In this episode of the McKinsey on Start-ups podcast, McKinsey executive editor Daniel Eisenberg speaks with Anita Balchandani, a London-based McKinsey partner who leads the firm’s Apparel, Fashion & Luxury practice in the UK, Europe, the Middle East, and Africa. An edited transcript of their conversation follows.
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Daniel Eisenberg: Hello and welcome to McKinsey on Start-ups, I’m Daniel Eisenberg.
When you think about the pandemic’s impact on fashion, what comes to mind? How about sweatpants or pajamas, or maybe jeans and t-shirts? For many people, the answer would likely be really any super casual attire or cozy athleisure, the likes of which so many of us around the world started wearing regularly as our homes suddenly became (and have remained) our offices.
But far from the Zoom calls or runways, the business of fashion has been undergoing a serious makeover. As with so many other industries, the digital transformation of fashion and apparel has radically accelerated during COVID. This has impacted not only how customers interact with brands and retailers, but just as critically, how the industry operates internally, whether managing its inventory, pricing, and supply chain or designing and producing its products.
An industry that has always been (and still is) built on a foundation of creativity and artistic expression is now adding more science to the mix, embracing technology to an unprecedented degree. To help us understand how technology is fundamentally changing the business of fashion and fashion innovation, we are pleased to be joined today by Anita Balchandani, a McKinsey partner based in London who leads the firm’s Apparel, Fashion & Luxury Practice in the UK, Europe, the Middle East, and Africa.
As well as helping clients with developing strategic responses to the disruptions shaping the retail industry, Anita co-leads the industry’s leading thought publication, State of Fashion, in partnership with the Business of Fashion. Prior to McKinsey, Anita was the Global Head of Retail at OC&C Strategy Consultants and served as a Non-Executive Director on the Boards of Space NK Apothecary Ltd and Majestic Wine PLC.
Anita, thanks so much for joining us today.
Let’s start with a broad perspective. What is the role that technology and digitization has generally played in shaping the apparel and fashion industry over the course of the past two to three years? And how did this change with the arrival of the pandemic?
Anita Balchandani: Technology has been playing an accelerated role in the fashion industry over the last two to three years, particularly when it comes to the customer-facing side of the industry. This is impacting where and how consumers are discovering brands and shopping the category, through to purchase, transaction, and commerce.
If anything, during the pandemic that acceleration of digital and e-commerce has completely step-changed; in fact, you could argue it’s what kept the wheels on the bus. When the fashion industry faced the fallout of the lockdowns that took place across many regions, and stores were closed, digital was the only way you could access the category and shop it.
But the expanding role of fashion and technology has not just been about the customer-facing initiatives, but also about the end-to-end initiatives across the organization. It’s how people have designed product, it’s how people have flowed product through. The role that technology has played in keeping the entire fashion value chain going has been immense.
Daniel Eisenberg: There’s a tendency to often think about technology and fashion in the context of what consumers or customers see and touch. But, as you point out, there’s the entire value chain and the back-of-the-store story that is just as important. Can you talk about how technology is being leveraged across the rest of the supply chain in light of disruptions that occurred during COVID, and how the fashion industry is looking at technology going forward?
Anita Balchandani: I think the answer to that is two-sided. On the one hand, we’re seeing, for example, that 23 percent of the investments that have been made in the fashion and retail-tech space have been in supply chain.
But if we step back, I think there is still a lot more to be done on this front. In particular, we’re excited about innovations such as the role that technology can play in much more predictive demand forecasting to enable the flow of product; the role that technology can play in on-demand production; the role that technology can play at the design front end and really eliminate a lot of the waste and the long lead times related to the physical production of samples.
So I think we’re still at the tip of the iceberg, or the foothills, if you will, of all that’s capable here.
Daniel Eisenberg: In fact, McKinsey’s recent “State of Fashion” report pointed out how that demand-centric approach is going to have to be a real guiding principle for the industry going forward, including better management of inventory and sharper focus on the best-selling, or core, brands or products. And of course, better management of everything in the supply chain means hopefully that waste can be at least minimized, if not entirely eliminated.
Speaking of State of Fashion, one of the statistics that really jumped out was that up to 73 percent of the industry had actually destroyed value in the wake of COVID. Does technology have a role to play in starting to reverse this trend? How does a player leverage technology to win in the next normal of fashion?
Anita Balchandani: First of all, you’re right, that’s an eye-popping stat. And, if anything, that’s been a trajectory that has been advancing. So every year we see that the proportion of the industry that is value-creating is actually shrinking, with fashion arguably becoming more of a “winner takes all” industry.
Do we think technology has a role to play in reversing this? Absolutely. Typically in the industry, overproduction is a big issue—40 percent of garments are currently sold at a markdown. And that markdown is a huge source of value leakage and profit leakage in this industry. The potential impacts of technology around advance-demand forecasting, AI-guided stock management, promotion, and price optimization are huge.
Another area ripe for change would be waste, more broadly tied into toxicity and the sustainability record of the industry. Even today still only a fraction—it’s less than one percent—of used products are recycled back into the fashion industry’s value chain. So, again, we feel like technology has a huge role to play in sustainable materials, recycling, fashion repair, and creating new streams of propositions and revenues for customers who are increasingly mindful of sustainability.
Finally, another area that we think has huge potential is returns and e-commerce economics. We anticipate that by 2025 fully half of the fashion industry globally will be online, sold via e-commerce. The proportion that will be influenced by online will be far greater. At the same time, we also see that 93 percent of apparel retailers expect returns will continue to grow in importance and cost over the next three years. And when you look at a lot of fashion retailers’ online economics, their P&Ls are pretty challenged, even as they scale. So we do believe that technology has a huge role to play there, with things like omnichannel inventory management and predictive virtual sizing.
We certainly see the potential of technology to solve some of the industry’s biggest pain points and challenges, which fundamentally are sources of profit leakage.
Daniel Eisenberg: You recently did some research in the UK looking at what succeeds in e-commerce, the key outperforming factors. What stood out in those findings?
Anita Balchandani: Yes, we were trying to get under the skin of what really matters, and a few key themes emerged. First, none of what you might call the core “basics of retailing”—product, price, experience—have gone out of fashion. And, actually, making sure that your proposition is strong, effective, and differentiated is as, if not more, important in the current competitive age.
However, it is also very clear that there is huge consumer appetite for new innovation; we’re definitely pushing on an open door with consumers when it comes to fashion tech. We ran another study very recently just to pulse the consumer on “adoption” rates viz and “likelihood to adopt” a number of more fashion tech-forward innovations, such as sustainable clothing, AI-driven customer service, personalized clothing, livestream shopping, et cetera. And we have been quite surprised by the huge proportions of the population that have either already tried, or indicated a very high likelihood of trying, some of these innovations, which one might assume to be still quite niche.
So it is true that the basics and fundamentals of what it takes to operate a brilliant fashion business, to some extent, haven’t gone away. But there is also a lot of consumer openness to evolve that formula, drawing upon a huge host of fashion-tech innovations that are now accessible. And for players to win here, we do believe that both speed and innovation will be of the essence.
Daniel Eisenberg: You were talking earlier about the use of analytics for inventory management and predictive modeling. Is it fair to say that that until recently the fashion industry has not used these technology tools as much as other industries? Is it in some ways playing catch-up, compared to other sectors?
Anita Balchandani: On the one hand, when you look at online adoption in this industry, while it’s nowhere at the order of magnitude of what you see in consumer electronics or music, it’s definitely well ahead of categories such as food and beauty. You could look at that and say, “The fashion industry and its shift to online actually puts it in a pretty good relative position to other industries.”
On the other hand, because the industry has long been founded on the importance and centrality of creative art design, I think it would be fair to say that the industry has been slower to adopt some of the core disciplines, or the thinking, around how you combine that art with science, how you get the best value, and how you take very effective data-driven decisions in the end-to-end system.
There’s been a lot of talk, clearly, and if you look back over the last five to seven years this has definitely been part of the promise. And over the last decade, 2021 has been the high point for investment into fashion and retail tech. Yet, when you actually look at the quantum of investment, while $18 billion might put it at a ten-year peak, it is still a fraction relative to the scale of the industry.
So we do think there is some catch-up to be done, and fashion tech, if anything, is still at the early stages of its evolution. However, the pandemic has really shone a light on the criticality of getting digital and tech working effectively in the fashion industry—and how it can be a fabulous complement to the art and creative energy that goes into this industry.
Daniel Eisenberg: How does technology factor into the evolution of the in-store experience for fashion brands? Does the physical store have a role to play, and, if so, how is it changing?
Anita Balchandani: I like to think of it as the pandemic forced the industry to collapse the walls between online and stores. Traditionally, you’ve always seen a bit of segmentation by channel—this is our online channel, this is our store channel. With the lockdowns leaving online as the primary source of customer interaction, engagement, and purchase, many retailers simply pulled down the walls that exist between the two main channels.
There were some practical ways in which that took place. One was a huge investment retailers made in clienteling, which effectively meant that in-store colleagues could use mobile phones to engage with e-commerce customers and have digital access to the brand’s inventory. In-store colleagues were able to provide brilliant service to customers who were shopping online.
We saw the rise of virtual appointments, particularly in the higher-purchase investment categories such as jewelry and watches. Many players also used the stores as a source of inventory and points of fulfillment at a time when e-commerce distribution centers were overloaded and running out of inventory.
Suddenly, the walls that existed between the two channels were really brought down, and I think people realized that that’s probably how the customers actually do engage with the brand. The customers are much more brand-driven and mission-driven, rather than channel-driven. Now a whole host of innovations are really helping bring the digital and the physical together, with CRM, clienteling, customer service and experience, and inventory, as the glue that brings all of that together.
Daniel Eisenberg: You talk about what in-store workers can now do with their phones, whether it’s inventory or virtual service. It almost sounds as if those people are getting additional responsibilities, empowered to do more than a traditional store worker might have, say, just a few years ago.
Anita Balchandani: Yes, and we also think that is driving a whole new level of skills and capabilities, and actually making those roles much more exciting and interesting. Because one of the things technology has the power to do is to liberate store colleagues from what you might call the more administrative, routine, and repetitive tasks to spend time on customer service, advice, and some of those other things that enrich the shopping experience and give customers added reason to visit the store or, indeed, the website.
Daniel Eisenberg: You’ve talked previously about the trend of “casualization” of what people are wearing, and buying often these days, especially with so many people staying home to work during the pandemic. I’m wondering to what extent you think that trend will be permanent. And does a shift like that have long-term implications for the industry, such as needing to rely on technology even more to cater to changing tastes?
Anita Balchandani: Fashion has always been centered around catering to changing tastes. And those who have been the most successful brands at any moment in history are the ones that have the had the best pulse on what the customer wants. I do think that this is where tech has a huge opportunity to play in keeping a retailer current on where trends and tastes are likely to go. You could look at data that tells you what’s likely to surge next, and how you can position your offers and ensure that you’ve got the right levels of inventory to back that level of customer demand.
On casualization, while that is a trend that is here to stay, the data is already showing that people are back buying more glamour and special occasion-wear with a vengeance. People refer to this as the “back to the Roaring ‘20s”: we have done some machine-learning analysis of 2021 runway collections, and you can clearly see the expressions of optimism, boldness, and self-expression.
Now it doesn’t mean to say that casualization has gone away. It doesn’t mean to say that, in a hybrid world when we are going to be spending more time at home than we did prior to the pandemic, that athleisure and casualization go away.
But the evidence would suggest that the role that fashion plays in self-expression, in the ceremony of dressing up, is starting to return as people are injecting their lives with more special occasions, and going back to more of a sense of normalcy, as well.
Daniel Eisenberg: Right. Folks are clearly hungry, some might say desperate, to go out to celebrate something and to maybe make it more special by dressing up after, say, wearing sweatpants for the better part of almost two years.
In terms of the use of technology to help discern and cater to changing tastes, it seems that science is playing a bigger role in the industry than ever before.
Anita Balchandani: We certainly think the importance of science is growing, and that we can find a happy medium where the science enables the art, because it’s actually helping point the art in a more targeted way. At the end of the day, though, this is also about creative imagination, and really bringing things that surprise consumers, and I don’t think technology or science will take that away.
Still, the role that tech and science can play in really solving some of the pain points and the bottlenecks in the industry is critical. You could say the airbrushed view of the fashion industry is that everything is beautiful and looks perfect. But in reality, getting that perfect-looking item or product on the shelves requires a lot of back-of-house tasks, many of which have been manual, wasteful, and the opposite of streamlined. So the role that technology could play to make that much more sustainable, much more streamlined, much less wasteful, and much more effective, is huge.
Daniel Eisenberg: And by that logic, technology could potentially free up even more time for designers’ creative spirits to flourish.
Anita Balchandani: Exactly. As a designer, you could spend even more time doing what you love, which is designing, versus a lot of the other more administrative tasks that are essential to making sure that you’ve got a sample at the other end that is ready to approve. So I think this is very much about liberating those who work in the fashion industry to actually spend more time on the creative side, the customer value-add.
Daniel Eisenberg: Let’s shift gears a little bit and talk about the fashion-tech start-up landscape. Earlier you spoke of the amount of investment going into fashion and fashion-tech right now. What is your outlook going forward? And how much has COVID impacted the view of investing in the space?
Anita Balchandani: You could argue that a lot of the innovation that’s coming onstream is still small in scale and quite niche, but we do believe there is huge growth and runway on a number of fronts. That includes technologies that make shopping more frictionless, but also more fun, because we’re certainly seeing consumers have appetite in fashion not just for shopping experiences that are highly convenient, but also for something that is much more engaging: livestream shopping, conversational commerce, everything that we’re seeing at the interface of the fashion industry and gaming and NFTs.
A large amount of this kind of innovation is still, arguably, early-stage, but there are certainly a slew of new tools to make the entire process of how people transact and interact with brands online much smoother to operate—predictive sizing and AI-driven customer service are just two examples that come to mind. Then you have a whole other swath of innovation around completely new business models: resale, rental, personalized subscription boxes. And finally, all of the innovation having to do with sustainable materials, sustainable clothing, and so on, which is also in the early stages.
Daniel Eisenberg: It sounds like the last two years, as challenging as they have been for the industry as a whole, have not dimmed interest in investing in the fashion-tech space?
Anita Balchandani: Not at all. I think, if anything, people are now increasingly seeing technology and data as one of the things that could be a source of competitive advantage, particularly if you look at some of the moves that the biggest winners in the industry are making with their own heavy emphasis and focus on direct-to-consumer, machine learning, and AI.
Daniel Eisenberg: Is there still momentum behind digitally-native, small fashion and beauty brands? And how has that been impacted by the last 21 months, if at all?
Anita Balchandani: What we’re seeing is continued consumer interest in, and investor interest, in this space. If I look at beauty as an analog, there has been a lot of innovation that’s been in the pipeline that’s started to come out during the pandemic. Even prior to the pandemic, however, the data showed that only five percent of these innovations or digital brands then go on to scale and succeed. So a key skill will be in spotting which of these disruptors will indeed become billion-dollar-plus brands.
Increasingly, what we are seeing is that these new brands’ playbook of scaling is clearly rooted in digital and tech, around community-building with social media and social commerce; around direct-to-consumer engagement; and around personalization. But, at the same time, in order to become a billion-dollar-plus brand, many of these brands are having to adopt a wholesale, or wholesale-like, models, that include physical distribution. I think the playbook to scale is evolving from being purely digital towards one that is increasingly more omnichannel.
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Daniel Eisenberg: Would you say distribution is the biggest obstacle to succeeding at that scaling stage?
Anita Balchandani: I’d say distribution is one of the challenges, for sure, more so in fashion than in beauty, because of the way the contract manufacturing base is set up. But in fashion the supply chain, how it’s set up and friction points in it, is also a major issue, particularly if you’re a brand that’s looking to do something that is more sustainable and technologically ahead of the curve. When it comes to some of the investments in underlying technologies and supply chain or back-end infrastructure that can help scale these more innovative models, there is still a tech deficit in the industry.
Daniel Eisenberg: Sustainability is obviously an important trend, and it was highlighted quite a bit in the “State of Fashion” report. You’ve also done reports on the industry and climate change. Walk us through the kinds of business models that are emerging to create value from a “conscious consumption” in fashion.
Anita Balchandani: There’s a lot of exciting innovation in this space, and I’ll maybe just call out a few areas that I’m particularly excited about.
One has been the growth and increase in resale and resale models, which are definitely starting to show signs of being scalable and are attracting more interest from luxury brands. I think increasingly the opportunity to extend the life of a garment, or an object, has some very powerful potential, in terms of what it can do to the carbon footprint of consumption, while still satisfying the intrinsic desire that we, as consumers, have for newness and self-expression.
The next interesting space is the growth and rise of models and brands that use deadstock or recycled fabric to produce garments, something that is capturing a lot of consumers’ attention. Not only are these models producing fashion with a lower carbon footprint, but they are doing so with materials that are not accessible and available all the time, especially in mass quantities, which makes the final product feel that much more special and unique.
Finally, you have the whole space of new materials, biomaterials, eco-fabrics: This is a sector that is growing extremely fast. We expect, for example, the US eco-fiber production market to be around $15 billion by 2025. I think it would be fair to say that these are not yet at full commercial scale. But investment in some of these sectors—be they biomaterials, be they HEMP, what we see players like Bolt Threads or Renewcell doing—is very interesting and worth watching.
Daniel Eisenberg: How long do you think it will take for these alternative materials to become a core part of the industry’s output?
Anita Balchandani: Look, it’s definitely a longer-term play. As a share of actual garments or of products that are drawing on some of these biomaterials or recycled materials, the number is still very low. Having said that, you have a number of key players in the industry that now are partnering with many of these companies, looking to bring these sorts of products to life. Given that kind of collaboration, we are starting to see early markers of this being able to scale and succeed over the next five to ten years.
Daniel Eisenberg: Going hand-in-hand with sustainability are issues like social justice, working conditions, and the supply chain: How much are those issues driving the conversation in the industry and forcing it to think about new approaches to doing business?
Anita Balchandani: Throughout the pandemic, as lots of producing countries like India and Bangladesh were severely affected with lockdowns, the livelihoods of millions of human beings were negatively impacted. I think these disruptions really shed light on the importance of the sustainability debate to be not just about the planet but to really expand into worker rights and social justice. In fact, during the pandemic many brands have been either lauded or vilified for how they have treated partners and supplier workforces.
As a result, increasingly when the industry scores itself on sustainability, social justice and worker rights are critical factors in that assessment. And I think more players are absolutely clear that, even if they’re working with suppliers on an arms-length basis, or with a second tier of suppliers over which they have no direct control, it is no longer acceptable to have worker rights violated and infringed upon. Fashion brands are becoming acutely conscious of making sure that that record is set straight.
In addition to the increased importance of social justice, the industry’s focus on sustainability has moved beyond just focusing on being net zero in terms of emissions to being nature-positive. This means asking the question, “What are we giving back to the environment as well?”
Daniel Eisenberg: Going back to investment themes, social commerce platforms and marketplaces have obviously grown meaningfully over the past few years. Is that still a major area for investment focus in fashion start-ups?
Anita Balchandani: Online marketplaces have absolutely been the powerhouses driving the huge growth and share in online shopping over the pandemic. They arguably took more than their fair share of the growth in consumer traffic and spend, and they continue to be on a scale trajectory and a major focus of investment. If anything, we may start to see some consolidation focused on the winning models start to play out in that space.
As for social commerce, China has always been at the forefront of that trend; it now accounts for 13 percent of total e-commerce in China, compared to four percent in the US. Certainly in the fashion and beauty industry, as we look ahead for the next three years, that is the source of growth, even in the Western world beyond China, that we are most excited about.
Daniel Eisenberg: I know we’re getting short on time, so I just want to ask one more question. We usually end our podcast by talking about a longer-term horizon. By the end of this decade, how much do you think technology will have transformed the business of fashion? And what do you think will stand out as the biggest tech-driven transformations?
Anita Balchandani: There are three main areas of innovation and transformation that I believe hold huge promise. And in a sense, they are equally aspirations and areas where we’re seeing the biggest investment and focus.
Number one would be the role that technology can play in minimizing overproduction, waste, and actually better matching consumer demand and supply. I think there’s a huge potential to pioneer a fashion model that is just much less wasteful, but also much more responsive to what the customer wants and demands.
The second area I would think about is a world in which the fashion industry is really able to reshape its economics, particularly its online economics, through addressing returns the last mile, the flow of goods, and a lot of the waste that exists in the end-to-end value chain. I think that’s there’s great potential there to streamline the value chain to be much more efficient and effective.
And then, finally, I think would be just the promise around new circular business models, new technology, and fabric innovation, things that can enable the fashion industry to make the resources that go into its production and consumption part of a fundamentally better equation.
Daniel Eisenberg: That gives us a lot to think about. Fashion is obviously such a key part of all of our lives, and the intersection of technology with fashion will continue to capture our attention.
Anita Balchandani: I like the challenge of the ten-year view, because I do believe it’s time for the industry to look at where it would like to be in ten years, and then work back from there. To take full advantage of these technologies, the industry will need that kind of lens, one that poses the question, “How do you completely reimagine what you do, versus tweaking and refining the system that we have?”
Daniel Eisenberg: Well, watching the industry, especially in the resale category, it has been encouraging to see how they’re starting to embrace that kind of disruptive innovation. Whereas a few years ago many players seemed wary of these new models, more are now really starting to take part in them. They’re striking partnerships with online resale marketplaces and getting their customers involved, while making sure that the brand still remains a key part of the equation. So it seems like that’s a positive indicator of an industry becoming more open to change.
Anita Balchandani: I’d absolutely echo that view.
Daniel Eisenberg: Anita, I want to thank you so much for taking the time to speak with us today. It’s been a great conversation.
Anita Balchandani: And a great opportunity for the fashion industry to not waste a good crisis here, and take the opportunity to really reimagine itself.
Daniel Eisenberg: Indeed. Well that’s our podcast. Thanks again to our guest, Anita Balchandani, a London-based McKinsey partner who leads the Apparel, Fashion & Luxury practice in the UK, Europe, the Middle East, and Africa.
As always, I want to thank our great McKinsey on Start-ups production team—Molly Karlan, Polly Noah, Sid Ramtri, Myron Shurgan, and Katie Znameroski.
And of course, thank you for listening. We hope you’ll return for future episodes of McKinsey on Start-ups.