McKinsey and BoF find 90 percent profit decline for the fashion industry

The Business of Fashion and McKinsey Company have released a report examining the future of the 2.5 trillion dollar global fashion industry. The report forecasted a staggering 90 percent economic profit decline across the industry in 2020. This marks the worst year on record, while global fashion sales will decline 15 to 30 percent in 2020 compared to 2019.

Europe will see a 22 to 35 percent decline in sales, with the U.S. seeing a 17 to 32 percent decline, and China seeing a 7 to 20 percent decline. There is a bright side for online sales, which saw the equivalent of 6 years of growth in only 8 months, nearly doubling from 16 to 29 percent of total revenues. 71 percent of fashion executives now expect their online business to grow by 20 percent or more in 2020. However, it will take at least two years for industry revenues to recover to 2019 levels.

Of course, the culprit behind this steep decline is coronavirus. Coronavirus accelerated the situation for brands who were already troubled before the pandemic, and also accelerated shifts in consumer behavior and disrupted supply chains.

In a statement, Achim Berg, senior partner and global leader of apparel, fashion and luxury at McKinsey said, “As a result of the decline in economic profit, fashion industry value is now further consolidated among the top players — 60 percent of the industry was value-destroying in 2019, growing to an estimated 73 percent in 2020. In this disrupted environment, leaders must develop new strategies and have the agility to change their product offering.”

2021 is seen as the bridge between the pre-pandemic reality and a potentially protracted recovery period for the global fashion industry. The pace of recovery will vary across fashion categories and geographic segments. Fashion companies focused on digital, the Asian market and luxury are considered to have a competitive edge in recovery.

In a statement, Imran Amed, founder and CEO of The Business of Fashion, said, “While the fashion industry has experienced its worst year on record, the pandemic has also prompted a long overdue reckoning for the sector, creating an opportunity for industry re-invention and reset in the coming years. Digital adoption and innovation has been catalyzed by the pandemic, even while consumers have become more aware of the plight of vulnerable workers in the value chain, creating expectations for fair treatment of all workers in fashion’s value chain. In the post-coronavirus world, the fashion system will need to be rewired to become more responsible, more sustainable and more human.”

From a segment perspective, luxury and affordable luxury have proven marginally more resilient, with sales shrinking an average of 30 percent and EBITA declining by an average of 20 percentage points during the quarters falling between February and June 2020, compared to the same period in 2019. The global beauty market is also proving that it is more resilient than fashion and is set to return to — and even surpass — 2019 levels of sales in 2021.

In a statement, Lauren Sherman, chief correspondent at the Business of Fashion, said, “While luxury has proven marginally more resilient throughout the pandemic when compared to other parts of the fashion industry, brands must tap artificial intelligence, but also cultivate direct relationships with salespeople, to make every customer experience feel personal. Brands must also develop local customer relationships in regions that in the past were reliant on tourism to drive growth. While the pandemic has forced a shift away from buying experiences to buying things, brands should plan for the return of the experience economy.”

photo: Aygin Kolaei for FashionUnited