JEDDAH — Though fashion leaders are not looking forward to 2020 as the prevailing mood among respondents to a survey is one of anxiety and concern.

The McKinsey Global Fashion Index (MGFI) forecast that global fashion industry growth will slow further - down to 3 to 4 percent - slightly below predicted growth for 2019.

On the one hand, evolving channels, shifting markets, and groundbreaking research offer revenue opportunities and the chance for radical innovation. On the other, global economic growth is slowing and competition is more intense than ever.

To thrive in this environment, companies must think strategically, sharpen their decision making, and keep their fingers on the pulse of customer demand. They need to get digital right and to address consumers increasingly concerned by the climate-change agenda. At the same time, they must cater to local tastes across multiple markets and cultures. One size will not fit all.

These are some of the findings from the latest report, The State of Fashion 2020, written in partnership with The Business of Fashion (BoF).

The latest reading of the McKinsey Global Fashion Index (MGFI) revealed new insights into fashion-company performance by category, segment, and region.

For many in the fashion industry, the glass is half empty. The mood among respondents to our executive survey is sober across geographies and price points, and the pockets of optimism seen last year in North America and the luxury segment have steadily evaporated (Exhibit 1).

Economic profit grew for the second year running in 2018, following consecutive annual declines from 2012 to 2016. The 16 percent year-on-year rise came largely from improved operating margins driven by cost cutting. The average industry EBITA

margin was 10.8 percent, a tick up on 2017 and the highest since 2014.

One reason that executives are not breaking out the bunting is that the outlook for the global economy is less rosy than it was a year ago. Against this background, fashion-industry fortunes are highly polarized. For an exclusive group of “Super Winners,” the sun is shining (Exhibit 3); by economic profit, these 20 companies added more to the industry bottom line in 2018 than all others combined. The Super Winners include three new entrants—Anta Sports, Heilan Home (HLA Corporation), and Lululemon—reflecting the strength of sportswear and the growing influence of Chinese players. In luxury, Kering made an impressive rise through the ranks, driven by Gucci’s double-digit sales growth and strong performance in Asia–Pacific markets such as Japan. Not only are leading companies highly value-creating, they are also at the cutting edge of innovation. They are also most successful in attracting funding and talent, often leaving the rest to fight over scraps.

Alongside public companies, the report also identified a group of “hidden champions.” These privately owned gems often dominate their category areas and generate significant revenues. Some are household names, while others are less visible but still pack a punch. Among the well-known brands, Chanel is a significant player, with revenues of more than $10 billion, while Rolex is one of the few large independent and private luxury watch brands remaining. At the opposite end of the price spectrum is Primark, whose commitment to its core value proposition has made it a formidable competitor. These players show that there is a great deal of industry value outside the spotlight, and the “hidden champions” too have much to offer alongside their listed counterparts

Of course, for every success, there are also relative failures. A growing number of publicly traded and private companies have become “value destroyers.” The midmarket in particular is in the doldrums, generating negative returns for shareholders. For some, the abyss beckons.

However, in this year’s report by McKinsey & Company, which includes an exclusive chapter on the Middle East titled: “The GCC: A region in Transition”, it revealed that annual fashion sales in the Middle East’s Gulf Cooperation Council (GCC) markets amount to $50 billion, reflecting the region’s significant financial clout.

Spending in some GCC countries is among the highest on a per capita basis globally, reaching approximately $500 and $1,600 per person in Saudi Arabia and the United Arab Emirates (UAE), respectively.

E-commerce, therefore, is fast becoming a table stake in the region. It is set to grow at around 40 percent a year over the next five years, increasing its penetration to 9 percent from the current 2; in some fashion categories in Saudi, it is already at 20 percent.

The report features interesting insights on consumer trends and the region’s fashion markets, including specific details of the Saudi Arabia market.

The report showed that in contrast to last year, when there were pockets of optimism in North America and within the luxury segment, “we now see pessimism across all geographies and price points. To make matters more complicated, although we know that external shocks will continue, we don’t know what form they will take.”

Even without the economic headwinds, these would be challenging times.

Fashion players are under pressure to be digital-first and fully leverage new technologies, to improve diversity across their assortments and organizations and to address growing demand

for the industry to face the sustainability agenda head-on. — SG