When industry executives were asked to conceptualize the fashion industry in one word, they expressed three words that outperformed all others: “uncertainty,” “challenging,” and “changing”. They also said that dealing with uncertainty and global economic changes is their biggest challenge in the short term. Many of them also saw drawbacks in maintaining sales growth and profitability and in confronting fierce competition from online and specialized platforms.
McKinsey goes deeper into these preceding statements, generating the report we continue to analyze, “The apparel sourcing caravan’s next stop: Digitization”.
The new fast fashion client is global and digital.
While uncertainty is an increasingly present protagonist in corporate meetings and boards of directors, apparel brands must face the rapidly evolving customer preferences. On the one hand, digital sales of garments and accessories are increasing at a dizzying rate: online sales represented around 14% of total sales in the fashion sector in 2016, compared to only 5% in 2010 (Source: Euromonitor).
Dazzled by the huge selection offered on the web and the ability to compare models and prices, today’s consumers are much more experienced and demanding than before. They are much more focused on value and savings, and are increasingly likely to look for products that are tailored to their immediate needs and personal tastes. The new players in Ultra Fast Fashion on the internet are targeting voluble consumers and are rapidly gaining market share; therefore competition is increasing throughout the sector. The minimum quantities of production orders are being reduced, so it is essential that suppliers increase their flexibility regarding the minimum purchase quantities per model.
Permanent volatility and accelerated change add up to a challenging situation for the fashion industry. In an analysis of a previous report by McKinsey International Consulting – The State Of Fashion – 37% of executives believed that conditions in the industry would deteriorate by 2017, while 40% expected them to improve.
This evenly matched difference between pessimists and optimists raises the next question:
What is the future of fashion?
Today more than ever, the answer lies in the sector’s own brands and their corporate culture. The winners will be those who shift the focus from supply to demand, speed up and be quicker to market, become much more flexible and “reinvent” their supply chains from end to end. Those who do not change fast enough are likely to lose everything.
Supply costs are increasing.
Adding an even greater element of change, many apparel brands are experiencing significant pressure on sourcing costs from their suppliers. In the 2017 survey referenced above, 69% of purchasing managers surveyed in the U.S. and 61% of European managers said they expected sourcing costs to increase next year. It is critical to say that competition for market share among apparel-producing countries over the past year has helped to contain product price increases to some extent.
Executives expected the main cost drivers in the coming year to include exchange rates and the cost of raw materials. The impact of labor costs had a lower rating – 3.0 out of 5 in the 2017 survey, compared to 3.5 in 2015 – despite the steady increase in minimum wages in key fashion producing countries.
Why is there this change in perception?
McKinsey, its professionals and I myself believe this is meant by excess production capacity in some of the most important origins of fashion sourcing, a shift in production volume towards low-cost countries and a greater concentration on the total cost of industrial property in recent years.
It is assumed that the cost of raw materials and exchange rates will continue to be the main drivers of sourcing costs in the mid-term, while labour costs have a lower rating. With regard to China, we need to watch very closely the new environmental regulations that have been pushed by the last Five-Year Congress of the Chinese Communist Party.
Speed, flexibility and strategic alliances with suppliers.
Purchasing Managers were also consulted as to what leverage they would use in the coming year to adjust their companies’ supply to the new challenges of the macroenvironment. The change in the location of production and purchase orders in the different supply countries, which has dominated much of the discussion in recent years, continues to be among the priorities of these executives.
It is clear that efficiency in end-to-end processes is seen as the most important challenge and leverage the sector faces and is pointed out as the main possibility by 41% of respondents. Supply chain flexibility, a strongly related alternative, was seen as the second most important priority.
The drop in margins that many companies are experiencing is clearly worrying managers. At the same time, a greater degree of competition and the speed to market put the focus on strategic and common alliance with suppliers, as well as interdisciplinary collaboration with companies in other sectors – technology, communication, etc. – to generate synergies.
The shared and priority objective is digitization.
The digitization of supply systems and processes is one of the three priority areas for almost half of the supply executives consulted and 21% identified it as the most relevant development. Digitization is not an end in itself, but a key means for other priority leverages. As we have already discussed in this article – The fashion supply chain will be predictive and digital – and we will do in the next post on this report, faster progress in digitization will be essential to generate greater flexibility, efficiency, collaboration and speed in the apparel supply chains.