Even before COVID-19 disrupted financial markets, fashion industry leaders were already on a high alert. And the latest ‘The State of Fashion 2020’ report suggests, future outlook has gotten dramatically and suddenly bleaker as the average market capitalisation of apparel, fashion and luxury players has dropped almost 40 per cent between the start of January and March 24, 2020. Combined with the McKinsey Global Fashion Index (MGFI) analysis, the report expects a large number of global fashion companies to go bankrupt in the next 12 to 18 months. The report outlines five themes that will dominate the post COVID-19 market scenario:
Slow sales recovery
According to the report, a two- to three-month lockdown will cause financial distress for 80 percent of European and North American fashion businesses. The luxury sector will suffer more due to its reliance on travel retail in addition to lower levels of online presence and high dependency on department stores and experiential in-store retail.
Any momentary uptick in sales will not be able to offset a decline in spending across the board. Markets that have been under economic distress before the crisis — such as Venezuela and Nigeria — will require more time to restore growth, owing to their inherent political instability. Looking ahead, businesses will have to review their operating models. While implementing short-term interventions these companies will have to consider actions for the recovery period and implement resiliency into their planning.
Discounting culture to grow
Low consumer sentiment has hit the fashion industry especially hard due to the discretionary nature of clothing purchases. In Europe and the US, more than 65 per cent consumers expect to decrease their spending on apparel, while only 40 per cent expect to decrease total household spending. As a result, overfilled warehouses laden with unsold seasonal stock will haunt most players, as long lead times weigh heavily on fashion’s supply chain and global consumer appetite for discretionary purchases wavers. Companies will turn to steep discounting to clear inventory for the rest of the year. Mid-market brands and retailers will be hit hardest, as middleclass consumers will turn more to heavily discounted affordable luxury and premium goods.
Digital fashion to grow
The global pandemic’s shutdown of offline retail channels has pushed digitally inept fashion companies to the brink. Consumers in China are increasingly embracing digital solutions for shopping, entertainment and communications thanks to the response of brands and retailers who quickly enhanced their digital capabilities by launching or improving innovative new channels. Nike — whose digital sales in the region grew 36 per cent in the third quarter ended February 29, 34 leveraged Taobao livestream bloggers during lockdown in China, while local fashion group Peacebird grew retail sales as a result of innovative customer engagement on their digital channels including WeChat, which featured over 41 live broadcasting sessions with influencers.
Gap between winners and losers to widen
The shutdown of physical retail and the slump in both consumer and investor confidence will accelerate the decline of struggling companies and buoying stronger empires. This will widen the gap between fashion’s winners and losers, with the latter likely to file for bankruptcy, seek government aid, close, or become targets for stronger players or private equity firms.
New sales models and technologies to emerge
The coronavirus has forced companies to create new sales models to stay afloat. Technologies like virtual fashion shows and digital show rooms, sample sign-offs in sourcing offices, livestream commerce and the latest 3D design tools are being relied upon to get business done. As soon as the immediate firefighting subsides, brands will rush to make longer investments in these innovations.