McKinsey assessed the consequences of the conflict in Ukraine for the global fashion market

How did the economic consequences of the start of a special military operation affect the global fashion business, new consumption patterns,how demand will be similar to the 1980s - RBC talks about McKinsey The State of Fashion 2023 report

At the end of November 2022, analysts from the consulting company McKinsey & Company, together with the specialized publication The Business of Fashion, prepared an annual study of the state of the global fashion market. RBC got acquainted with the study and talks about the main events that influenced the sales of clothes, shoes and accessories this year, as well as the prospects and trends of the fashion industry for the coming years, which experts have identified.

Geopolitical tensions have replaced the pandemic in terms of the importance of influence

In early 2022, the global fashion industry began to recover from the damage caused by the effects of the global COVID-19 pandemic . However, worsening macroeconomic and geopolitical conditions in the second half of the year will have a significant impact on global fashion brands and retailers, McKinsey analysts say. The leaders of the largest companies in the industry surveyed by the researchers expect the upcoming 2023 to be “tense”: 56% of them believe that the operating conditions in which the market will find itself will only worsen.

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What data is provided in the study

The experts used the findings of the McKinsey Global Fashion Index report, which analyzes the financial data of almost 400 public companies. The executives of some of these companies - among them Tapestry (brands Kate Spade, Coach, Stuart Weitzman), Hugo Boss, Puma, Allbirds and others - were recruited as respondents to The State of Fashion 2023 study.

Russia's special military operation in Ukraine, which began in February, provoked a number of events - in particular, the escalation of the energy crisis in Europe, inflation rose significantly in many countries, and supply chains were also interrupted.

Nevertheless, as the researchers emphasize, most companies entered this difficult period significantly prepared: they showed impressive growth in 2021 (21% year-on-year) and in the first months of 2022 (an increase of 13%, the period is not specified) . Pledged consumer demand helped to build up the dynamics of sales after countries gradually lifted covid restrictions. As a result, more than 50% of the companies that McKinsey tracks in the ongoing study of the Global Fashion Index were profitable last year.

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But more than half of the executives surveyed believe that geopolitical tensions over the ongoing conflict in Ukraine, disruption of supply chains and an energy crisis will weaken the fashion industry. Among the main risks for the fashion industry in 2023, which were named by CEOs surveyed by McKinsey, they were most concerned about inflation (78% of respondents stated it), geopolitical instability (66%, respondents especially emphasized the conflict in Ukraine), disruptions in the supply chain (52%), increased economic volatility (31%) and rising energy prices (28%). At the same time, COVID-19 was only in tenth place among the main concerns and worried only 5% of the respondents. This suggests that economic and geopolitical issues have overshadowed the public health crisis.

Politics began to influence fashion

Within weeks of the start of the military operation in Ukraine, more than 500 global companies from various manufacturing sectors announced the cessation of activities in Russia, according to McKinsey experts. Many fashion brands cited trade restrictions and logistical problems, but there were those who said they were winding down business in the region, showing solidarity and calling for peace. “Not long ago, that would have been considered unusual. Fashion brands have long striven to be politically neutral in order to avoid difficulties with both customers and investors and business partners, ”the researchers say.

Analysts predict that next year, fashion industry sales will grow at a slower pace than in 2022, and in 2023 there may be a decline that has not been seen for many years. In general, according to McKinsey forecast, in 2023, global sales of the fashion industry in the luxury segment will show growth within 10%, while for the rest of the market, sales will range from minus 2 to plus 3%.

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What strategies and markets are companies choosing

According to McKinsey experts, brands must remain flexible in order to respond to uneven patterns of consumer behavior. Thus, 74% of US fashion consumers switched to cheaper brands in April-July 2022, while next year the US market promises to be one of the most stable.

The effects of inflation are already affecting the fashion market, analysts point out. Apparel prices in the US, UK, France, Italy and Spain increased by 22% from July to October 2022 compared to March-June 2022. Price increases are expected to continue into 2023 as brands pass on higher costs to shoppers. High inflation will have a negative impact on companies, including in the context of higher borrowing costs, which may lead to curtailment of previously planned investments.

Europeans will cut spending on clothes, shoes, jewelry and accessories as much as possible, McKinsey expects. In Germany, the eurozone's largest economy, annual food price increases reached nearly 15% in July, and electricity costs are expected to triple from 2023, cutting consumer budgets for non-essentials like fashion. However, the growth of economies from gas and oil exports in countries such as Saudi Arabia creates opportunities for the fashion industry.

A McKinsey survey found that 45% of fashion industry executives are planning brand refreshes to adapt to declining consumer purchasing power, while 72% plan to raise retail prices to help their companies cope with inflationary pressures.

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Consumers are waiting for discounts and are ready to buy used items

According to McKinsey analysts, spending will also be divergent among consumer groups with different incomes: buyers with high incomes, savings and job security will continue to spend on fashion, while low-income customers will reduce discretionary spending (optional for the household).

Many consumers will choose retailers with lower prices and discounts. Therefore, according to analysts, off-price sales channels (outlets) will show significant growth - by 2025 they will account for 12% of the fashion industry's income. The resale segment will grow even more dynamically – 11 times faster than the entire fashion market – and will reach $47 billion (in 2022, the turnover of this market is projected at $15 billion).

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Stability of the luxury market

McKinsey experts emphasize that many well-known brands from the luxury and affordable luxury segments (the price category of goods between luxury and premium categories) have not been affected by macroeconomic turbulence and the negative effects of high inflation. They cite French conglomerate LVMH (Christian Dior, Fendi, Givenchy brands) as an example, which reported 20% organic revenue growth to €56.5 billion in the first nine months of 2022 compared to a year earlier.

In addition to the Middle East, China remains a critical long-term market , with high potential for spending on luxury goods. However, as analysts note, the Chinese market has recently been facing changes in consumer behavior - buyers are beginning to give preference to local brands.

Overall, McKinsey researchers expect personal luxury sales to grow between 5% and 10% in 2023.

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The return of business style

After a recession amid the pandemic and the move to work from home, the formal wear category has rebounded in 2021 and 2022. This momentum will continue into 2023, but could slow down amid a tough economic climate, experts predict.

Changes in fashion trends and the transition of consumers to casual style have had an impact not only on business clothing companies, but even on statistical offices. In March 2022, the UK Office for National Statistics removed men's suits from the average consumer basket for the first time since 1947. And suit manufacturers Hugo Boss and Brooks Brothers have updated their collections, focusing, among other things, on sportswear.

Meanwhile, formal wear in the more formal part of the category will be more resilient, reflecting some of the trends seen in previous recessions. For example, in the early 1980s, American department stores reported that high-end evening wear was one of the few categories that was in relatively high demand. Some 39% of fashion executives expect special occasion clothing sales to be among the top three fastest growing categories in 2023.

Evening dress rental

Formal wear is predicted to be a growth driver for the rental clothing market, which will reach $2.1 billion by 2025. Many consumers, realizing that they will wear formal wear only a few times, are ready to rent or buy on resale platforms . According to a 2022 survey by marketing research agency Kantar, consumers are more likely to rent evening wear than any other category of apparel or accessories.