Is the Global Fashion Industry Turning a Corner? 

Outlook for North America remains uncertain

Author: Andria Cheng

November 30, 2017

The struggling global fashion industry may be getting its sexy back, but with new regions in starring roles. 

The McKinsey Global Fashion Index projects worldwide industry sales will rise as much as 4.5% next year, compared to the up to 3.5% growth it expects for 2017 and a 1.5% increase in 2016. Faster year-over-year growth was expected across most categories including apparel, footwear and handbags and luggage. What’s changed is the source of that demand: Sales in emerging markets in Asia, Latin America and Europe will see growth anywhere between 5% to 7.5%. In contrast, North America will only see growth of 1% to 2% and in mature European markets, up to 3%, McKinsey said.

That growth gap will lead to “a watershed year in fashion." For the first time in 2018, more than half of global apparel and shoe sales will take place outside of Europe and North America, according to the report, written in partnership with The Business of Fashion.

Still, while mature markets may be laggards, the overall picture for the industry is looking brighter. “The fashion industry is turning a corner,” the report said. “There is a new sense of optimism in an industry plagued by uncertainty.”

Even though “uncertain” and “challenging’ remained the most common words that 200-plus senior industry executives surveyed used to describe the state of the industry, “optimism” came in third place.

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Not surprisingly, online will also be an industry bright spot, with sales rising an average of 10% each year through 2020, the study said, citing a Euromonitor forecast. As purchases increasingly shift online, global fashion industry executives surveyed cited “decreased foot traffic” as a top challenge for 2018.

Also echoing comments by many fashion retailers, the study found integrating online and physical store operations as well as online marketing to be a key area of investment for the industry. Other areas of investment include VIP customer loyalty program, better in-store experience and increasing full-price sales.

Macy’s, for example, has redesigned its loyalty program. To drive traffic and better experience at its flagship store in New York, it has added Apple and Samsung in-store sections, as well as restaurants and other food options. Adidas, in its new flagship location in New York’s midtown, features a track for people to test running shoes.

Among some of the top industry trends, the report also confirmed the theme of using big data and artificial intelligence to better target consumers, forecast demand or make operations more efficient.

“Is the promise of AI in fashion still a mirage? Not quite,” the report said. One example: Amazon’s $775 million purchase of robot systems company Kiva has helped it to cut “click to ship” cycle time from over 60 minutes to 15 minutes. Meanwhile, British fashion chain Topman has used AI to increase its online conversion rates.

Another notable example is Stitch Fix, which recently became a publicly traded company. It has pitched its big data and machine learning ability as a big competitive advantage that allows it to better personalize fashion offerings for its box subscribers. 

While off-price chains including TJX’s TJ Maxx have stolen share from department stores and specialty clothing retailers—and helped stoke the trend of retailers including Macy’s introducing its own Backstage off-price concept—the report cautioned against “saturation and possible sales cannibalization” in what it described as “off-price deception.”

“Off-price sector growth continues to be driven by the notion that it provides a solution to challenges like excess stock and slow growth, but the US market serves as a warning,” the report said. “As Europe and Asia get hooked on the myth of an off-price ‘panacea,’ the fashion industry could be put at risk of margin erosion unless companies carefully consider their off-price channel strategies.”

Even though the US market was quick to adopt off-price formats, in the forms of TJX, department stores’ own off-price concepts or brands’ own outlets, the study said there are now signals of “slowing sales” and “tight competition” following a period of “aggressive footprint expansion.” A case in point, TJX, which also owns Marshalls, earlier this month reported flat Q3 comparable sales, compared to a 5% increase a year earlier. 

“In the US, some brands that leveraged off-price stores to grow sales volumes saw their brand image or margins suffer” when off-price units started to hurt sales of the regular-priced chains, the study said, pointing to Michael Kors and Ralph Lauren as examples. It added Coach has improved its financial performance partly by lowering its outlet exposure.

The industry is now slowly waking up to the reality that there can be “too much movement” away from selling at full price, the study said. One-quarter of executives in this year’s survey said investing in “brand building” to increase sales at full price is one of their top five sales and growth priorities.