The State of Fashion 2022: Global Gains Mask Recovery Pains

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With much of the world under Covid-19-related restrictions through 2020 and 2021, the global fashion industry has faced exceptionally challenging conditions. But after nearly two years of disruption, the industry is beginning to find its feet again.

Despite ongoing headwinds, there were signs by mid-2021 that things were taking a turn for the better, particularly in markets where vaccination rates were high. In the US, the release of pent-up demand created spikes of so-called “revenge buying,” leading to a growth spurt that echoed an earlier phenomenon in China. Return-to-work and occasion styles topped consumer shopping lists.

But the pandemic has only served to exacerbate inequalities in performance that have become a persistent theme over recent years. A small group of leading brands are equalling, and in some cases already surpassing, their pre-pandemic performance. This should not, however, be confused with a universal return to form. Large numbers of companies will continue to struggle to create value — and, in some cases, to survive — as the bruises of the crisis linger on.

The few brands that outperformed either played into the needs of the moment — comfort, outdoor activities and online shopping — or appealed to wealthier cohorts who were able to better weather the impacts of the crisis. Companies that couldn’t align with these market features tended to struggle, and the list of casualties grew longer as the pandemic continued through 2021. Indeed, the fashion C-suite has been an uncomfortable place to inhabit for much of the past year, illustrated by the rising numbers of takeovers and bankruptcies.

After a hiatus in last year’s edition of The State of Fashion, we return to our roster of fashion “Super Winners” — the top 20 listed companies by economic profit. The proportion of value destroyers (companies generating negative economic profit) in 2021 was higher than ever. Moreover, the losses of the bottom 80 percent in terms of value creation more than offset the profits of the top 20 percent.

This year’s Super Winners group is dominated by sportswear brands, luxury players and Chinese home-grown companies, all of which outperformed the wider market. From a geographic perspective, China recovered to 2019 levels of economic activity much faster than the rest of the world. Chinese demand was fuelled by appetite for local shopping, particularly in the luxury segment, as consumers who faced travel restrictions shifted to domestic alternatives.

Looking ahead to 2022, in aggregate, McKinsey Fashion Scenarios suggest global fashion sales will reach 96 to 101 percent of 2019 levels in 2021 and 103 to 108 percent in 2022. Still, while overall sales are expected to make a full recovery next year, performance will vary across geographies, with growth likely driven by the US and China, as Europe lags. In addition, as international tourism remains in the doldrums, the shape of consumption will continue to evolve, sparking a growing focus on domestic spending. In response, many companies will recalibrate their retail footprints, even amid uncertainty as to whether these pandemic-induced behaviour shifts will stick.

While overall sales are expected to make a full recovery next year, performance will vary across geographies, with growth likely driven by the US and China, as Europe lags.

In the year ahead, discount and luxury fashion will continue to outperform, as recovery will be uneven across value segments, and the mid-market will be squeezed. Still, with economic growth and consumer sentiment improving in some markets, and many shoppers looking to refresh their pandemic-era wardrobes, growth will be top of the agenda for many brands.

The market environment, however, will remain complex with new challenges to address, amid logistical bottlenecks, manufacturing delays, high shipping costs and materials shortages. These will further inflate input costs and strain imbalances between supply and demand. The likely result will be higher prices for customers.

Despite widespread operational disruptions, the pandemic has done little to slow down the megatrends reshaping the industry. In fact, these have accelerated over the past year, with industry leaders making bold moves in digital, taking action on environmental and social priorities and focusing more sharply on diversity, equity and inclusion in response. However, concerns around slow progress in these areas, coupled with all-time high job vacancies, mean brands will need to work hard to attract and retain talent in the year ahead.

In a similar vein, fashion companies will need to ensure they are acting in the interests of all stakeholders — including customers, employees, contractors, investors and wider society. Many brands will push harder on circular business models, greener materials and more sustainable technologies. One breakthrough to support these initiatives is blockchain, which is the underlying technology for digital “product passports.” These contain coded information that can add value, support supply chain transparency and ensure authentication — a significant advantage tackling counterfeiting.

Online business models were a standout success story of the pandemic. We expect that companies will continue to invest in digital innovation and experiment with fresh approaches to creativity and commerce in 2022. Digital assets such as non-fungible tokens (NFTs), gaming “skins” and virtual fashion will edge closer to the mainstream, with some brands expanding into the digital “metaverse.” In-app social commerce will play an increasingly important role in sales and marketing. On the flipside, these opportunities will bring increasing threats of cyber crime and data loss, meaning companies will need to work hard on resilience in an increasingly risky digital landscape.

Most fashion players will proceed on an uneven footing in 2022, as an inconsistent and uncertain recovery requires them to either raise their games or face the threat of consolidation or bankruptcy. Indeed, many of the gains expected next year are likely to be offset by recovery pains and disruptions to the global economy, which will compel decision-makers to take measures to keep businesses steady.

As fashion leaders consider their options, they will need to reflect on the many lessons they have learned during the pandemic, keeping their companies aligned with an ever-shifting playing field, enhancing their strategies for managing turbulence and balancing the needs of various stakeholders to create value for their customers, their shareholders and society at large.

The 10 fashion industry themes that will set the agenda in 2022:

1. Uneven Recovery

Recovery from Covid-19-related economic shocks will be uneven across consumer markets and sourcing regions, as countries with strong healthcare systems and economic resilience outperform. In this patchy environment, fashion players with international footprints will need to look at investment decisions with precision, reassessing local conditions regularly while mitigating for market-specific risks.

2. Logistics Gridlock

The fashion industry is reliant on an intricate web of global supply chains that are seeing unprecedented levels of pressure and disruption. With logistical logjams, rising shipping costs and shortages of many kinds adding new layers of complexity, companies must rethink their sourcing strategies while implementing cutting-edge supply chain management, and building in greater flexibility to keep products flowing with customer demand in the year ahead.

3. Domestic Luxuries

Travel has traditionally been a key driver of luxury spending, but international tourism is not expected to fully recover until between 2023 and 2024. To capture the shift in shopping patterns set to shape the year ahead, luxury players should engage more deeply with domestic consumers, rebalance their global retail footprints and duty-free networks and invest in clienteling for local e-commerce channels.

4. Wardrobe Reboot

After focusing on the likes of loungewear and sportswear for nearly two years, consumers will reallocate wallet share to other categories as pent-up demand for newness coincides with more social freedoms outside the home. To anticipate these nuanced and sometimes paradoxical preferences, brands should lean more on data-driven product development, adjusting their inventory mix accordingly to ensure that assortments resonate with consumers adjusting to new lifestyles.

5. Metaverse Mindset

As consumers spend more time online and the hype around the metaverse continues to cascade into virtual goods, fashion leaders will unlock new ways of engaging with high-value younger cohorts. To capture untapped value streams, players should explore the potential of non-fungible tokens, gaming and virtual fashion — all of which offer fresh routes to creativity, community-building and commerce.

6. Social Shopping

Social commerce is experiencing a surge in engagement from brands, consumers and investors alike as new functionality and growing user comfort with the channel unlocks opportunities for seamless shopping experiences from discovery to checkout. Though use cases differ across global markets, brands should double-down on tailored in-app purchase journeys and test opportunities in technologies such as livestreaming and augmented reality try-on.

7. Circular Textiles

One of the most important levers that the fashion industry can pull to reduce its environmental impact is closed-loop recycling, a system which is now starting to be rolled out at scale, promising to limit the extractive production of virgin raw materials and decrease textile waste. As these technologies mature, companies will need to embed them into the design phase of product development while adopting large-scale collection and sorting processes.

8. Product Passports

In a bid to boost authentication, transparency and sustainability, brands are using a portfolio of technologies to store and share product information with both consumers and partners. To get the most from these digital ‘product passports,’ which can help brands tackle counterfeiting, differentiate themselves and build loyalty by enhancing consumer trust, businesses must coalesce around common standards and engage with pilot projects at scale.

9. Cyber Resilience

As the digitisation of fashion businesses reaches new heights, companies face more threats of cyber attacks and growing risks relating to improper data handling. Amid increased sophistication in cyber crime and rises in consumer and regulatory pressure, brands need to act urgently to shore up their defences and invest more to make digital security a strategic imperative.

10. Talent Crunch

Companies that rely on brand appeal or the allure of fashion to attract and retain talent will need to raise their game as competition from both within and outside the industry intensifies, leading to more vacancies next year. As employees from upper management to the retail front line reconsider their priorities, companies must refresh their talent strategies for an increasingly flexible, diverse and digitised workplace.