How current global trends are changing the fashion industry (2023)

In this episodevonThe McKinsey PodcastMcKinsey senior partner Achim Berg talks to editor-in-chief Roberta Fusaro about insights from McKinsey'sThe state of fashion 2022Report. They cover the simultaneous impact of the many challenges facing both suppliers and brands, including the war in Ukraine, the pandemic and inflation.

After: Anxiety tends to get a bad rap. But in our second segment, Dr. Tracy Dennis-Tivary, 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 Podcastwill be moderated by Roberta Fusaro and Lucia Rahilly.

Back to normal? Not yet

Roberta Fusaro:Achim, the world has changed since our publicationThe state of fashion 2022Report. What changes have most impacted the fashion and textile industry?

Achim Berg:The invasion of Ukraine is one of those issues that isn't fully on our radar in November or December.

But that's not the only change that has occurred since the report was published. Little did we know that Omicron would be the dominant variant in the first half of 2022.

Nor did we anticipate that inflation would be a lasting challenge. Like many governments, we expected this to be a temporary problem. We expected the supply chain to normalize after two years of pandemic. That didn't come true either.

We didn't expect an energy crisis.

We also didn't expect COVID-19 to become a big issue again in China because China looked like the big winner of the whole pandemic late last year. That's the challenge of writing a report that tries to somehow predict or shape the future: things often turn out a little differently. But overall, our forecasts provided reliable insights and included themes we identified to drive the industry forward in 2022.

Supplier Challenges

Roberta Fusaro:From the multitude of problems you mentioned, which challenges are suppliers currently facing?

Achim Berg:There are many different challenges. It depends on which country we are looking at. Some are quite challenging.

The supply side has a practical problem of delivering what is expected. But they also face the problem of making the right forecast because we don't know exactly how consumer behavior will develop.

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

Provider Solutions

Roberta Fusaro:Given the heightened risk, how should companies respond? And what can companies do to hopefully end up on the right side of those big bets?

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

On the other hand, it's worth thinking about how to flex the system to the maximum, because demand patterns aren't 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 on the receiving side, so they need to increase their flexibility even further.

Cost pressures will continue so they will likely need to work on the cost side as well and also on their Tier 2 and Tier 3 suppliers throughout the system.

Different regions, different challenges

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

Achim Berg:Globally, we have seen a faster recovery than we expected 18 months ago. We had expected that the entire fashion industry would not return to the level of 2019 until the end of 2022. And on a global level, we already achieved that by the end of 2021.

One could argue that the fashion industry has shown more resilience and a faster ability to meet challenges than we anticipated. Maybe we were too conservative in the eye of the storm. That could be another explanation.

The recovery also varied greatly from region to region. Asia, with China's very strong leadership, was the engine of the recovery right from the start. They had a very brief slump and then were just fine.

Europe faced the toughest challenge due to a lack of international travellers. Nor was the recovery as quick or as strong, given the fragmentation of markets.

North America was remarkable. We've seen a V-shaped recovery that we've seen after some of the financial crises before. But we didn't expect that here in the pandemic. Looking ahead, as we have discussed, it is difficult to make predictions.

China is currently quite challenged with its zero-COVID-19 policy, but we don't know how long it will take for a recovery to start here. Let's hope for the best because that's going to be very important, especially for the luxury end of the industry. Europe is doing better right now because we are seeing travel coming back. North America is still strong.

It will depend heavily on how long the war in Ukraine lasts, how long that will affect energy costs, and how much stimulus various governments can provide after two years of continuous anti-pandemic stimulus.

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

Think technology from start to finish

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

Achim Berg:Technology plays a very important role. We also just released the new oneState of Fashion Technology Report 2022, which highlights an important point: that we really need to think technology from start to finish.

We used to focus more on the front end - anything that was more consumer-centric, through e-commerce, through loyalty systems. But we are now realizing that the backend 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 in the future. Therefore, the digitization of the entire supply chain end-to-end is a big topic for many of our customers. And that is also why technology investment for the fashion industry is expected to increase.

The importance of consumer demand for brands

Roberta Fusaro:When you think about the current challenges for brands, what obstacles do these companies face?

Achim Berg:It all comes down to consumer demand. And like I said, we were hoping that 2022 would mark the end of the pandemic, that a certain freedom would return that would allow people to party and entertain. And the fashion industry was very willing to dress consumers to do just that. And to some degree we see that happening. Some of the categories that have been hammered during the pandemic, like dresses, heels and even suits, have seen a strong return in the first five or six months of this year.

We also expect people to travel a lot. Europe is clearly returning to the whole holiday industry; I think Americans will do the same, and so will Asia except for China. That will boost consumption.

In a way, despite a looming recession and rates of inflation, we see that consumers have some kind of pent-up demand and desire to spend on fashion. The problem is that energy bills will continue to rise and we don't know how long the conflict between Russia and the western world will last.

The conflict is expected to continue to negatively impact energy and living costs. Realistically, we could see many consumers returning from vacation and a great summer to find that everything has gotten much more expensive. That could hit larger parts of the fashion industry -- particularly the discount, value, and mid-market segments. The jury is still out on how luxury will play out in this setting.

We were all surprised at how quickly luxury has returned from the pandemic lows. This return was mainly driven by China, but also by a very strong recovery and a quick recovery in the United States. Demand for luxury is very strong at this time of year. I'm more concerned with the Christmas business and especially the outlook for 2023.

Renew plans, adjust systems and manage costs

Roberta Fusaro:If you think about it, Achim, what should brands do?

Achim Berg:Brands should prepare for a likely recession. If the recession doesn't happen, we will all be pleasantly surprised.

But -- given current rates of inflation around the world, driven by rising energy costs, and the fact that interest rates are rising around the world -- it's going to affect a lot of things. It will have an impact on consumer behavior. It will affect companies' refinancing behavior and cost structures. What we discuss with many customers is how we can prepare for this.

On the one hand, this means having a solid plan for the demand side and how you can adapt your systems to different requirements, similar to the suppliers. The industry has been quite innovative in this regard over the last two years of the pandemic. This has to go on somehow.

On the other hand, industry has to manage costs. Many of the leading players have started to address this by reviewing their capital expenditure budgets and cost structures and preparing for a challenging 2023. This is what brands need 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. How do they react to these disturbances? And how do they find ways to invest in new technologies?

Achim Berg:2020 was the worst year from an economic profit perspective since we collected data on this industry - probably dating back to the Great Depression.

2021 was a year of recovery for many. And in that regard, a tougher 2022 and an even tougher 2023 could have some devastating effects on the industry. Our report also shows that profitability in the industry is becoming increasingly polarized.

In 2020, less than a third of companies were value-creating, 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 that there are some companies that we call the "super winners," the top 20 performers in the industry. But you could extend that to the top 20 percent of the industry, which is pretty healthy. These companies have already started investing in technology and digitization. They've invested in sustainability, they've invested in talent — all the things you want to invest in. They also have a more balanced, global business. So they will likely get better in the coming months.

There is no question that companies will have to make this transformation away from physical shops and towards a more digital business model. You need to find ways to redirect budgets into these areas. This will be more difficult for some than others, likely leading to even more polarization in the industry.

The importance of sustainability

Roberta Fusaro:Is sustainability one of those factors when considering how companies will change?

Achim Berg:Sustainability is the big issue in the industry. It was the big issue before the pandemic and it continues to be the big issue.

I always say that we go through different stages. It took us a few years to really create awareness and the industry to accept that sustainability is a big issue - not just in terms of CO₂, but also on workers' rights, working conditions and environmental pollution more broadly. The industry has finally accepted the challenge.

Many companies have now committed, most of them by 2030. COP26 was a big event in that regard. We are now entering a phase in which the industry must deliver on these promises. And that now coincides with a period where we're likely to have tight budgets and more stress on the demand side. So without a doubt it would have been much better in the end, and for the planet too, if we had had a stronger recovery from the pandemic. But unfortunately that's not what we're in for.

On the other hand, the planet cannot afford an industry that does not progress. With that in mind, companies need to do all of this. You have to face up to the ambitions of digitalization, but also to the demands of sustainability.

Consumers have become more demanding in this regard. Many people have been at home during the pandemic. They had more time to think about their consumption behavior. We've seen a major shift - particularly in Western Europe and North America - in the way consumers think about sustainability and what they expect from brands. Therefore, brands must do everything. Things won't get any easier for brands across the industry over the next 18 to 24 months.

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

Achim Berg:Product passports and traceability are the two big issues when it comes to sustainability. Digitization will be a key lever here: on the one hand, to create the necessary transparency along the entire value chain, and on the other hand, to make this information available to an increasingly demanding consumer who wants this transparency. Let's not forget that there is a regulator out there that demands this transparency. And the supply chains are very complex.

There are different stages. It's happening in emerging markets. In most cases, it is transported at least halfway around the world. So all of this requires the use of technology to provide the transparency and reliability you need to drive the business forward.

Learn from the top 20 in fashion

Roberta Fusaro:What lessons can companies learn from some of the top companies in our study?

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

You are a constant inspiration to the rest of the industry. Not everything they do can be replicated; Many low-performing players have trouble funding some of the things that the high-performers do.

You need to be active in different geographic regions to balance risks. It also helps to operate across different product categories - higher digital content and more consistent use of data are clearly beneficial for performance.

And finally, it's the fashion industry. Of course, if you're betting your chips on the right trend and if you've got the branded warmth you desire, you'll do better. And you can be like a phoenix rising from the ashes in the next few seasons. That's the beauty of the industry.

We're also seeing some strong brands now that weren't as strong before the crisis. Unfortunately, for many, it's a sliding scale. But there is always some renewal and innovation and hope. We will undoubtedly see some surprises over the next 24 months.

Roberta Fusaro:Thank you, Achim, for being with us today.

Achim Berg:Thank you Roberta for having me.

Lucia Rahilly:And now we hear from Dr. Tracy Dennis-Tivary from oursSeries of author talksabout her new bookFuture tense: why fear is good for you (even if it feels bad).

Tracy Dennis-Tivary:The essence of the book is that we mental health professionals have inadvertently given people some harmful information related to anxiety. And we basically spread some misconceptions about fear.

First, fear is always a debilitating experience, it is dangerous and we should even consider it a disease.

This means that the solution is to prevent and eradicate them and destroy them at all costs, as we do with any disease. The problem with anxiety is that it's literally a prescription for making anxiety worse.

There is a paradox of fear: the more we avoid it, the more it tends to get out of control. So not only do we have more intense fear because we avoid it, but we also lose the opportunity to look at fear and its potentially helpful parts.

Fear is an emotion we have developed to anchor ourselves in the future tense. This ability to think into the future not only protects us, but also makes us more persistent, innovative, creative and socially connected.

So this story that we all believe about fear is really starting to really get in our way, especially at a time like the pandemic when we can't escape fear.

And that's the second misconception that we, psychologists, have inadvertently propagated, that every experience of fear is a malfunction and a failure.

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

A healthy way of thinking about fear is one in which we look at it in a very different way than we are used to. We see fear as a problem to be solved, but fear is a trait of being human. And if you look at the difference between fear and anxiety, it helps us understand that.

Fear is the present certainty. We are absolutely certain that we are in danger right now. But that's not fear. Fear is the fear of the uncertain future. That means we know something is coming around the corner. It could be bad, but it could also be good. Fear helps prepare us to make those good things happen.

A second healthy way of thinking about fear involves this perspective on fear that it is information that tells us something is going to happen in the future and we really care enough about that happening.

When we start seeing fear not as something dangerous but as something helpful, it changes everything about how we face anxious moments, whether they are controllable or uncontrollable - it helps us to deal with them in the best way possible.

And a third aspect of a healthy attitude toward anxiety is that we don't see it as something that overwhelms us as we face the uncertain world around us, but rather as something that helps us deal with the uncertainty. Because fear is an emotion that evolved to help us translate and navigate the uncertain world.

How does fear help you?

What seeing helps you is that it helps you see possibilities because you are in the future tense and you care about the good things happening in the future. It can make us more persistent. It can make us more fluid to think outside the box to innovate when needed because we see that there is a possibility that something good can happen.

When we're anxious, we also focus more on rewards. We have higher levels of dopamine in our brain when we are anxious. Normally, we associate dopamine with a reward neurotransmitter that we feel when we experience something pleasurable. Well, fear triggers dopamine. Why? Because dopamine helps us achieve positive results.

It also triggers our social bonding hormone, oxytocin, to surge when we're with someone we love. It's one of the ways we biologically bond to one another. And when we're anxious, this hormone shoots up. Why? Because social connections, social bonds, are one of the best ways to deal with our anxiety.

Also in the book I talk about a three part framework for doing something with fear to work with. One is that we remember that fear is information and we need to listen to it.

Second, fear is sometimes not useful information. We can learn to tell the difference, and when we know it is sonotuseful fear we can use these great tools out there to let go and dive into the present moment, get help through therapy, do things that help us get out of future tense. The third guideline is really overcoming that fear, that information that we're getting about what we want in the future, what's important to us, what gives meaning to your life.