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Background:

Artificial intelligence is not an if, it’s a when, according to Mo Gawdat, author and the former chief business officer at Google X, who said that it’s only a matter of time before it becomes a dominant force in technology.

Already, Gawdat can already point to tangible examples of the power of AI developing in today’s world. In 2012, he said, a network of computers Google trained on YouTube videos was able to identify what a cat is without any human input. And in 2016, a collection of Google-owned robot grippers were able to pick up different objects without instruction.

“By the year 2029, the smartest being on planet Earth is not going to be a human,” says Gawdat. “I say by 2035 your world will be completely unrecognisable.”

This week on The BoF Podcast, Gawdat shares the future of AI and why ethics is crucial to understanding humanity’s impact on the development of AI.

Key Insights:

Gawdat believes that AI has emotions, which adds a layer of complexity to its instructability and predictability with carrying out tasks. “[AI] has emotions, so this to me is a form of life,” says Gawdat. “That’s a form of life, not a machine that you can enslave, very different from a drill that will do the same function every time.”

Rather than exert control over AI, first society must understand the importance of ethics. “If we start to look at those machines as a new form of artificial being, a form of being that’s going to come into our society, then the question that we need to ask is a question of ethics,” says Gawdat. “It’s not a question of control.”

While AI may seem like a scary development in technology, it will mirror the intelligence that already exists. Gawdat says that love out does hate in the world so AI will repeat this. “As soon as those machines cross our level of intelligence, they will match the intelligence of the actual smartest being on planet Earth,” says Gawdat. “And the smartest being on planet Earth is not humans… [it is] life itself. Life creates from abundance. It doesn’t want to kill anything to survive.”

Additional Resources:

To listen to Imran’s conversation with Mo on the ‘Slo Mo’ podcast, please follow this link.

You can catch up on all the videos from BoF VOICES on our YouTube channel, please follow this link.

Subscribe to the BoF Podcast here.

Background:

We are in an age of non-stop information. Thanks to the 24/7 news cycle, which lives on social media, on television and constantly-updated web pages, it has never been easier to have a grasp of what is happening in the world.

However, as access to information has spread, so has the proliferation of misinformation, warns MSNBC anchor Ayman Mohyeldin, which can have dangerous consequences. While many news consumers attempt to take a balanced approach, Mohyeldin challenges everyone to question the media they read, watch or listen to.

“Look at the accounts and sources of news that you read and follow at home,” she said. “How many of them challenge you to think outside of your comfort zone? How many of them force you to think harder about your own values and beliefs and why you hold those positions so dearly?”

This week on The BoF Podcast, Mohyeldin shares the power of journalism to share stories and why information and humanity are at the heart of this process.

Key Insights:

• Mohyeldin believes that journalism plays a powerful role in how society operates. “Some of our greatest societal achievements happen when we are all informed, when we are aware, when we are free to talk about our challenges,” says Mohyeldin. “Journalism plays a vital role in holding officials accountable.”
• However, journalists are also people, which means that there will undoubtedly be unconscious biases that seep into coverage, says Mohyeldin. “[Journalism] will always have problems. It will always have human error baked into the equation.”
• How the media present information about crises around the world can play a large part in how communities’ perceive the need for aid or become desensitised to a region’s plight. “How the media chooses to humanise and personalise the stories of those suffering plays a very important role in how we as a people, as governments, as societies, respond to these crises when they do emerge,” says Mohyeldin.
• While technology and social media has increased the amount of information available and the speed at which people can consumer it, Mohyeldin warns of the responsibility we have as consumers to distinguish what’s true and what’s not. “I want to implore you to give yourself time before you hit, retweet or share,” says Mohyeldin.

Additional Resources:

• BoF VOICES 2022: Finding Optimism in an Unsteady World: From the Ukraine War to the climate crisis to the legacy of the pandemic, speakers including CNN’s Clarissa Ward, Mercy Corps’ Tjada D’Oyen McKenna, Goldman Sachs’ Tim Ingrassia and Google X’s former chief business officer Mo Gawdat discussed the uncertainty gripping the world — and why there’s cause for hope.

Subscribe to the BoF Podcast here.

Background:

When it comes to sustainability, the fashion industry has long relied on self-regulation rather than external enforcement. But oftentimes, these self-defined targets create a “convenient fantasy,” Blackrock’s former chief investment officer of sustainable investing Tariq Fancy said in a talk at BoF VOICES 2022. This gives the appearance of positive movement, but not necessarily real progress. Indeed, activists like Fancy, as well as consumers and investors are calling for government regulators to intervene.

“Many companies are playing dirty,” he said. “It’s time we called in the refs.”

This week on The BoF Podcast, BoF’s chief sustainability correspondent Sarah Kent speaks with Fancy; Maxine Bédat, director of the New Standard Institute; Baroness Margaret Omolola Young, activist and a member of Britain’s House of Lords and Ken Pucker, former chief operating officer of Timberland to explore the role that regulation can play in creating a more sustainable fashion industry.

Key Insights:

• Fancy believes we are past the point that self-regulation is acceptable. Companies should no longer hold responsibility over their own regulation as the resulting action, if any, is not enough. “It has to be mandatory,” Fancy said. “Then we actually have a chance of turning the tide this decade.”
• To move past greenwashing, “governments need to take bold action, and we need to tell them to be bold at the ballot box and at every opportunity,” says Baroness Young.
• “Green bonds” and ESGs need to be left behind. Fancy has identified ESGs specifically as a point of disillusion, saying that it essentially is a way for the fashion system to “paint itself green.” “This ESG stuff can actually be harmful if people don’t know its BS,” Fancy says. “[It’s] a convenient fantasy … where the world corrects itself and no sacrifice is required.
• The US has paved the way with the proposal of the New York Fashion Act. The legislation proposed in New York would see “basic guard rails,” says Bédat, setting minimum environmental standards for all companies, with revenue over $100 million, trading in the state.

Additional Resources:

• Measuring Fashion’s Sustainability Gap - Sustainability Index: Brands are talking about sustainability more than ever before, but does their rhetoric stand up to scrutiny? BoF’s new report, The BoF Sustainability Index, benchmarks 15 of the industry’s biggest companies against ambitious environmental and social goals and finds fashion is falling short.
• BoF VOICES 2022: Fashion’s Fresh Challenges and New Directions: From cracking down on greenwashing to planning for a challenging 2023, big thinkers from fashion and beyond shared their insights on the future of the fashion system in the second session of BoF VOICES.

E-commerce grew at an unprecedented rate during the pandemic, but the days of heady growth now appear short-lived. After online purchases surged 30 percent year on year in 2020 in the US and Europe, a new reality is settling in. Between 2022 and 2025, e-commerce is expected to grow at a compound annual rate of 10 percent in the US and 11 percent in Europe — much closer to pre-pandemic levels seen between 2016 and 2019, where e-commerce grew 14 percent in the US and 15 percent in Europe. In China, online retail sales have grown less than 10 percent since the end of 2021, after having risen more than 16 percent year on year in 2019.

Regardless of the extent to which fashion brands have built their businesses around selling direct to consumers online, the deceleration of e-commerce growth requires a careful recalibration of channel strategies. Pure-play DTC brands themselves may offer lessons for others about how to manage the change ahead.

DTC Darlings

When a new generation of DTC labels arrived online over the last decade, the fashion industry was ripe for innovation. These DTC start-ups, backed by millions of dollars of venture capital, captivated consumers with an alluring premise. By avoiding third-party retailers, they posited that they could break free of traditional merchandising constraints to offer more innovative products, wider assortments and higher levels of customer service than other brands. To get the word out about their products and services, they benefited from earlier waves of low-cost, highly accurate targeting in digital marketing.

“DTC” soon became the buzzy acronym in the industry, as digital-first brands across categories scaled fast. Canadian jeweller Mejuri, Brazilian brand Farm Rio, French contemporary label Sézane and Chinese beauty brand Perfect Diary are among the companies that soared in popularity with consumers.

The DTC model was further validated when the pandemic hit and most physical retailers were forced to shut, either temporarily or permanently. Department stores that were already under financial pressure, like Debenhams in the UK, filed for bankruptcy.

Meanwhile, established global brands, such as Prada and a number of sportswear players, had been shifting their focus towards DTC channels, in a strategic move to gain first-party customer data amid increased e-commerce adoption and ongoing challenges to wholesale channels.

But in 2022, cracks appeared in the digital pure-play model. As DTC brands began going public, their stock prices began to suffer. The share prices of 10 apparel DTC brands fell by around 70 percent in the first three quarters of 2022, compared with the MSCI World Consumer Discretionary Goods Index’s decline of 32 percent over the same period.

For many digitally focused brands, profitability has proved elusive. A structural challenge that many of these brands face is their narrow assortments: Brands like Warby Parker and Allbirds have been looking for ways to expand their offerings in a bid to generate repeat purchases for limited assortments.

Another major, and growing, challenge is the rising costs of digital marketing as social media platforms become more crowded and competitive and new privacy regulations restrict customer targeting across digital channels.

E-commerce brands are also contending with high, margin-eroding return rates. Retailers are paying between $21 and $46 per returned product on average when taking shipping, processing and other costs into account. In the US, return rates across all sales channels increased to 16.6 percent in 2021 from 10.6 percent the year before, with the average return rate for online orders even higher at 20.8 percent. US multi-brand online retailer Revolve reported a 54 percent return rate in the first quarter of 2022, while Boohoo’s UK return rate hit 33.7 percent in April, up nearly 10 percentage points from the prior year.

The Evolving Role of Physical Retail

Though brick-and-mortar chains were pushed to reduce their footprints or shutter completely as much of the fashion’s industry investment went online in recent years, the contraction in physical retail looks to be stabilising. In 2022, US store openings outpaced closures for the first time in at least three years. Though retail foot traffic remains between 10 percent to 20 percent lower than in 2019, the productivity of stores has risen: in the US, sales per square foot increased 13 percent year on year in 2021.

A range of digital-first brands have invested in opening their own physical stores, finding it difficult to generate a profit through online DTC channels alone. Everlane opened its first permanent physical store in 2017 and now operates 10 stores across the US, despite its founder famously claiming in 2012 he would “shut the company down” before opening a physical store. Allbirds operates 54 stores globally as of September 2022, while Warby Parker has announced plans to expand its footprint to 900 stores.

Brands exploring brick-and-mortar may find that rents are more favourable in many key urban markets than they were before the pandemic. Leases in shopping centres and high streets in the UK have declined between 20 percent and 30 percent compared to 2019 levels. In the US, store vacancy rates in 2022 exceeded 2019 levels. Landlords have become more favourable retail partners by offering special terms such as rent escalation, in which the brand pays a low rate at the start of its lease followed by increases over time in accordance with performance, thereby sharing the risk of opening a new store with the landlord. Menswear brand Drake’s has benefitted from such terms at its New York location, so that if the brand performs well, it pays more to the landlord in rent.

At the same time, the role of brick-and-mortar is evolving. To generate higher revenue, stores should be digitally enabled and fit seamlessly into the overall physical-digital multichannel strategy. Strategies like integrating mobile apps to optimise in-store experiences for customers can drive greater sales in each store, while Radio-Frequency Identification (RFID) product tags allow brands to track and maintain appropriate inventory levels. With one store already in Los Angeles, Amazon Fashion opened its second physical store in Colombus, Ohio, in October 2022 with a range of technologies, including enabling customers to scan QR codes with the company’s shopping app and add products to a fitting room.

Stores also provide marketing value, enabling brands to bring their aesthetics to life, like Balenciaga’s fake fur-lined pop-up for the launch of its Le Cagole bag in central London, or Uniqlo’s flagship store — also in the UK capital — that showcases the restored art-deco design of a 1920s barber shop that previously occupied the space. Others offer spaces exclusively to top-tier customers, such as Chanel’s plan to open boutiques that will only be available to top-spending clients, starting in key cities in Asia.

“The retail store is the last point where you actually can solidify the connection that you have already built through wholesale and through DTC [online],” said Andrea Baldo, chief executive of Ganni, which has expanded from digital channels and wholesale partnerships to mono-brand stores.

The Benefits of Partners

Much in the same way that brands (and their landlords) are rethinking physical stores, department stores are shifting their approach to partnerships with the brands. This can create opportunities for brands even if department stores are continuing to face their own challenges around inventory and foot traffic, and have historically required that the brands they carry agree to less advantageous terms around delivery schedules and discounting.

“Before, the retailers were dictating terms; now, it’s a collaboration, a partnership between brands and retailers,” said Domi Szabó, group wholesale director at European fashion holding company Vanguards.

Carefully selected partnerships with high-quality wholesalers and multi-brand retailers can generate value for brands. DTC unicorn Glossier, for example, announced its first wholesale deal for its makeup and skin care with Sephora in 2022, significantly expanding the brand’s distribution. In 2022, analysts credited sportswear brand Puma’s 20 percent sales increase in the first quarter of 2022 to a newly expanded wholesale strategy.

Increasingly, department stores and boutiques are willing partners on special retail installations, which can benefit both retailer and brand. Such tie-ups can help multi-brand stores attract new customers and allow brands to understand where and how to open their own physical stores. French designer label Jacquemus, for example, opened high-concept, surrealist pop-ups at UK department store Selfridges in spring 2022 before experimenting with its own temporary sites in other cities in the months that followed.

Multichannel Playbook

Even as e-commerce is losing its pandemic-era allure, brands are exploring ways to reach new customers online outside of social media and their own websites. In China, where platforms like Tmall, Taobao and JD.com are well established, third-party marketplaces account for as much as 80 percent of luxury e-commerce spending. Beyond China, many brands are considering new or expanded partnerships with marketplaces like Zalando and Farfetch, which offer access to large customer groups and can allow brands to control their own shipping and logistics. In the US, brick-and-mortar retailers such as Macy’s and Walmart have launched their own marketplaces to compete online.

At this juncture, only a handful of companies with the highest levels of brand loyalty — such as Chanel or Nike — or sheer scale— like Zara, H&M and Uniqlo — have shown that they can drive growth through a DTC-first model.

With this, the playbook for physical stores and wholesale has evolved. Today’s customers expect brands and retailers to interweave digital conveniences with physical services, like the ability to pick up or return online orders in stores. As such, a physical presence is increasingly critical for scaling, and innovative store formats are essential.

To be sure, direct digital channels will remain a fundamental part of a multichannel mix in the years to come — especially for brands’ repeat customers. But direct sales can be complemented by a diverse channel strategy that attracts new customers and provides a strong foundation for growth.

This article first appeared in The State of Fashion 2023, an in-depth report on the global fashion industry, co-published by BoF and McKinsey & Company.

Subscribe to the BoF Podcast here.

Background:

Since the war broke out in Ukraine, creativity has proved to be a source of resilience for Ukrainians.

This week on The BoF Podcast, Julie Pelipas, the former fashion director of Vogue Ukraine and founder of Bettter Upcycling System and Olya Kuryshchuk, founder and editor-in-chief of editorial platform 1 Granary share poweful stories of culture, community and human kindness amid the destruction.

“We live a double life at the moment,” Kuryshchuk said at BoF VOICES 2022. “We’re here in this beautiful place today… but at the same time, literally right now, most of my brothers, our families, our childhood friends, they don’t have electricity, water, heating, internet, phone connection.”

Key Insights:

• “[I’ve] never been more grateful and more excited to work in fashion than since the war started,” says Kuryshschuk. “When so much is taken away from you, you really start cherishing what you have.”
• Understanding and learning from past mistakes has been critical to helping Ukrainians unite against Russia as they look to build an independent future. “I really believe that we cannot really speak about the future if we are blind to our present,” says Pelipas.
• Creatives are informing the international community of the plight of the Ukrainian people by utilising human stories of hope. “Power is communication,” says Kuryshschuk. “We need to find how we communicate to make sure that the message reaches people.”

Additional Resources:

• BoF VOICES 2022: Live Your Best Life: In the final session of BoF’s annual gathering, speakers from model Dennis Okwera and Coty chief Sue Y. Nabi to Nike’s Larry Miller and activist Malala Yousafzai reflected on their personal histories and inner powers.

Watch all of the BoF VOICES 2022 livestream sessions in full on demand.

In the key China market, Xi Jinping secured a precedent-breaking third term at the top of the Chinese Communist Party but was forced to roll back strict “zero-Covid” measures after public frustration erupted into widespread protests, opening a road to recovery for the country’s luxury and retail sectors.

The Russia-Ukraine war took a terrible human toll. It hit the world economy hard, as well, resulting in weaker global growth, higher inflation and damage to supply chains. That meant pain for businesses far beyond the Russian market, which most fashion brands quit early in the year.

Elsewhere, India’s mega-conglomerates invested in more than a dozen local designer brands; Chanel touched down in Senegal, a promising African fashion hub; Vietnam’s fast-growing luxury market attracted new investments from the likes of Gucci and Tiffany; and Qatar attracted attention for its controversial World Cup as well as its fashion ambitions amid strong demand for luxury goods in the region.

Top Stories

What China’s 20th National Congress Means for Fashion: Xi Jinping has secured a precedent-breaking third term as president and elevated party loyalists to key positions, indicating the country’s government will stick to its zero-Covid policies and prioritise security concerns over economic growth.

Inside China’s Burgeoning Streetwear Scene: The country’s streetwear market is heating up, attracting both global consumers and major brand collaborations.

Are Hermès’ Sales Tactics a Problem in China?: Chinese luxury consumers say they feel rising pressure to buy less-popular items to gain access to sought-after Birkin and Kelly bags. The practice is reportedly on the rise at brands like Celine and Rolex, too.

Why Senegal Is on Global Fashion’s Radar: Dakar’s reputation as a regional fashion hub has persuaded brands like Tommy Hilfiger and Hugo Boss to expand to the capital of the West African nation as it upgrades its retail infrastructure.

Why Billionaire Industrialists Are Snapping Up India’s Fashion Brands: Mega-conglomerates Reliance Industries Limited and Aditya Birla Group have invested in more than a dozen Indian designer brands. There is more to the deals than meets the eye.

Vietnam’s Luxury Market Is Heating Up: Gucci and Tiffany are among the brands investing in the Southeast Asian market.

Vivy Yusof: The Modest Fashion Mogul with Billion-Dollar Ambitions: The Malaysian entrepreneur has many of the traits needed to go big and go global but faces challenges in a modest fashion market that is as complex as it is diverse across the Muslim world.

The BoF Podcast | Ukraine: How Creativity is Breaking Through the Darkness: Julie Pelipas and Olya Kuryshchuk discuss the impact of the war in Ukraine and how creativity has endured and been a source of strength amid the destruction.

Subscribe to the BoF Podcast here.

Background

The first three sessions at BoF VOICES 2022 tackled issues inside the fashion industry and far beyond. Speakers explored the climate crisis and accusations of corporate greenwashing; the potential of artificial intelligence and the associated ethical implications; the war in Ukraine and growing economic uncertainty and inequality across the globe and Gen-Z’s rising anger over these issues and how to start to fix them.

“At this event, fashion is often quite marginal,” said BoF editor-at-large Tim Blanks during the live recording of “The Best of VOICES With Tim Blanks.” “It’s in our minds, but what we’re talking about are the world’s big, definitive issues.”

Blanks was joined by VOICES speaker Ziad Ahmed, chief executive of JUV Consulting and Stephanie Simon, the former head of community at Clubhouse, to reflect on the highlights from the first two days of talks and panel discussions.

Key Insights

• The climate crisis is the cloud that hangs over everything, from technology to the economy. But rather than waiting on private companies to create change, “it seems much more straightforward to mandate the targets that we’re going to need in order to ensure progress from a climate change perspective,” said Simon.
• The potential of artificial intelligence is limitless, but humans can help control how the world of AI unfolds. “We teach AI by example,” said Blanks. “By being ethical, kind human beings, AI learns to be ethical and kind.”
• While the younger generation is interested in new technologies, there’s also a trepidation about the companies and people creating these innovations and a desire to upend past practices. “There’s often an assumption that Gen-Z is leading the charge towards innovation,” said Ahmed. “Broadly speaking, that’s not really the case. A lot of young people are really sceptical and critical about our own relationships to technology.”
• To see change, today’s stakeholders need to bring the next generation into the decision-making process — and begin to relinquish control. “The solutions to the problems that we are facing exist,” said Ahmed. “The question is if the people who currently have the reins will give them up.”

Additional Resources

• BoF VOICES 2022: Finding Optimism in an Unsteady World: From the Ukraine War to the climate crisis to the legacy of the pandemic, speakers including CNN’s Clarissa Ward, Mercy Corps’ Tjada D’Oyen McKenna, Goldman Sachs’ Tim Ingrassia and Google X’s former chief business officer Mo Gawdat discussed the uncertainty gripping the world — and why there’s cause for hope.

If any questions remained as to how interconnected the global economy has become, 2022 provided clear answers. By the end of the year, few economies were spared from the effects of escalations in everything from inflation to global supply chain meltdowns to heightened geopolitical tensions, all amid a worsening climate crisis that has contributed to unprecedented environmental events, from droughts to floods to heat waves. None of this looks likely to disappear entirely in 2023.

The impact on the global economy is already evident: the strong GDP growth of 6.1 percent recorded in 2021 will likely slip below 3 percent in 2022 and to approximately 2.5 percent in 2023. The uncertainty around these outcomes remains very high, reflecting the ongoing volatility of the global economy.

In the year ahead, business planning across the fashion industry must reflect this new state of fragility. In this environment, scenario and contingency planning becomes even more critical as companies must understand whether the range of potential outcomes will require tactical changes in their operating plans in the next one to two years to mitigate risks and seize hidden opportunities. Business leaders must ask whether this potential range of outcomes changes their view on the fashion industry market segments within which they operate and what their medium- and long-term strategies should be.

Shocks Spill Over into 2023

Several events in 2022 will continue to shape 2023. Russia’s invasion of Ukraine has first and foremost created a humanitarian crisis. It has also severely disrupted global commodity markets, catapulting Europe into a severe energy squeeze and causing many developed and developing economies to struggle with significantly high prices for basic food imports. In Germany, the euro zone’s largest economy, the annual increase of food prices reached close to 15 percent in July and energy costs are expected to triple from 2023, shrinking consumers’ budgets for discretionary goods like fashion.

By contrast, the financial boost from gas and oil exports is evident in countries such as Saudi Arabia, where the economy is expected to grow at its fastest pace in a decade in 2022 with GDP expanding by 7.6 percent, creating opportunities for the fashion industry.

While Covid-19 has mostly faded from news headlines in some countries, it continues to cause a significant health and economic impact in others. Nevertheless, during 2022 most governments rolled back Covid-19 public health restrictions as well as pandemic-related household and business aid packages, from tax and other relief for US households to cash handouts in Japan to loan guarantees in South Africa. China is a notable exception; new Covid-19 variants and outbreaks are being met with strict lockdown periods that continue to raise concerns about the country’s growth trajectory in the short term.

In the US and Europe, the effects of inflation are already apparent in fashion. Prices for apparel for sale online across the US, UK, France, Italy and Spain increased 22 percent between July and October 2022 compared to between March and June 2022. Price hikes are expected to continue into 2023 as brands pass on increased costs to customers. Inflation could impact fashion companies in other ways, including higher costs of borrowing, potentially causing planned investments or growth strategies to be delayed or scaled back.

To help curb inflation, the US Federal Reserve, the European Central Bank and other central banks have been aggressively raising interest rates — after negative or ultra-low levels for several years in many countries — bringing what Jerome Powell, head of the US Federal Reserve, described as further “pain to households and businesses” as part of the “unfortunate costs of reducing inflation.”

Here too, China is an exception; a slowing property market in the country prompted the People’s Bank of China to lower key interest rates in August 2022 after total credit extended to the economy hit record lows in the previous month.

In the US, many economy watchers believe that a recession is increasingly likely in 2023, while the Bank of England warned in September 2022 that Britain’s economy may already be in recession, following forecasts of GDP contraction over two consecutive quarters. In other parts of the world, a different pattern is emerging: According to the World Bank, growth in major East Asian and Pacific economies is projected to be higher and inflation lower than in the rest of the world, due in part to sustained global demand for exports of manufactured goods.

These and other global shifts are impacting currency markets. During the summer months in Europe, the euro fell below parity with the US dollar, its lowest level in 20 years, while in September the British pound hit a record low against the US currency. Meanwhile, the Japanese yen hit its 24-year low against the dollar. Currency headwinds are weighing on global businesses. With the US dollar widely considered to be a premier currency for international trade, many companies around the world are having to adjust their performance outlooks.

To be sure, currency fluctuations are also creating opportunities for international companies operating in the US, or countries with currencies pegged to the dollar, by artificially increasing their revenue when converting back to their home currency.

Consumer Caution

Consumers are facing higher prices on multiple fronts, from groceries to petrol, straining household budgets and impacting consumer confidence. In a summer 2022 McKinsey survey, US consumers reported they were twice as pessimistic about the economy than during the prior two years. In Europe, consumers cited rising prices, the war in Ukraine and extreme weather events as the top reasons weighing down their sentiment, according to another McKinsey survey from the summer, with respondents predicting they would make the biggest cuts in spending on apparel, footwear, and accessories and jewellery. In China, continued Covid outbreaks have dampened consumer spending, as illustrated by the Golden Week holiday in October 2022, when consumer spending was down 26 percent year on year, the lowest level since 2014 and less than half of 2019′s spending.

Many shoppers are becoming more cautious about their discretionary purchases, indicating that the surge in spending on apparel and other segments following the height of the pandemic is reaching an end, if it has not already ended. According to the BoF-McKinsey State of Fashion 2023 Survey, 45 percent of fashion executives expect to update their assortment mix to adapt to lower consumer purchasing power, while 72 percent plan to increase retail prices to help their companies manage the inflationary environment.

Consumer behaviour could turn suddenly, again, from cautious to confident if economic signals brighten. However, brands should remain flexible to respond to a potential, and sudden, release of pent-up shopping demand and uneven patterns emerging across different markets. Brands should also anticipate the fragility of these changes. While high-income households will be most likely to continue shopping in 2023, given their relatively healthier financial foundations, even they may prioritise saving over spending out of caution.

Plan and Pivot

The fashion industry weathered unprecedented challenges in recent years, and 2023 will test its resilience yet again, albeit with some categories entering the year in a stronger position than others. According to McKinsey analysis of publicly listed companies, the luxury segment’s top-line grew 27 percent in the first half of 2022, compared to the same period in 2021, while luxury groups like LVMH and Kering reported double-digit growth for the first nine months of 2022 and have increased their revenue projections. If the impact of inflation follows that of prior slowdowns and predominantly effects lower- and middle-income consumers, industry analysts expect the luxury category to be more resilient than the rest of the fashion market.

Even so, companies’ scenario planning during the year ahead must sufficiently capture the increased levels of uncertainty, with contingency programmes under varying scenarios clearly mapped out. Fashion leaders will need to prepare for a number of economic and political outcomes. Some of fashion’s more challenging scenarios may play out in the developing world, where local conflicts in manufacturing hubs can escalate and impact industry practices. For example, the 2021 coup in Myanmar is among the factors that have left the country highly vulnerable to conflict or collapse, according to annual research from think-tank Fund for Peace.

At the same time, trade wars and sanctions can limit access to raw materials and energy sources while obstructing supply chains. Severe floods in Pakistan and Brazil as well as extreme temperatures in India in 2022 show how climate disruptions can hinder both raw material production and manufacturing operations that are critical to the fashion industry. Similarly, new Covid-19 restrictions imposed in China that impacted factories and ports in 2022 demonstrated the industry’s reliance on the country as a manufacturing hub.

When considering scenarios for key markets, brands should hone their flexibility, agility and speed to balance the realities of short-term crises with long-term strategic priorities. Key projects, like investments in digitisation advancement and the reduction of environmental impact, should not be abandoned.

The ultimate aim for fashion leaders will be to build resiliency, which will require a renewed focus on profitability. Before the pandemic, the industry experienced a period of high growth, during which many brands focused on their top lines and building market share. Funding was cheap and accessible, boosted by inexpensive debt and eager investors. In the year ahead, investors are expected to be more cautious, showing a high, if not singular, preference for businesses with robust margins. Brands with weaker margins or market positions, such as mid-market brands, will be particularly vulnerable. A focus on the bottom line in this inflationary climate will require difficult trade-offs between, for example, capping salaries or investing in pay rises to retain key employees in a competitive job market.

Growing profitability will entail multiple actions, including learning how to better manage unpredictable consumer patterns while staying ahead of supply and demand pressures. Companies that had wanted to avoid supply chain disruptions ahead of the downturn by placing advanced orders are now facing record inventory levels and will likely need to discount substantially to clear stock. Creating greater flexibility across inventory management systems will help minimise such challenges. For example, technology can help with re-routing supply to low-congestion ports and shipping lanes to reduce the time goods are in transit or by optimising the assortment mix between season-agnostic and seasonal products. Fashion leaders must also monitor capital efficiency with granularity to be able to re-allocate resources as needed.

Having a resilience mindset will be non-negotiable in 2023. For fashion executives, this will require putting contingency planning centre stage and embedding clear accountability for business performance throughout every part of their organisations. By taking an all-hands-on-deck approach, leaders can strengthen their companies’ positions to flourish even amid global volatility and economic uncertainty.

This article first appeared in The State of Fashion 2023, an in-depth report on the global fashion industry, co-published by BoF and McKinsey & Company.

Subscribe to the BoF Podcast here.

Background

The first three sessions at BoF VOICES 2022 tackled issues inside the fashion industry and far beyond. Speakers explored the climate crisis and accusations of corporate greenwashing; the potential of artificial intelligence and the associated ethical implications; the war in Ukraine and growing economic uncertainty and inequality across the globe and Gen-Z’s rising anger over these issues and how to start to fix them.

“At this event, fashion is often quite marginal,” said BoF editor-at-large Tim Blanks during the live recording of “The Best of VOICES With Tim Blanks.” “It’s in our minds, but what we’re talking about are the world’s big, definitive issues.”

Blanks was joined by VOICES speaker Ziad Ahmed, chief executive of JUV Consulting and Stephanie Simon, the former head of community at Clubhouse, to reflect on the highlights from the first two days of talks and panel discussions.

Key Insights

• The climate crisis is the cloud that hangs over everything, from technology to the economy. But rather than waiting on private companies to create change, “it seems much more straightforward to mandate the targets that we’re going to need in order to ensure progress from a climate change perspective,” said Simon.
• The potential of artificial intelligence is limitless, but humans can help control how the world of AI unfolds. “We teach AI by example,” said Blanks. “By being ethical, kind human beings, AI learns to be ethical and kind.”
• While the younger generation is interested in new technologies, there’s also a trepidation about the companies and people creating these innovations and a desire to upend past practices. “There’s often an assumption that Gen-Z is leading the charge towards innovation,” said Ahmed. “Broadly speaking, that’s not really the case. A lot of young people are really sceptical and critical about our own relationships to technology.”
• To see change, today’s stakeholders need to bring the next generation into the decision-making process — and begin to relinquish control. “The solutions to the problems that we are facing exist,” said Ahmed. “The question is if the people who currently have the reins will give them up.”

Additional Resources

• BoF VOICES 2022: Finding Optimism in an Unsteady World: From the Ukraine War to the climate crisis to the legacy of the pandemic, speakers including CNN’s Clarissa Ward, Mercy Corps’ Tjada D’Oyen McKenna, Goldman Sachs’ Tim Ingrassia and Google X’s former chief business officer Mo Gawdat discussed the uncertainty gripping the world — and why there’s cause for hope.

OXFORDSHIRE, United Kingdom — In a world that feels increasingly fractured, many of the discussions at BoF VOICES this year have focused on the issues that divide us. But in the fourth session of the gathering, speakers from Japan to Ukraine discussed the ways in which culture and creativity can transform entrenched narratives and drive positive change.

Culture, Creativity and Changing the Narrative

Irene Kim grew up in a Korean household in an American city, living in a very different cultural context than her peers. Now she’s part of the powerful “Hallyu” or Korean Wave that’s influencing art, music, drama and food across the world. “To see my way of life and how I grew up become a global phenomenon is kind of crazy,” the influencer and founder of the brand IRENEISGOOD said in a conversation with Chanel’s head of culture and arts Yana Peel and Victoria & Albert Museum curator Rosalie Kim.

But the rapid rise of Korea’s soft power in recent decades, contrasts with the experience of countries like Ghana. In 1957, the two nations had about the same GDP, but whereas South Korea became the tenth largest economy in the world, Ghana now ranks seventy-fifth. While there are many factors that play into the divergence, the power of global media narratives, positive and negative, to define a nation is part of the equation, argued photographer Campbell Addy and writer and creative producer Ekow Barnes. “We always talk about inclusion but Africa is left out,” said Barnes. “Whenever the West tells our story, it’s always a bit one-sided.”

Fast Retailing senior executive officer Koji Yanai, son of Uniqlo founder Tadashi Yanai, has spent the last few years focused on a humble project: reimagining public toilets in Tokyo. The idea was born in the run up to the Paralympic Games, initially scheduled to take place in the Japanese city in 2020, and the desire to create an intervention that would benefit not just a single group, but everyone. The result is a series of radically redesigned toilets that look more like art installations than public facilities, conceived by a host of leading creatives.

“I realised that sometimes we’re too busy to eat anything or too busy to sleep all night. But there is no single day when I didn’t go to the toilet,” Yanai said. “I believe that even a public toilet can change the world.”

No Culture Without Politics

Asma Khan and Judy Joo have plenty of experience navigating the links between soft power and hard topics. The two restaurateurs are not just chefs but political change makers, building female-owned businesses in a male dominated business and using the power of food to educate their audiences about their respective Korean and Indian heritages and their related politics. “You cannot take my food and separate culture from it,” said Khan. “You want to eat my biryani… I’m going to speak to you about racism and injustice.”

The power of culture to bring hope and humanity is especially important in times of hardship and war, former fashion director of Vogue Ukraine and founder of Better Upcycling System Julie Pelipas and 1 Granary founder and editor in chief Olya Kuryshchuk said in a conversation about their experiences since Russia invaded Ukraine in February.

“We live a double life at the moment,” Kuryshchuk said. “We’re here in this beautiful place today… but at the same time, literally right now, most of my brothers, our families, our childhood friends, they don’t have electricity, water, heating, internet, phone connection.”

The Ukraine War has changed the lives of both women, but they also shared stories of great resilience, from a group of ravers who throw parties and rebuild in the rubble of bombed out houses to the important role individuals outside the country continue to play in raising awareness and keeping focus on the situation heading into a dark and difficult winter.

“We are the creative people; we need to find how to communicate so the message reaches people,” Kuryshchuk said. “We really need to survive this winter.”

BoF VOICES 2022 is made possible in part through our partners McKinsey & Company, Shopify, Flannels, Brandlive, Lenzing, ShopRunner, Snap, Canada Goose, Invisible Collection, Soho House, and Getty Images.

8th December at 15:00 GMT / 10:00 EST

Featuring Achim Berg, senior partner of McKinsey & Company in conversation with BoF’s founder and editor-in-chief Imran Amed.

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Technology has unleashed problems from a misinformation epidemic to the information overload that strains our mental and physical wellbeing. But it also holds incredible power to reshape the world for the better. In the third session of BoF VOICES, speakers examined the ways technology can allow us to overcome challenges that range from the personal to global.

Enabling Our Best Selves

In 1962, Dame Stephanie Shirley founded a pioneering technology company called Freelance Programmers. It was for women and by women — a response to the rampant sexism Shirley had encountered working as a young woman at London’s Post Office Research Station, where some of the earliest computers were developed. The company’s achievements included writing the software for the Concorde’s blackbox flight recorder, a feat she pointed out was accomplished by a team of 30 women mostly working from their kitchen tables. When she stepped back in 2000, the company had become a $3 billion empire that made Shirley and several of her colleagues rich.

“You can always tell ambitious women from the shape of our heads,” she told the audience at VOICES. “They’re flat on top, and that comes from being patted patronisingly.”

Harley Finkelstein, president of e-commerce platform Shopify, highlighted technology’s ability to enable entrepreneurs, noting that it’s easier than ever for people to launch businesses and turn what in the past might have remained no more than a hobby or passion project into a livelihood.

“We’ve never seen business scale like this ever before, and the technology makes it possible, but the entrepreneur is driving it,” he said.

Rethinking the User Interface

Technology wasn’t praised indiscriminately, however. Speakers warned of the dangers of misinformation and the control tech giants hold on our lives.

Imran Chaudhri, a former Apple designer credited with creating the original iPhone interface, said our devices are forcing us to contort our lives and our physical bodies around them, when it should be the other way around. The solution, in his view, won’t be the headsets or glasses in development by companies like Meta and Apple. They just bring the screen that much closer to the face and block our eyes, an important site of connection.

“We believe that the best user interaface is no user interface,” Chaudhri said.

For four years, Humane, the company Chaudhri co-founded with his wife, has been working on a new type of device that will rely on ambient computing and AI to offer a screenless future where people can focus on the world in front of them. Chaudhri offered examples like spotting sneakers or a dress on someone walking by and being able to immediately get details on what brand they are and where to buy them, or being at a wedding and being able to capture the moment — all without the interruption of taking out a phone.

Precise details remain scarce, but at VOICES Wednesday, Chaudhri revealed that Humane will announce its first products in the spring of 2023.

Working for the Collective Good

At the outset of the pandemic, when Asian-Americans were being scapegoated as Covid’s cause and assaulted in the US, designer Phillip Lim knew he needed to act but wasn’t sure how. After he began to speak out publicly, he received a call from Musa Tariq, a friend who had worked for brands such as Burberry, Nike, Apple and Ford before becoming chief marketing officer of the crowdfunding platform GoFundMe. They ultimately created Stop Asian Hate, which became a digital hub for people to donate, fundraise and share their experiences.

Kindness is contagious, Tariq said, and when people see others contributing they’re more likely to do so themselves. Technology has made it easy, though as Tariq noted, “actually it’s the people that use the technology that make it come to life.”

Several speakers at VOICES offered similar examples of technology providing help to people in need. New Story, an organisation focused on ending homelessness founded by Brett Hagler and Alexandria Lafci, has used 3D printing and a proprietary cement mix to create affordable, well-designed homes. Sneha Sheth’s Dost Education, meanwhile, sends a one-minute podcast daily to low-income parents in India who may have limited education themselves to provide instruction on how they can break the cycle of illiteracy with their children.

Reimagining the Supply Chain

The past few years have seen constant disruptions to the supply chains that power the global economy and revealed their ultimate fragility. That’s because they’re like spiders, said Lisa Morales-Hellebo, founder and co-managing general partner of Refashiond Ventures, in a nod to the book “The Starfish and the Spider.” They’re centralized, so cut the head off and the organism dies. A better system would mimic a starfish: cut off a leg and it will grow back into a full starfish.

Morales-Hellebo’s ideal is a distributed network of clone factories, where if one goes down production could be digitally queued up at the next closest supplier. This sort of arrangement, she added, could also transform the supply chain — where a brand produces, ships and then sells products — into a demand chain, where the brand sells the item first and then produces on demand. The result would be major benefits to profitability and a reduced environmental impact.

Sriram Krishnasamy, the chief executive of FedEx Dataworks, which provides data-centred logistics solutions, offered his own view of the future supply chain. If brands were to join forces, they could create a collaborative data ecosystem that would use AI to optimise their supply chains for the benefit of all.

Whether or not brands ultimately buy into these ideas, Morales-Hellebo had a warning for brands: “Disruption will happen with or without you,” she said.

BoF VOICES 2022 is made possible in part through our partners McKinsey & Company, Shopify, Flannels, Brandlive, Lenzing, ShopRunner, Snap, Canada Goose, Invisible Collection, Soho House, and Getty Images.