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In 2021, the COVID-19 outbreak will accelerate industry trends as shopping shifts to digital channels and consumers continue to defend justice and social justice.

With the COVID-19 pandemic dominating thoughts and minds, fashion executives are planning a series of scenarios and hoping for a rapid global recovery. However, amid growing pressure on performance, changing consumer behavior, and accelerating digital demand, there is an imperative to act decisively to prepare for the next normal.

After a year of record-low economic profits for the fashion industry, business leaders come to the forefront looking for innovations while continuing to interact with their key constituents. Given the disruptions in recent months, many companies are reconnecting with their supply chains, making difficult decisions – for example, about the store-level ROI – and increasing omnichannel services. The beauty segment, which was discussed for the first time in McKinsey’s The State of Fashion 2021 report, is relatively isolated from the epidemic and offers consumers a relaxing attitude in difficult times. As we move towards improvement, companies in the beauty segment have the chance to adapt to changing category and regional opportunities.

Those are some of the findings from McKinsey’s latest report, The State of Fashion 2021, written in partnership with the Business of Fashion (BoF). The report, the fifth in the annual series, drills down into the major themes affecting the fashion economy and assesses a range of possible responses. Reflecting research company’s conversations with industry leaders over recent months, it examines the ten key trends likely to shape the business over the coming year. The latest reading of the global fashion index, meanwhile, reveals new insights into company performance by category, segment, and region.

Silver linings

The sober mood among fashion executives surveyed in last year’s report has evolved over recent months into a strong determination to manage the industry through the COVID-19 pandemic. McKinsey’s calculations, based on the changes in market capitalizations over time in the index on global fashion, suggest that the industry’s economic profit will fall by 93 percent in 2020 after rising 4 percent in 2019. That translates into a significant increase in the number of companies that are “value destroyers,” which McKinsey expects will rise to 73 percent of those in the index in 2020, compared with 60 percent in 2019.

Still, there are silver linings among the clouds. While the crisis has visited a devastating impact on businesses and jobs, it may also have accelerated responses that can lead to positive outcomes. Indeed, many fashion companies have taken time during the crisis to reshape their business models, streamline their operations, and sharpen their customer propositions.

Looking forward, our base case is cautiously optimistic, with the virus more effectively controlled over the coming year, thanks to a strong public-health response.1 At the same time, government interventions will partially offset economic impacts, and global travel will pick up, alongside the possibility of larger social gatherings. In that scenario, we would see markets such as China recovering strongly. McKinsey predicts a 5 to 10 percent sales growth in China in 2021 compared with 2019. Europe, on the other hand, will probably continue to feel the effects of subdued tourist arrivals, leading in 2021 to a 2 to 7 percent sales decline from 2019. Moreover, precrisis levels of activity are unlikely to return before the third quarter of 2022. We expect a similar trajectory in the United States, with sales down 7 to 12 percent next year compared with 2019, and only a modest recovery before the first quarter of 2023.

Where there is positive momentum, the primary driver will continue to be digital channels, reflecting the trend established before the COVID-19 crisis and the reluctance of people in many countries to gather in crowded environments. Indeed, recent data show that we have vaulted five years forward in consumer and business adoption of digital in a matter of months. Around the globe, we expect more than 20 percent annual digital growth in 2021 (with 30 percent in Europe and the United States) compared with 2020.2 Other positive trajectories will include the growing influence of platform propositions as customers warm to marketplace experiences and renewed appetite among both brands and consumers for local engagement—the personal touch that reflects the priorities of many.

Against this background, fashion-industry fortunes are highly polarized. Given the disruptions in financial year 2019, it was not possible for McKinsey to calculate their annual list of 20 “super winners” accurately. Instead, the company referenced their 2018 list to gauge the fortunes of the elite group. Perhaps unsurprisingly, investors this year had more confidence in the top 20 than in other companies, and super winners were less badly hit by the April stock market sell-off than their peers were (–26 percent from December, compared with –33 percent on average). By the time the Northern Hemisphere went on its August vacation, the super winners had recovered on aggregate to just 5 percent below precrisis levels.

Companies that have performed the best over recent months tended to share at least one of two key characteristics. Many have had a strong Asia–Pacific focus, reflecting the economic strength of the region and the relatively lower impact of the pandemic there, and many have offered a compelling digital proposition. E-commerce players, such as ASOS, FARFETCH UK, Revolve, and Zalando, have consistently outperformed in 2020, as locked-down customers turned to digital devices to shop. By August, such digital-first players were trading 35 percent higher, on average, than they did in December 2019.

Given the standout performance of digital channels in the current environment, McKinsey expects digital to remain king in 2021. Indeed, some 22 percent of executives say it will be the key momentum driver in the coming year—a percentage point less than the proportion that cites “uncertainty” and slightly more than the 20 percent that pick “challenging.”

Ten themes for 2021

As the world recovers from the COVID-19 pandemic, what will be the defining themes in the business of fashion? McKinsey’s discussions with industry executives suggest that the key drivers will include shifting consumer behaviors (in relation to digital channels, social-justice concerns, and a reluctance to travel), opportunistic investment, and the need to build more efficient, simple, and demand-focused operating models:

There is little doubt that 2021 will continue to be tough for many as the COVID-19 pandemic tracks an uncertain trajectory. The task for decision makers, therefore, is to find silver linings, knowing that times of change are inherently rich with opportunity. Fashion companies that double down on strategy, align with key trends, and reflect an evolving consumer landscape are likely to emerge from the crisis stronger, leaner, and ready to thrive in the next normal.

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