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This month, McKinsey released The State of Fashion 2019, a report in partnership with Business of Fashion (BoF). While the report is aimed at retail and fashion businesses, the economic and consumer trends it covers are not only relevant but critical to all businesses.
“In 2018, fashion executives have begun to think less about survival and much more actively about their strategic agenda.” The same can be said of business more broadly. As we move into the new year, leaders in all industries should be thinking about how to set strategic agendas beyond survival.
The report highlights ten trends to watch in 2019:
- Global Economy: Caution Ahead
- Global Economy: Indian Ascent
- Global Economy: Trade 2.0
- Consumer Shifts: End of Ownership
- Consumer Shifts: Getting Woke
- Consumer Shifts: Now or Never
- Consumer Shifts: Radical Transparency
- Fashion System: Self-Disrupt
- Fashion System: Digital Landgrab
- Fashion System: On Demand
The “Global Economy” and “Consumer Shift” trends offer insight for all businesses, not just those sequestered in the fashion industry. In an increasingly connected business landscape, business leaders should be thinking through the first seven trends and the impact they will claim on their businesses.
1. Global Economy: Caution Ahead ― Keeping Costs In Check
Many experts suggest that slower growth or a possible recession is likely to hit the U.S. in 2020. The recent market fluctuations are a likely indicator that we’re headed in that direction. Unpredictable leadership can also exacerbate minor economic instability in the markets to cement the likelihood of greater economic problems to come.
“To offset the impact of slower growth and rising costs, companies need to set a strategic agenda to boost productivity over the coming period,” the report cites. Cost-cutting measures should be considered as part of that strategic agenda. While never popular, it is a critical component of a company’s strategy to ensure strategic initiatives can withstand a turbulent economic environment.
SG&A is a common victim of cost-cutting measures.
“Several companies have already taken steps, implementing cost reduction and restructuring programmes. As a result, SG&A ratios have become more fragmented, with leading companies seeing a slower rate of cost increase than laggards.”
Most fashion executives have not adopted cost-cutting measures as a top priority yet, according to the report. A survey conducted by BoF estimates only 17% of respondents stated the focus in the year ahead would be on cost-cutting initiatives, which include re-organization structures, opportunities for efficiency improvement along the value chain, and product rationalization.
Among those are the top performers.
“[O]n average over the past five years, firms in the top 20 percent of economic profit have seen significantly lower SG&A and COGS as a proportion of revenue (4 percentage points and 6 percentage points respectively), compared with those in the bottom 80 percent, suggesting a strong link between keeping costs low and a strong bottom line.”
2. Global Economy: Indian Ascent ― Rethinking The Value Chain
“According to a 2017 McKinsey survey, 41 percent of chief procurement officers expect to increase their sourcing share from India. India’s average labor cost is significantly lower than China’s and comparable with Vietnam’s. There is also a high availability of raw materials (e.g., cotton, wool, silk, and jute), which enable participation in the entire fashion value chain.”
The globalization of value chains is not isolated to the fashion industry. Most businesses that care to map out their value chain will quickly recognize they have global dependencies. This poses a potential risk to businesses as the current political administration pushes a nationalistic agenda and escalates tensions with many foreign territories, most notably China. Now is the time for executives to take stock of their value chains, and identify possible weak points in which global turbulences can cause it to rupture.
3. Global Economy: Trade 2.0 ― Localizing The Value Chain
The escalation in the trade war with China has been one of the biggest economic stories of 2018 and will likely only worsen in the next two years. The China Trade War has been emblematic of the trend in trade more generally:
“For the G20 economies, there were $74 billion of restrictive measures in May 2018, compared with $47 billion in May 2017, a rise of 58 percent. Trade-facilitating measures, which include eliminating or reducing tariffs and simplifying customs procedures, meanwhile, fell from $163 billion to just $83 billion, a 49 percent drop.”
A trade-restrictive environment can quickly mushroom costs for companies that rely on a global value chain. To offset the risk, companies will have to seek sustainable alternatives that localize their operations.
The report highlights an interesting example of Nike, which has leveraged technology and automation to streamline and localize its operations:
“Nike has pursued a similar strategy with the introduction of its Flyknit athletic shoes. Because they have two sewn pieces rather than the 37 pieces in its traditional running shoes, Flyknits can be made with a fully automated process, from the weaving of the fabric to the assembly of the shoe. As a result, Flyknits are mostly produced in Mexico, which has higher labor costs than Vietnam and Indonesia (where Nike’s traditional running shoes are made), but is closer in proximity to the United States. Amazon recently patented a system for robo-cutting fabrics into customized orders, an innovation it could potentially offer as a service to the multitude of apparel companies that operate on its platform.”
4. Consumer Shifts: End of Ownership ― Renting Is On The Rise
Consumers are driving the shift away from an ownership business model to one of renting instead. “Think of Spotify supplanting CD sales and downloads, Netflix replacing video stores and ZipCar standing in for car ownership among many young urbanites,” the report states.
Every business, especially those that rely exclusively on a business model based on consumer ownership, should be exploring new models to tap into this consumer shift. This can include small pilot programs to test how renting can strategically fit into a business model. Cult French brand Ba&sh, the report cites, is dipping its toe into it by offering free rentals for a select weekend “as part of its North America expansion strategy.”
This new business model gets at the core of what the customer wants: access. Jim Hilt, chief customer experience officer for Express echoes the trend, “The consumer who is more interested in access versus ownership is happening across many industries. We looked at this evolution and asked, ‘how do we participate?’” the report cites. As businesses consider how this will change their strategy and subsequent business model, they will have to assess whether to build, partner, or buy their way into it.
5. Consumer Shifts: Getting Woke ― Redefining How Consumers View Business
There is a reckoning happening in the business world: Companies are now being held accountable by consumers to uphold values and standards. Companies, especially with all the power they wield, can no longer stand by as nonpartisan entities.
Facebook is one company that comes to mind. It tried to claim nonpartisanship, but its involvement in the 2016 U.S. election has proved that approach infeasible. Conversely, companies that have taken decisions based on company values stand to gain. Delta, which pulled its discount for National Rifle Association members following the Florida school shootings, is an example of a company that took a stance on the issue of gun control. While it alienated N.R.A. customers, it also endeared the brand to many beyond its existing customer base.
It’s becoming increasingly popular for organizations to put “purpose at the heart of their strategy and operations.” More and more companies are opting to get certified as a B-corporation, a for-profit certification that verifies the company operates without harm to society or the planet. Over 2,500 businesses operating in over 50 different countries have secured B-corp certification.
A B-corp certification signals a business is thinking about impact throughout their value chain, not as an afterthought in the form of an end-of-year charity donation. “Athleta promises that 40 percent of its products are made of recycled and sustainable materials, while Eileen Fisher and Allbirds have made similar commitments,” the report states.
If McKinsey includes the term “getting woke” in a published report, it is a sure indication that the trend has taken momentum.
6. Consumer Shifts: Now Or Never ― Embracing An “I Want It Now” Mentality
Amazon, Netflix, and Uber are all examples of businesses that have raised the expectations of customers and cemented an I-Want-It-Now mentality. Immediacy and time-to-delivery are now part of customer expectations.
“The time lag between discovery and purchase is a pain-point for customers who continue to expect better experiences,” McKinsey explains. Companies are looking to develop innovative ways to address this pain point. eBay, in their own attempt, launched an app that can identify items for customers based on a photo. The report indicates eBay’s app has had success, “the company says AI is driving more than $1 billion per quarter in incremental sales.”
This consumer trend is making commerce an attractive revenue stream, even for industries or companies which historically hadn’t leveraged it. Media is one such example. Many media companies have been exploring ways to integrate technology to introduce commerce into the media experience, effectively allowing customers to purchase what they want when they see it.
7. Consumer Shifts: Radical Transparency ― Building A Business Based On Trust
Trust has become an important decision factor in which businesses consumers support. One hypothesis is since the aftermath of the 2008 financial crisis, millennials have been active in leading the charge.
“Millennials are at the vanguard, with 52 percent agreeing that they always research for background information before buying, compared with 45 percent of Gen Z consumers and 41 percent of baby boomers.”
One survey cited in the report indicates in 2017 alone, trust in businesses declined in 40% of countries. Perhaps exacerbating this problem is the many companies touting trust as a competitive advantage, only to find later evidence to the contrary. For many years, Wells Fargo was touted as the most trustworthy financial institution in the U.S. until the fake accounts scandal came to the fore.
But trust in corporations can be murkier. Building consumer trust isn’t simply about not deceiving customers―frankly, that should go without saying―it’s about always doing what’s best for the customer. Media companies, for example, have taken to brandishing trust and safety in content and advertising as a differentiating point in their business, but the advertising business model itself is oftentimes anathema to what customers want.
What remains clear is when setting strategic priorities for the new year, companies can no longer make business decisions based on margin impact alone. Successful businesses don’t operate in a silo but have to recognize they are but one part of the whole. It is up to executives to determine what piece they want to play in the scheme of the larger puzzle.
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December 27, 2018 at 04:12PM
Forbes – Entrepreneurs