How current global trends are disrupting the fashion industry

| Podcast

In this episode of The McKinsey Podcast, McKinsey senior partner Achim Berg talks with executive editor Roberta Fusaro about findings from McKinsey’s The State of Fashion 2022 report. They cover the concurrent effects of the many challenges facing both suppliers and brands, including the war in Ukraine, the pandemic, and inflation.

After that: the state of anxiety tends to get a bad rap. But in our second segment, Dr. Tracy Dennis-Tiwary, author and professor of psychology and neuroscience at Hunter College, shares why anxious feelings deserve respect.

The following transcript has been edited for clarity and length.

The McKinsey Podcast is cohosted by Roberta Fusaro and Lucia Rahilly.

Return to normal? Not yet

Roberta Fusaro: Achim, the world has changed since we published The State of Fashion 2022 report. What are the changes that have had the greatest effect on fashion and the textile industry?

Achim Berg: The invasion into Ukraine is one of those topics not fully on our radar in November or December.

But that’s not the only change that has occurred since we published the report. We also didn’t know that Omicron would be the dominant variant in the first half of 2022.

We also did not expect that inflation would be a permanent challenge. We expected, like many governments, that this would be a temporary problem. We expected that the supply chain would normalize after two years of a pandemic. That also didn’t come true.

We did not expect an energy crisis.

We also didn’t expect that COVID-19 would be a big issue in China again, because China looked like the big winner of the whole pandemic at the end of last year. That’s the challenge of writing a report that tries to somehow predict or frame the future: things often turn out slightly different. But overall, our forecasts provided reliable insight and included topics we identified to drive the industry in 2022.

Supplier challenges

Roberta Fusaro: From the panoply of issues you’ve mentioned, what challenges do suppliers face right now?

Achim Berg: There are a lot of different challenges. It depends on which country we look at. Some are quite challenged.

The supplier side has a practical problem of delivering what is expected. But they’re also facing the issue of forecasting in a proper way because we don’t know exactly how the consumption patterns will develop.

The industry is always a couple of months ahead of the consumer, so they need to make some bets. In this environment, which is much more volatile than what we have seen in the last 20 years, it’s very difficult to make the right bets.

Supplier solutions

Roberta Fusaro: Given the increased risk, how should companies respond? And what are some things that companies can do to hopefully end up on the right side of these big bets?

Achim Berg: They should look for real partnerships and closer exchanges with brands because that would give companies access to data and would therefore make things more predictable.

On the other side, it’s worthwhile to think about how to flex the system to the maximum, because demand patterns are not as stable as they used to be. Brands and retailers will be forced to react more flexibly to these challenges. And the suppliers are, by definition, at the receiving end, so they will have to increase their flexibility even more.

Cost pressure will continue, so they will likely have to work also on the cost side, and also on their tier-two and tier-three suppliers in the whole system.

Different regions, different challenges

Roberta Fusaro: What were some of the more interesting data that came out from different geographies?

Achim Berg: On a global level, we’ve seen a faster recovery than what we expected 18 months ago. We had expected that the whole fashion industry would not get back to 2019 levels until the end of 2022. And on a global level, we already achieved that at the end of 2021.

We had expected that the whole fashion industry would not get back to 2019 levels until the end of 2022. And we already achieved that at the end of 2021.

Achim Berg

You could argue that the fashion industry has shown more resilience and a faster ability to deal with challenges than what we had expected. Maybe we were too conservative in the eye of the storm. That might be another explanation.

The recovery was also quite different by region. Asia, with the very strong leadership of China, was the motor of the recovery right at the beginning. They had a very short dip and then they were doing quite well.

Europe had the toughest challenge to deal with, because they were lacking international travelers. Also, given the fragmentations of the markets, the recovery wasn’t that fast or that strong.

North America was remarkable. We’ve seen a V-shape recovery, which we had seen after some of the financial crises before. But we didn’t expect to see that here in the pandemic. If we look forward, it’s difficult to make predictions, as we discussed earlier.

China is currently quite challenged with its zero-COVID-19 policy, but we don’t know how long it will take to get recovery here. Let’s hope for the best, because that’s going to be very important in particular for the luxury part of the industry. Europe is currently doing better, because we see travel coming back. North America is still going strong.

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It will heavily depend on how long the war in Ukraine continues, how long that will impact the cost of energy, and also how much stimulus the different governments will be able to provide after two years of continuous stimulus against the pandemic.

So the jury is out. We should prepare accordingly for some challenges we could face.

Think tech from beginning to end

Roberta Fusaro: During the height of the COVID-19 outbreak, we talked a lot about companies accelerating their use of technology. Has that momentum continued?

Achim Berg: Technology plays a very important role. We also just published the new State of Fashion Technology Report 2022, which makes an important point: that we have to think about technology really end to end.

We used to focus more on the front end—everything that was more consumer focused, through e-commerce, through loyalty systems. But we are realizing now that the back end also needs to be digitized for many reasons.

Traceability from a sustainability point of view has become more important and will become even more important going forward. So digitizing the whole supply chain end to end is a big topic for many of our clients. And that’s also why technology investments for the fashion industry are expected to ramp up.

The importance of consumer demand for brands

Roberta Fusaro: Thinking about the challenges now for brands, what obstacles do these organizations face?

Achim Berg: It all comes down to consumer demand. And as I said, we had hoped that 2022 would mark the end of the pandemic, that certain freedom would return that would allow people to celebrate, to entertain. And the fashion industry was very ready to dress consumers exactly for that. And, to a certain extent, we see that that is happening. Some of the categories that were hammered throughout the pandemic, like dresses, high heels, even suits, have had a strong return in the first five or six months of this year.

We also expect that people will do a lot of traveling. Europe is clearly returning to the whole vacation industry; I think Americans will do the same, and Asia as well, with the exception of China. That will drive consumption.

In a way, despite a looming recession and inflation rates, we see that consumers have a kind of backlog and a desire to spend on fashion. The problem is that energy bills will continue to increase, and we don’t know how long the conflict between Russia and the Western world will continue.

The conflict will likely continue to have a negative impact on the cost of energy and on the cost of living. Realistically, we might see a lot of consumers returning from vacation and from a great summer, realizing that everything has become much more expensive. That could hit larger parts of the fashion industry—in particular, the discount, the value, and the midmarket segments. The jury’s still out on how luxury will play out in this environment.

We were all surprised by how quickly luxury returned from the lows of the pandemic. This return has mainly been driven by China, but also by a very strong recovery, and a fast recovery, in the United States. The demand for luxury is super strong at this point in the year. I’m more concerned with the Christmas business and, in particular, the outlook for 2023.

Innovate plans, flex systems, and manage costs

Roberta Fusaro: Thinking about that, Achim, what should brands do?

Achim Berg: Brands should prepare for a likely recession. If the recession is not happening, we’re all going to be positively surprised.

But—given the current inflation levels all around the world, driven by energy cost increases, and the fact that interest rates are increasing around the world—that will have an impact on a lot of things. It will have an impact on consumption patterns. It will have an impact on refinancing patterns and on the cost structures of companies. What we’re discussing with a lot of the clients is how to prepare for that.

On the one hand, that means having a robust plan for the demand side and for how to flex your systems, similar to the suppliers, to varying demands. The industry has been quite innovative in that respect over the last two years of the pandemic. This will somehow have to continue.

On the other hand, the industry will have to manage costs. Many of the leading players have started to tackle that by reviewing their investment budgets, reviewing their cost structures, and preparing for a challenging 2023. That is what brands will have to focus on in the coming months.

The winners and losers of 2022

Roberta Fusaro: Most companies in this industry have been challenged for several years now. How do they respond to these disruptions? And how do they find ways to invest in new technologies?

Achim Berg: 2020 was the worst year from an economic-profit point of view since we’ve collected data about this industry—probably going back to the Great Depression.

2021 was a recovery year for many. And in that respect, a more difficult 2022 and an even more difficult 2023 could have some devastating effects to the industry. Our report also shows that profitability is more and more polarized in the industry.

In 2020, less than one-third of the companies were value generating, while two-thirds were value destroying. So a longer recession and a more challenging environment will definitely lead to a shakeout in the industry. We also see there are a few companies we call the “super winners,” the top 20 performers of the industry. But you could broaden that to the top 20 percent of the industry that are quite healthy. These companies have already started to invest in technology and digitalization. They’ve invested in sustainability, they’ve invested in talent—all the things that you would want to invest in. They also have a more balanced, more global business. So they will likely get better through the months ahead.

Without any question, companies will have to do this transformation away from physical stores and toward a more digital business model. They will have to find ways to redirect budgets into those areas. That will be more difficult for some than for others, which will likely lead to even more polarization in the industry.

The importance of sustainability

Roberta Fusaro: Is sustainability one of those factors in thinking about how companies are going to transform?

Achim Berg: Sustainability is the big topic for the industry. It was the big topic before the pandemic hit and it continues to be the big topic.

I always say that we’re going through different stages. It took us a couple of years to really create awareness for the topic and for the industry to accept that sustainability is a big topic—not only on CO2, but also on worker rights, worker conditions, and pollution in a much broader sense. The industry has finally accepted the challenge.

A lot of companies have now made commitments, most of them until 2030. COP26 was a big event in that respect. We’re now heading into a phase where the industry has to deliver against those promises. And that coincides now with a phase where we likely have limited budgets and more stress on the demand side. So, without any doubt, it would have been much better in the end, and also for the planet, if we were having a stronger recovery after the pandemic. But that’s unfortunately not what we are facing.

On the other hand, the planet cannot afford an industry that’s not making progress. So, in that sense, companies will have to do all of that. They will have to deliver against the ambitions of digitalization, and also against the demands of sustainability.

Consumers have become more demanding in that respect. A lot of people have been at home throughout the pandemic. They have had more time to think about their consumption patterns. We’ve seen a big change—in particular, in Western Europe and North America—in how consumers think about sustainability and what they demand from brands. Therefore, brands will have to do it all. It’s not going to get any easier for brands in the whole industry in the next 18 to 24 months.

Roberta Fusaro: In the report, you talked about the use of digital “product passports,” which contain data about how products came into being and their impact on the environment. Do you think digital product passports are a good tool to help brands reach their sustainability commitments?

Achim Berg: Product passports and traceability are the two big topics when it comes to sustainability. Digitalization will be a key lever here: on the one hand, to provide the required transparency along the whole value chain, and on the other, to provide that information to an ever-more-demanding consumer who wants to have that transparency. Let’s not forget that there is a regulator out there that will request that transparency. And the supply chains are very complex.

There are different stages. It’s happening in emerging markets. It’s transported in most cases at least around half of the world. So all of that requires the use of technology to provide the transparency and the reliability that you need to drive the business.

Learning from the top 20 performers in fashion

Roberta Fusaro: What are the lessons that companies can take from some of the top companies in our research?

Achim Berg: Super winners have been outperforming the industry now for many, many years. That has led to the level of polarization that we have at the moment. We also expect that the top players will get stronger due to the next crisis we are facing, given the resources they have built and the brands and business systems they have built.

They are a constant inspiration for the rest of the industry. Not all of what they do can be replicated; many low-performing players have challenges in funding some of the things that the top performers are doing.

You need to be active in different geographic regions to balance risk. It also helps to operate across different product categories—a higher share of digital and a more consistent use of data are clearly beneficial to the performance.

And then, last, it’s the fashion industry. If you put your chips on the right trend, and if you have the brand heat that you wish for, of course you’re going to do better. And you can be like a phoenix rising from the ashes over the next couple of seasons. That’s the beauty of the industry.

We also see some strong brands now that were not that strong before the crisis. So, unfortunately, it’s a sliding scale for many. But there’s always some renewal and innovation and hope. We’re going to see some surprises over the next 24 months, without any question.

Roberta Fusaro: Thanks so much, Achim, for joining us today.

Achim Berg: Thank you, Roberta, for having me.

Lucia Rahilly: And now, let’s hear from Dr. Tracy Dennis-Tiwary from our Author Talks series about her new book, Future Tense: Why Anxiety Is Good for You (Even Though It Feels Bad).

Tracy Dennis-Tiwary: The core message of the book is that we mental-health professionals have unintentionally given people some damaging information when it comes to anxiety. And we’ve essentially spread a couple of fallacies about anxiety.

First, it’s that anxiety is always a debilitating experience, it’s dangerous, and it’s even something we should think of as a disease.

That means that the solution would be to prevent it and eradicate it and destroy it at all costs, like we do with any disease. The problem with that, when it comes to anxiety, is that it is literally a recipe for making anxiety worse.

There’s a paradox of anxiety: the more we avoid it, the more it tends to spiral out of control. So we not only have more intense anxiety because we’re avoiding it, but we lose the opportunity to look at anxiety and its potentially helpful parts.

There’s a paradox of anxiety: the more we avoid it, the more it tends to spiral out of control.

Tracy Dennis-Tiwary

Anxiety is an emotion that we’ve evolved to anchor us into the future tense. This ability to think into the future not only protects us but also makes us more persistent, more innovative, more creative, and more socially connected.

So this story that we have all come to believe about anxiety is actually really starting to get in the way, especially during a time like the pandemic when we can’t escape anxiety.

And that’s the second false idea that we’ve unintentionally spread—we mental-health professionals—that any experience of anxiety is a malfunction and a failure.

So what do we do? We start to try to fix it all the time. And we lose those opportunities to see how it can actually be a strength and a source of resilience. Anxiety can be very intense, very extreme, even, but that doesn’t mean that it’s an anxiety disorder.

A healthy mindset about anxiety is one in which we look at it very differently than we’re used to looking at it. We’re looking at anxiety as a problem to solve, but anxiety is a feature of being human. And when you look at the difference between anxiety and fear, it starts to help us understand that.

Fear is the present certainty. We’re absolutely certain that right now we’re in danger. But anxiety is not that. Anxiety is apprehension about the uncertain future. That is, we know that there’s something coming around the bend. It could be bad, but it could also be good. What anxiety helps us do is prepare to make those good things happen.

A second healthy mindset about anxiety involves this perspective about anxiety, that it’s information telling us there’s something happening in the future and we really care enough to make it happen.

When we start to think of anxiety not as this dangerous thing but as a helpful thing, that changes everything about how we then face anxious moments, whether they’re controllable or uncontrollable—it helps us cope with that at our best.

And a third aspect about having a healthy mindset about anxiety is that we think of it not as something that overwhelms us when we face the uncertain world around us but rather something that helps us navigate uncertainty. Because anxiety is an emotion that evolved to help us translate and navigate the uncertain world.

How does anxiety help you?

What it helps you see is that because you’re in the future tense and you care about making the good things happen in the future, it helps you see possibilities. It can make us more persistent. It can make us be more fluent to think outside the box to be innovative when we need to, because we see that there’s a possibility for something good to happen.

When we’re anxious, we also are more reward focused. We have higher levels of dopamine in our brain when we’re anxious. We typically associate dopamine as a reward neurotransmitter that we feel when we’re experiencing something pleasurable. Well, anxiety triggers dopamine. Why? Because dopamine helps us move toward positive outcomes.

It also triggers our social-bonding hormone oxytocin, which increases when we’re with someone we love. It’s one of the ways that we biologically bond to each other. And when we’re anxious, that hormone shoots up. Why? Because social connection, social bonding, is one of the best ways that we manage our anxiety.

In the book, I also talk about a three-part framework for doing something with anxiety, for working with it. One is that we remember that anxiety is information, and we need to listen to it.

Two is that sometimes anxiety is not useful information. We can learn to tell the difference, and when we do know that it’s not useful anxiety, we can use those great tools out there to let go and immerse ourselves in the present moment, get help through therapy, do those things that help us scale back from the future tense. The third guideline is to really hitch that anxiety, that information we’re getting about what we want in the future, to what we care about, to what gives your life a sense of meaning.

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