The State of Fashion Report 2022 by McKinsey – China trends
It’s been a tough 20 months for the global fashion industry, as the downturn in international travel and lockdowns brought on by the pandemic has significantly impacted fashion sales, both luxury and non-luxury. Not to mention the continuing impact that supply chain challenges has had on the industry.
However, the industry is now finding its feet, and China has emerged ahead of the world in its return to pre-pandemic fashion sales levels.
With a focus on China, we highlight the key fashion industry findings from The State of Fashion 2022 report from McKinsey in partnership with the Business of Fashion.
1. Chinese fashion market back to pre-pandemic sales levels
The Chinese fashion market, both luxury and non-luxury segments, is already back to pre-Covid sales levels. The non-luxury segment reached +2% over 2019 H1 sales in H1 2021. However, for a full-year comparison, macroeconomic disruptions through the latter half of 2021 will likely temper this growth to -3 to +2% for 2021 versus 2019 sales overall. On the other hand, the luxury sector shows strong signs of growth in China amid ongoing travel restrictions and increased domestic spend; the luxury segment is set to reach +70 to +90% over 2019 sales by the end of 2021
2. Fashion industry growth largely driven by China
Global fashion sales are on track to pick up momentum in 2022, as hopeful consumers unleash pent-up buying power. McKinsey Fashion Scenarios suggest global fashion sales are expected to make a full recovery in 2022, to reach 103-108% of 2019 levels, however, this will vary globally. Growth is likely to be driven by China and the US, with Europe lagging. In China, there are strong prospects for growth in consumer spending power, where rising incomes will contribute to an anticipated increase of US$10 trillion in consumption growth between 2021 and 2030. None of the executives surveyed in Asia anticipate worse trading conditions in 2022, whereas in Europe and US, scepticism among executives surveyed was seen.
3. Domestic luxury shopping spend is set to continue
The vast amounts of spend from Chinese nationals travelling overseas has been redirected to Mainland China boosting domestic fashion sales. Pre-pandemic, 30-40% of luxury sales were generated by shoppers in transit or overseas, but in line with international travel flows plunging amid the pandemic, global tourism spending was cut nearly in half. With tourists set to stay local in 2022, and inter-regional travel unlikely to return to pre-pandemic levels before 2023, consumers and brands alike are doubling down on domestic luxury shopping. Luxury retailers and brands are shifting to domestic sales. In China, Louis Vuitton and Prada shifted some of their attention away from tourism hotspots and first-tier locations to new stores in cities such as Wuhan.
4. China growing domestic duty-free zones
While international airports and city-centre retail locations, often designed for the international traveller, have seen store closures and strategic shifts, China’s government has been reducing import duties and promoting duty-free zones in-country, to encourage luxury shoppers to spend more at home. In China, the popular holiday destination of Hainan saw duty-free sales surge by 257% in the first half of 2021, to US$4.13bn. This followed a Chinese government announcement that it planned to transform Hainan into the world’s largest free-trade port. The government also lifted purchasing limits from U$S4,646 to US$15,487 and allowed consumers to buy duty-free products online for six months after returning home. The success of China Duty Free Group (CDFG), which controls around 95% of the Hainan market, has attracted companies such as LVMH’s DFS, Dufry and Lagardere over the past year. Looking forward, CDFG expects 20-fold revenue growth between 2019 and 2025, which could see it account for one-third of China’s luxury market by 2025. Elsewhere in China, municipalities in the city of Shenzhen are considering developing their own downtown duty-free zones.
5. Local Chinese brands and platforms rising
Given the increased choice in home markets, both brands and channels, the rise of domestic luxury is likely here to stay. In China, Alibaba expects to see a continued rise in cross-border ecommerce through 2022, as consumers browse for both foreign and domestic goods on local sites. “Here in Shanghai, many showrooms are still reporting a big boost in sales of Chinese designer brands,” says Shaway Yeh, founder of fashion innovation and sustainability agency Yehyehyeh. “With consumers having less access to international fashion than before, this isn’t surprising, but it also speaks to the rising national confidence that consumers are tapping into, and a newfound sense of solidarity to support local businesses that won’t go away anytime too soon.”
6. Fast fashion firms to face increasing scrutiny
With sustainability at the top of the business agenda, fast and ultra-fast fashion players are facing increased scrutiny for their environmental impact and labour conditions. Among these are Chinese ultra-fast fashion player Shein which consistently introduces more than 6,000 new products per day in limited units, with designs informed by customer data, which can be turned around in as little as three days. A growing number of consumers are likely to allocate more of their wallet share to investment pieces and versatile items, even as inexpensive items and impulse purchases remain an important part of the wardrobe mix for many in 2022.
7. Gaming and virtual world becomes prime target for fashion brands
As gaming increasingly becomes an extension of the real world, and with the pandemic supercharging participation, it has become a prime target for fashion brands. In many cases, engagement has taken the form of collaborations with gaming platforms to design virtual fashion assets. Ralph Lauren partnered with South Korean social network and avatar simulation app Zepeto to create a virtual fashion collection, giving users the opportunity to dress their avatars in exclusive products, or appearance-altering ‘skins.’ Balenciaga teamed up with gaming giant Fortnite to unveil a collaboration including shoppable virtual clothing and physical products. It advertised the partnership across traditional and metaverse channels. The opportunities in gaming are extensive and offer a platform to engage younger consumers, as well as create buzz with cohorts that would not usually interact with brands in physical formats. Tapping into in-game merchandise further allows brands to monetise digital assets where it is the norm to pay for elevated experiences.
8. Social commerce to experience surge
The use of social media to discover and shop for fashion gained traction during the pandemic, as customers – unable to visit stores or socialise in-person – spent more time scrolling. By 2027, worldwide social commerce sales are set to reach over US$600bn, and while western markets are currently lagging, social commerce is already booming in China with sales from social commerce across all sectors in China set to top US$363bn, up 35.5% from 2020, around 10 times higher than social commerce sales in the US. Super-apps like WeChat offer users a wider array of functions than just social networking and messaging services, and social media players like Douyin and Xiaohongshu have boosted their e-commerce capabilities. Tommy Hilfiger held a livestream in China that attracted 14 million viewers and sold 1,300 hoodies in two minutes, for example.
9. AI and AR present opportunities
Beyond social media and gaming, AI and AR technologies present additional opportunities for new business models leveraging virtual fashion. Online fashion wholesale platform Ordre uses 360-degree view technology to present seasonal collections through online showrooms, offering a complimentary channel to facilitate management of luxury wholesale networks. Elite World Group and Tommy Hilfiger have recently partnered on various virtual ventures, including avatars of models walking 3D virtual runways.
10. Shipping costs from China to Europe have risen six times
Today, it costs up to six times more to ship a container from China to Europe than it did at the start of 2019, and up to 10 times more from China to the US West Coast. In real terms, shipping a 40-foot container from Asia to the US West Coast cost between US$1,600 and US$2,100 in July 2019 – now it will set companies back between US$21,000 and US$23,000. Looking ahead to 2022, McKinsey predicts shipping prices will likely continue to climb and remain above their pre-pandemic levels in the longer term. Therefore, fashion brands may need to plan for cost increases as a permanently more expensive logistical future. There are opportunities for luxury brands to pass on higher costs to customers by raising prices, but not so more affordable fashion. According to Joseph Phi, group CEO of Hong Kong-based supply chain management company Li & Fung, “the pandemic has shaken the very core and the very foundation of how the fashion supply chain has been built. It was built on efficiency by squeezing every ounce to make it cost-effective. There is a need for a new equilibrium, and this will include diversification of the sourcing base, instead of putting all of your eggs in one basket.”
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