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The ‘State of Fashion 2018’ recently published by McKinsey & Company in collaboration with the Business of Fashion (BoF) is a must-read for everyone in the fashion industry. Clocking in at over 80 pages long, it is a deep analysis of the business based on over 200 interviews with senior industry executives plus benchmarking analysis of over 500 retailers around the globe.

The key findings:

  • Emerging markets are set to overtake the West in the 2.5 trillion dollar fashion industry next year.
  • 2018 will see an important tipping point when more than half of apparel and footwear sales will originate outside of Europe and North America.
  • The digital transformation of the customer journey will continue to usher in new business models that will disrupt traditional retailers unwilling to change —it will become even more of a winner-take-all game than it is today.
  • The winners in 2018 will take advantage of their customers’ digital obsession and create a deep understanding of each shopper and leverage those insights across every touchpoint, delivering more meaningful personalization and a consistent experience across devices and channels.

The global fashion industry is on track for continued growth in 2018,with average revenues expected to rise between 3.5% and 4.5% in the coming year to 2.5 trillion dollars. This is more than the 2.5% to 3.5% growth projected for 2017 and more than triple the growth in 2016—but still below the long-term average of 5.5%.

In 2018, more than half of revenues in the global fashion industry will come from new markets in the East than long established markets in Western Europe and North America

The growth will come from emerging markets

But the rebound is not felt evenly across the globe. In fact, 2018 will mark the end of an era, as the West will no longer be the leader in fashion sales. 2018 will be the year that more than 50% of the fashion revenue is generated outside of North America and the mature countries of Europe.

Emerging markets such as Asia, Africa, and Latin America will drive the growth, as well as the developing countries in Europe. The report projects that emerging markets in Asia (India, Vietnam, China, etc) will deliver revenue growth of 6.5-7.5%, while their European counterparts (Romania, Russia, Hungary, Turkey, etc) will be slightly behind at between 5.5% and 6.5%. North America and the developed countries in Europe will grow much slower at only 1% to 3%.

“In 2018, more than half of revenues in the global fashion industry will come from new markets in the East than long established markets in Western Europe and North America,” said Imran Amed, founder and editor-in-chief of The Business of Fashion (BoF). “This is an important symbolic tipping point as business leaders across the industry continue to gear themselves up for growth, amidst a backdrop of rapid flux where new technologies, new consumers and an unpredictable macroeconomic environment continue to challenge leaders to rapidly shift their strategies and operating models.”

Even more of a winner-take-all game

And the performance gaps between winners and losers continues to widen. From 2005 to 2015 the top 20% of fashion companies contributed 100% of the profit growth, while in 2017 the top 20% are projected to contribute 144% of the profit growth.

“The best companies grow faster and more profitably. That is a massive contrast to the vast but basically unprofitable middle section of the industry and the poorly performing bottom fifth that is actually destroying value. The fashion industry will always be an industry where ‘The winner takes it all’,” said Achim Berg, senior partner at McKinsey and expert in the fashion and luxury goods industry.
The challenges of operating in a fundamentally changing industry and an unpredictable macroeconomic environment has led fashion players to refocus their efforts and energies on improving what is in their control. Many fashion retailers will continue the 2017 trend of deepening relationships with existing clients. Deep understanding of client needs and truly personal experiences are expected to provide competitive differentiation in 2018.

10 Key Trends for 2018

The macroeconomic environment remains in flux, with natural disasters, threats of global conflict and terrorism creating uncertainty around the globe. Customers are also changing, demanding better prices, more convenience, and a personalized experience that fits their mobile-first lifestyle. And technology continues to advance, with the ecommerce platforms growing in importance for fashion and AI beginning to have a real impact on merchandising, supply chain, and marketing activities.

Here are the top 10 trends that will impact the fashion business in 2018 according to predictions by McKinsey & Company and BoF.

Predictably unpredictable. Geopolitical turmoil, economic uncertainty and unpredictability are the new normal.
Globalization reboot. Despite the rise of nationalism, isolationist rhetoric and reshoring, globalization will not stall.
Asian trail blazers. Asian players will assert their power and leadership even more through pioneering innovations and global scale investments and expansion.
Granular customer insights as a source of differentiation. The winners in 2018 will take advantage of their customers’ digital obsession and create a deep understanding of each shopper and leverage those insights across every touchpoint.
Getting personal. Personalization and curation will become more important to the customer who expects everything—convenience, price, quality, and a personal touch every time and every place they engage the brand.
Platforms first. The question for fashion brands is no longer “if” but “how” to collaborate with big online platforms
Mobile obsessed. As consumer obsession with mobile grows, the end to end transaction will also move to mobile. Over 50% of all revenue came from mobile during holiday 2018 and that trend will accelerate.
AI gets real. Leading innovators will reveal the possibilities of artificial intelligence across all parts of the fashion value chains.
Sustainability credibility. Sustainability will evolve to be an integral part of the planning system where circular economy principles are embedded throughout the value chain, and sustainability will tap millennials desire to be loyal to brands that match their lifestyle.
Off price deception. Off price sector growth continues to be driven by the false notion that it provides a solution to challenges like excess inventory and stagnant growth.

As the leaders in putting advanced customer analytics into the hands of marketers, Custora is ready to help. Looking for granular customer insights? Trying to make your personalization initiative actually feel personal? Wondering how to win the off-price game without losing your shirt (and your profits)? Reach out.

By the way, here is a link to the full report—let us know if you draw any different conclusions.