOTAL ECONOMIC PROFIT

8

2.980

2.910

2.316

1.669

1.513

1.311

1.059

1.008

897

861

641

568

532

515

483

413

401

400

371

315

Adidas

HLA Corporation

Fast Retailing

Nike

TJX Companies

Hermès

Inditex

Kering

VF Corporation

LVMH

Ross

Pandora

Richemont

Anta Sports

Next

LBrands

H&M

Lululemon

Hanes Brands

Burberry


THIS YEAR’S TOP 20 “SUPER WINNERS”

At adjusted 2018 foreign exchange rates

Top 20 Super Winners by economic profit, $US million New entrants

9

Rest of the industry

Capital efficiency

(invested capital as

percent of sales)

Gross margin

48%

Revenue growth

1%

Super Winners

55%

54%

5%

SUPER WINNERS OUTPERFORMED ACROSS KEY METRICS IN 2018


VS.

66%

10

Value

creating


AT THE OTHER END OF THE SPECTRUM, OVER HALF THE INDUSTRY IS NOW

VALUE-DESTROYING

Value creators vs. value destroyers per year, %

56%32%

2018

Value

destroyers

2010

11

GLOBAL ECONOMY CONSUMER SHIFTS

On High Alert

Continued caution is

advised for the year ahead

as mounting underlying

turmoil could disrupt

relations among both

developed and emerging

market economies.

Indicators of recession risk

are spurring companies

across industries to build a

resiliency playbook and plan

for other macro risks such

as geopolitical instability

and the inflammation of

trade tensions.

China will continue to

provide exciting

opportunities and play a

leading role in the global

fashion industry, but the

colossal market is proving

harder to crack than brands

anticipated. As some

successful players become

over-reliant on China and

others struggle, companies

should consider spreading

their risk by expanding to

other high-growth

geographies.

As traditional engagement

models struggle on

established social media

platforms, fashion players

will need to rethink their

strategy and find ways to

maximise their return on

marketing spend. Attention-

grabbing content will be

key, deployed on the right

platform for each

market, using persuasive

calls-to action

and, wherever possible, a

seamless ink to checkout.

Consumer demand for

convenience and immediacy

is prompting retailers to

complement existing brick-

and mortar networks with

smaller format stores that

meet customers wherever

they are and reduce friction

in the customer journey. The

winning formula will feature

in-store experiences and

localised assortments

in neighbourhoods and

suburbs beyond the main

shopping thoroughfares.

The global fashion industry

is extremely energy-

consuming, polluting and

wasteful. Despite some

modest progress, fashion

hasn‘t yet taken its

environmental

responsibilities seriously

enough. Next year, fashion

players need to swap

platitudes and promotional

noise for meaningful action

and regulatory compliance

while facing up to consumer

demand for transformational

change.

Beyond China Next Gen Social In the Neighbourhood Sustainability First

01. 02. 03. 04. 05.

The percentage of survey

respondents that expect

global economic conditions

to improve in the next year

has fallen from 49 percent

for 2019 to 9 percent for

2020

The population of

consumers aged 30 or

below in five identified

exciting markets outside of

China will grow to be more

than double that of China

by 2025

More than two-thirds of

fashion players believe

―increased exploration of

spend on new media

platforms vs. ‗traditional‘

platforms‖ will be a top

theme in the coming year

Over half of fashion

executives believe a ―localised

brick-and mortar-experience‖

will be a top theme this

year, and KSA customers note

an equal propensity towards

on online and in-store

shopping

Survey respondents cite

―sustainability‖ as the single

biggest challenge and

opportunity in 2020 with KSA

customers highlighting it as their

3rd most important brand

value, particularly for young

customers

2020 OVERVIEW: FASHION INDUSTRY THEMES

12

2020 OVERVIEW: FASHION INDUSTRY THEMES

FASHION SYSTEM

The percentage of

respondents that think using

innovative sustainable

materials is important for

their company

Fashion brands are

exploring alternatives to

today‘s standard

materials, with key players

focused on more

sustainable substitutes that

include recently

rediscovered and re-

engineered old favourites as

well as high-tech materials

that deliver on aesthetics

and function. We expect

R&D to increasingly focus

on materials science for new

fibres, textiles, finishes and

other material innovations to

be used at scale.

Materials

Revolution

06.

Across fashion companies

there are seven male chief

executives for every one

female and in KSA, the

liberalization drive is

providing unprecedented

creative freedom

Consumers and employees

are putting increasing

pressure on fashion

companies to become

proactive advocates of

diversity and inclusion.

More companies will elevate

diversity and inclusion as

a higher priority, embed it

across the organisation and

hire dedicated leadership

roles, but companies‘

initiatives will also come

under increasing scrutiny

in terms of sincerity and

results.

Inclusive

Culture

07.

Year-on-year growth in

APAC cross-border B2C

e-commerce transaction

value is 37 percent

Established fashion brands

and retailers will face growing

competition from new Asian

challengers, as manufacturers

and SMEs step out of their

traditional roles and sell

directly to global consumers.

Expect greater competition

from hitherto unknown players

in the Asian supply chain who

design popular items to sell at

affordable prices using

crossborder e-commerce

platforms.

Cross-Border

Challengers

08.

The trade show of the future

will need to be highly

digital, rethink its target

audience and bring fresh

trends and ideas

from the industry to the

forefront

Traditional trade shows must

respond to the increase of

direct-to-consumer

activity, shorter fashion cycles

and digitization by embracing

new roles and fine-tuning their

target audience. In a bid to

differentiate themselves — or

even just to survive — more

of these events will add B2C

attractions or launch new

services and experiences to

improve relationships with

their traditional B2B audience.

Unconventional

Conventions

09.

The average fashion-tech

IPO of the past two

years has seen a 27%

decrease in its stock

price since going public

Valuations of digital fashion

players have reached

dizzying levels and, despite a

slew of high-profile IPOs and

private firms achieving

unicorn status, investor

sentiment is taking a turn for

the worse. Investor

apprehension is growing over

the path to profitability for

some digital players, from

online pure play retailers

and marketplaces, to direct-

to-consumer brands and

other digital-first business

models.

Digital

Recalibration

10.

13

10 THEMES IMPACTING THE FASHION INDUSTRY IN 2020

14McKinsey & Company

And what about Saudi Arabia?



We ran a survey to evaluate KSA consumer buying behaviour and 70% of customers indicated they

delay their local fashion purchases

Of your (non-essential) purchases, what do you spend the most on?

N=376

8%

11%

16%

Luxury

Apparel &

accessories

Homeware

Electronics

14%

Do you delay purchases of

fashion items to times when

you are travelling abroad?

N=132

23%

Travel &

tourism

Entertainment

(e.g. cinema)

Food &

beverage

16%

11%

Experiences

Physical

products

Yes No

70%

30%

KSA customer behavior survey

15 question survey evaluated

KSA customer purchase

behavior across different

categories, including

fashion, with a broad spectrum

of demographics represented

45%

Saudi Non-Saudi

55%

24%

Upper

Middle

Affluent Low

Income

18%27% 31%

Lower

Middle

32% 29%29%

18-24 25-34

10%

45+35-44


KSA customers also actively engage in price comparison behaviour both internationally and on digital

channels, with 72% even doing this during in-store physical journeys

How often do you compare prices…

N=376

29%

22%

19%

32%Never

Most purchases

Every purchase

Few purchases

…locally vs.

intern-

ationally?

…online vs.

in-store?

23%

24%

21%

31%

Few purchases

Every purchase

Most purchases

Never

How often do you shop online while in-

store?

N=376

NeverEvery

purchase

Most

purchases

18%

Few

purchases

22%

32%

29%

17

Fashion players need to:

Continuously innovate

product and store

formats to meet

consumer demands, as

well as re-evaluate how

they communicate with

consumers through

their use of social

media

AMID TROUBLED TIMES IN 2020, FORTUNE

FAVOURS THE BIG AND THE BOLD

Credibly respond to a

consumer that

increasingly demands

fashion players to

address environmental

sustainability and

diversity, and votes

accordingly

Invest in understanding

their key business risks

and be prepared for

quick decision making

against an uncertain

economic background

18

Thank you!

The State of Fashion 2020 - RETAIL LEADERS...

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