Fashion is one of the past decade’s rare economic success stories. Over that period, the industry has grown at 5.5 percent annually, according to the McKinsey Global Fashion Index, to now be worth an estimated $2.4 trillion. In fact, not only does it touch everyone, but it would be the world’s seventh-largest economy if ranked alongside individual countries’ GDP.
Yet 2016 was one of the industry’s toughest years. Terrorist attacks in France, the Brexit vote in the United Kingdom, and the volatility of the Chinese stock market have created shocks to the global economy. At the same time, consumers have become more demanding, more discerning, and less predictable in their purchasing behavior, which is being radically reshaped by new technologies. It’s against this backdrop that McKinsey has teamed with the Business of Fashion to shine a light on the fragmented, complex ecosystem that underpins this giant global industry.
2016: A year to forget
Our first The State of Fashion report (PDF–8MB) finds that it’s not only external shock waves that have roiled the industry. Companies have also been looking inward, implementing changes to the core operations that are reshaping the entire fashion system, from shortening the length of the fashion cycle to integrating sustainable innovation into the core product-design and manufacturing processes. Perhaps unsurprisingly, 67 percent of executives said conditions for the fashion industry have worsened over the past 12 months.
This fact is clearly borne out in the industry’s financial performance. Sales growth seems set to slow to a mere 2 or, at most, 3 percent by the close of 2016, with stagnating profit margins. Speculation and uncertainty over the repercussions of the US election outcome could further dampen consumer sentiment and affect sales. This is in stark contrast to the fashion industry’s performance over the previous decade, which saw the industry expand at 5.5 percent annually.
Yet this sluggish overall growth masks some big winners: affordable luxury, value, and athletic wear.
With respect to sales growth, the affordable-luxury and value sectors have outperformed all other segments by one to one-and-a-half percentage points. This is consistent with their compound annual growth rate (CAGR) over the past three years, which has been 9 percent for affordable luxury and 6 percent for value, the highest of any segment since 2013.
Affordable-luxury players benefited from consumers trading down from luxury, particularly among Chinese consumers. However, their profit margins are expected to decline, especially after 2016, because of a pricing-arbitrage disadvantage across geographies and fluctuating foreign-exchange rates.
The value segment continued to grow in 2016, particularly as a consequence of large global players expanding geographically. With its clearly defined value proposition, the value segment has been taking share from discount this year.
In 2016, the 8.0 to 8.5 percent growth for athletic wear is more than double