A new report by The Business of Fashion and McKinsey & Company has detailed the effects of COVID-19 on the global fashion industry, and the results are not pretty. The fashion industry is in crisis, and millions of jobs are at stake, along with the potential for many companies to go bankrupt.
The global fashion industry is projected to contrast by up to 30 percent, and the personal luxury goods industry is set to contract by up to 40 percent this year. 8 out of 10 listed fashion companies in Europe and North America are predicted to be in financial distress if lockdowns and store closures last more than 2 months, leading to bankruptcies over the next 12 to 18 months.
Following lockdown orders, 84 percent of office-based workers have transitioned to work-from-home, and 93 percent of senior executives have said their companies have instituted hiring freezes. The cancellation of orders due to store closures is also leaving garment factory workers in Bangladesh, India and Cambodia out of work.
Fashion could be feeling the effects of an 18 month recession
"The coronavirus crisis has accelerated the wave of consolidation happening in the fashion industry in a major way," said Achim Berg, global leader of the Apparel, Fashion & Luxury Group at McKinsey and Company. "Due to the interdependence of the industry and the severity of the crisis, we expect the impact on fashion companies to be long-term in nature. But the crisis also offers fashion the opportunity to redesign the industry's value chain and to focus on the values by which we measure our actions."
The five key themes found in the study include survival instincts, discount mindset, digital escalation, Darwinian shakeout, and innovative imperative. Recovery from the pandemic will coincide with this current recession that will be ongoing and brands will have to ramp up resilience planning and will have to stabilize their core business before they focus on growth. Deep discounting will also bog down retailers for the rest of 2020 as shoppers will be incredibly cash strapped. Companies will also have to ramp up their digital channels as consumers will demand more online shopping as they try and stay safe in their homes. In regards to "Darwinian shakeout", the crisis will accelerate the decline of companies that were already struggling before the pandemic, leading to massive waves of consolidation, M&A activity and insolvencies. Companies left standing will have to get more innovative with their tools and strategies to future-proof their business models.
While the 2.5 trillion dollar fashion industry will weather the storm and rebound from the economic downturn, the storm will be a rough one. The industry will be a whole different animal when this is over.