McKinsey Issues Dismal Post-Pandemic Forecast For The $2.5 Trillion Fashion Industry – Forbes

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The $2.5 trillion fashion industry will suffer double-digit losses for 2020, a recessionary market and a landscape undergoing dramatic transformation that will have repercussions from the boardrooms of world class luxury brands to the textile workers in developing countries as a result of the coronavirus pandemic.

A report by McKinsey & Company and the publication, Business of Fashion, describe the unforeseeable humanitarian and financial crisis as a “black swan” event that “has disrupted financial markets, upended supply chains, and crushed consumer demand across the global economy.” While the pandemic is expected to hit business sectors ranging from finance to hospitality, “The State of Fashion 2020 Coronavirus Update,” says fashion is particularly vulnerable because of its discretionary nature. The report, an update of the same report released in November, 2019, provides a projection of what the fashion industry will look like during the 12-to-18-month period following the end of global pandemic. Among its findings:

* The global fashion industry (apparel and footwear) is forecast to contract by 27% to 30% in 2020, in terms of revenues year-on-year. For the personal luxury goods industry (luxury fashion, luxury accessories, luxury watches, luxury jewelry and high-end beauty), a contraction of 35% to 39% is estimated.

 * If stores remain closed for two months, McKinsey analysis projects 80% of publicly traded fashion companies in Europe and North America will be in a state of financial distress. Combined with a prior McKinsey analysis, the report forecasts that a significant number of global fashion companies will go bankrupt in the next 12 to 18 months.

 * Following lockdown orders, 84% of office-based workers transitioned to work-from-home and 93% of senior executives indicated their company has implemented temporary or indefinite hiring freezes, according to a survey of the BoF community. In addition, store closures and order cancellations created a “domino effect” that has led to “millions of lost jobs in retail stores around the world, leading brands to cancel orders, leaving millions of garment workers in sourcing markets like Bangladesh, India and Cambodia out of work.”

From high alert to red alert

The report describes an almost post-apocalyptic scenario with “dire consequences for fashion,” one of the biggest industries in the world, as McKinsey predicts that humanitarian repercussions are expected to outlast the pandemic. The pandemic will dramatically speed drastic changes already happening in every sector of the industry, creating a landscape that will look dramatically different from what preceded it.

“Fashion executives are focusing on crisis management now but eventually must shift to reimagining the industry,” the report states. “The industry was already on high alert, and executives expressed pessimism across all geographies and price points…. But fast-forward a few months, and fashion’s outlook has gotten dramatically and suddenly bleaker. The industry is now on red alert.”

The McKinsey report states that the “interconnectedness of the industry” makes it more difficult for businesses to plan ahead. For example, as China started to recover from COVID-19, outbreaks increased in Europe and the United States. In addition, workers in low-cost sourcing and fashion-manufacturing hubs in places like Bangladesh, Cambodia, Ethiopia, Honduras, and India will be the worst hit because of entrenched poverty and inadequate healthcare systems.

Meanwhile, 75% of shoppers in Europe and the United States believe that their financial situation will be affected negatively for more than two months.

“Although the duration and ultimate severity of the pandemic remains unknown, it is apparent that the fashion industry is just at the beginning of its struggle,” the report states. “By causing blow after blow to both supply and demand, the pandemic has brewed a perfect storm for the industry: a highly integrated global supply chain means that companies have been under immense strain as they have tried to manage crises on multiple fronts as lockdowns were imposed in rapid succession, halting manufacturing in China first, then Italy, followed by countries elsewhere around the world.”

Widespread store closures and a freeze on spending have created a supply-side crisis. And online sales hasn’t come to rescue as eCommerce sales have declined 15% to 25% percent in China, 5% to 20% in Europe, and 30% to 40% in the United States, according to the report.

An opportunity for change

The McKinsey report also serves as a call to arms to deal with a post-coronavirus world “characterized by a continued lull in spending and a decrease in demand across channels.” The report presents an opportunity for the fashion industry to become more sustainable, more efficient and better connected with consumers.

“The coronavirus … presents the fashion industry with a chance to reset and reshape the industry’s value chain completely—and an opportunity to reassess the values by which it measures actions,” the report states. “We expect that themes of digital acceleration, discounting, industry consolidation, and corporate innovation will be prioritized once the immediate crisis subsides. Even after witnessing waves of insolvencies, industry leaders will need to get comfortable with uncertainty and ramp up future-proofing efforts as the potential for further outbreaks and lockdowns loom.”

McKinsey, also calls for more collaboration among companies in fashion—even competing companies— sharing data, strategies, and insights; as well as cooperation among brands, suppliers, contractors, and property owners.

“Navigating this uncertainty will not be easy for fashion leaders,” the report states. “Players need to be decisive and start putting recovery strategies into motion to emerge with renewed energy. The crisis is a catalyst that will shock the industry into change—now is the time to get ready for a post-coronavirus world.”

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