👟10. Overview of the Development of the Fashion Market

Overview of the Development of the Fashion Market

10.1 General

The COVID-19 pandemic has changed the world we live in over the past two years. The years 2020 and 2021 will be remembered for their far-reaching impact on social, economic, cultural and psychological life and coexistence and will have a formative character for the future.

These two years have led to global impairments and market disruptions, affecting the fashion and clothing industry as much as other industries. In 2019 to 2020, the fashion and clothing industry recorded a 20 percent decline in sales, while EBITA profit margin decreased by 3.4 percentage points to 6.8 percent. According to the McKinsey Global Fashion Index, a record of 69 percent of companies destroyed value in 2020, compared to 61 percent in 2019 and only 28 percent in 2011. About 7 percent of companies left the market, either due to financial difficulties or due to consolidation through acquisition.[1]

Driven by the drastic impact of the pandemic, 2022 will be a pivotal year for the fashion industry as companies seek to enter in recovery and grow while struggling with new and existing challenges. Nevertheless, the results of the State of Fashion 2022 report by The Business of Fashion (BoF) and McKinsey & Company reveal a generally optimistic outlook.[2]

According to McKinsey, the global fashion industry is setting itself up for a recovery in 2022, with sales that could exceed 2019 levels by 3% to 8%, with the strongest recovery expected in China and the U.S., while Europe lags behind.

Supply chain pressures were identified as the biggest challenge facing the industry and are slowing the pace of recovery, with 67% of all companies expecting price increases in the coming year. Supply chain interruptions are expected to have a negative impact on margins. Companies must consider new sourcing and supply chain management strategies to meet consumer demand, as logistical congestion, rising shipping costs and bottlenecks only further complicate the supply chain system.

Sustainability continues to play a major role for fashion companies and 60% of them are increasing their investment in closed-loop recycling solutions to mitigate their impact on the environment. 32% of industry executives see digitalization as the biggest potential growth driver, followed by sustainability (12%).

Digital environments are becoming more and more advanced, offering increasingly multidimensional virtual worlds to billions of people. This also applies to the fashion industry where they are establishing themselves as one of the most important channels for reaching and attracting the lucrative younger consumer groups.

Social shopping is experiencing an upswing across brands, from 37%. In the study, industry executives named social commerce as one of three topics that will have a particularly strong impact on their business in 2022. In this context the "metaverse" offers new opportunities for expanding audiences and increasing revenue for fashion brands. This is done by being able to monetize their digital products by developing and selling Non-fungible Tokens (NFTs) and allowing gamers to purchase, use and trade virtual fashion items themselves. With the gaming industry on a growth trajectory and potentially worth a total of $219 billion by 2024[3], according to Newzoo, this means the metaverse offers a potential growth area for fashion companies.

Sustainability and, in particular, circular economy and closed-loop recycling within the global fashion system are further important topics on which companies will increasingly focus their attention in 2022. According to Textile Exchange's Preferred Fiber & Materials Market Report 2021, less than 10% recyclable materials are used in the fashion world to date.[4] Industry-wide investment is needed to expand closed-loop recycling technologies and processes so that they can help companies improve their environmental footprint. The maturity of technological solutions appears to be the most important factor in enabling the required expansion of closed-loop recycling solutions. While 60% of executives surveyed said they have invested in closed-loop recycling or at least plan to do so in the coming year, according to McKinsey, significant progress still needs to be made there if this is to become the mass standard. Furthermore, companies' own attitudes towards sustainability are becoming an increasingly important aspect of attracting and retaining talented employees. Employees today demand that their employers have values similar to their own and that meaningful work is a particularly important factor when deciding on an employer.

The State of Fashion 2022 report by The Business of Fashion (BoF) and McKinsey & Company identified the following ten themes across three categories that will be critical for the fashion industry in 2022.[5]

Category: Global Economy

Theme 01 - Uneven Recovery: Recovery from the pandemic will vary widely by region: Regions with stable healthcare and economic resilience will fare better than others. Fashion companies with an international presence will need to regularly assess local conditions and circumstances to mitigate risks.

About 4 out of 5 vaccine doses worldwide have been administered in high- to upper-middle-income countries as of September 2021.

Theme 02 - Logistics Gridlock: Pressure on global supply chains, rising costs and logistical bottlenecks are threatening the industry's ability to deliver products to its customers. Companies therefore need to rethink their sourcing strategies and introduce new supply chain management processes to meet demand in the coming year.

From the viewpoint of 49% of fashion industry executives, supply chain disruptions will have a particularly serious impact on their business in 2022.

Category: Consumer Shifts

Theme 03 - Domestic Luxuries: A full recovery of international tourism is not expected before 2023. To offset losses from international buyers, luxury brands should focus more on domestic consumers.

Air travel between Asia and Europe is likely to be 51% of 2019 levels in 2022.

Theme 04 - Wardrobe Reboot: Loungewear and sportswear boomed during the pandemic. As the world gradually opens up and returns to normal, and societal restrictions fall away, consumers will begin spending more on other categories again.

37% of industry executives expect special occasion clothing to be one of the top three categories for year-over-year sales growth.

Theme 05 - Metaverse Mindset: Fashion brands looking to increase their appeal to the valuable segment of younger consumers should explore the potential of non-fungible tokens (NFTs), gaming and virtual fashion to create new communities and revolutionize commerce.

81% of Generation Z have played video games in the past six months, an average of 7.3 hours per week.

Category: Fashion System

Theme 06 - Social Shopping: Fashion players are using social commerce to create seamless shopping experiences, from information search to purchase completion. Of course, the potential differs by market, but nonetheless, all companies should consider in-app checkout solutions, as well as testing live streaming, augmented reality and related technologies.

37% of fashion executives consider social commerce to be one of the top three issues that will impact their business in 2022.

Theme 07 - Circular Textiles: The increased use of closed-loop recycling solutions in the fashion industry could help to optimize the environmental balance at the material level. These technologies are now well developed and are constantly being refined. Companies should therefore include them in their product development and introduce collection and sorting processes on a large scale.

60% of fashion executives have already invested in closed-loop recycling or plan to do so in the coming year.

Theme 08 - Product Passports: Brands are increasingly using product passports to share information with consumers and their partners to provide greater transparency, improved authentication, and sustainability. To do this, however, they would have to agree on common standards and engage with pilot projects at scale.

About two out of five executives in the fashion industry plan to introduce product passports in 2022 or have already done so.

Theme 09 - Cyber Resilience: Companies are facing unprecedented challenges, including threats from cyber-attacks and misuse of data, to name a few. As a result, they must immediately adopt adequate protection and defence measures and make targeted investments to make digital security a top strategic imperative.

53% of executives believe their company is likely or very likely to be the victim of a critical cyberattack in 2022.

Theme 10 - Talent Crunch: In the post-pandemic environment, both senior management and operations staff will rethink their priorities. If you want to attract and retain the best talent, you need to create a flexible, diverse and fully digitized work environment.

45% of fashion company employees cited "meaningful work" as a key influencer in their decision to stay with their employer.

According to Bof-McKinsey's State of Fashion 2022 survey, digitization and sustainability offer the biggest growth opportunities for the fashion industry, while supply chain pressures will challenge the industry in 2022. The following charts show the top three responses, in % of respondents who mentioned these words:[6]

To Summarize, from virtual reality and digital fashion to the expansion of the circular economy, the latest trends and developments in the textile and apparel industry are promising.

10.2 Relevant Market Segment

Luxury is on the move. While luxury retail was still hit hard in 2020 due to closures and travel restrictions that impacted the wealthiest consumers, it recovered to some extent in 2021.

According to McKinsey, luxury segments already outperformed the overall market in 2020, while the mid-market segment in particular continued to come under pressure. The luxury was the only value segment that, as a whole, managed to maintain margins within its 10-year historic range. The prominent position of luxury brands can be attributed to the economic resilience of the more affluent segments of the population, resulting in sustained demand for bags, luxury jewellery and ready-to-wear.[7]

According to a Bain and Company study conducted in collaboration with Altagamma - the Italian Foundation for Luxury Goods Retailing - in 2021, Bain forecasts that the personal luxury goods market will continue to grow at a compound annual growth rate (CAGR) of 5 to 9 percent to EUR 360 billion to EUR 380 billion by 2025.[8]

International tourism, and therefore luxury brands, are expected to fully recover between 2023 and 2024. In the meantime, to compensate for the loss of international customers, luxury brands will have to focus on domestic and local consumers and add domestic market share to their existing markets.

Corresponding to the State of Fashion 2022 report by The Business of Fashion (BoF) and McKinsey & Company Luxury fashion sales in the US and China will broadly recover by 2021, while Europe will not recover until beyond 2022. As travel shut down due to Covid-19 restrictions, domestic spend on luxury goods in China exploded as spend previously allocated abroad was repatriated to China. As a result, luxury markets in the US and Europe dropped, while China soared, also driven by duty-free incentives and local brand initiatives.[9]

According to Bain, Gen Y and Gen Z will represent more than 70 percent of the total personal luxury market by 2025. With the pandemic and recovery accelerating structural changes in the luxury market, luxury brands will continue to redefine themselves and become facilitators of social and cultural change. This is particularly visible in the growth of the second-hand luxury market where consumers are embracing luxury brands as "value seals" rather than purely "wealth seals" as in previous times. Trends like sharing & 2nd life business models, co-creation & customization, digital detox & sustainability, health & mindfulness are substantially changing luxury markets right now. Luxury brands, luxury customers, understanding of luxury - everything is in dynamic motion.

While the pandemic initially challenged the luxury fashion industry on various levels, it has also accelerated the development of future strategies to address these challenges and inspired the industry to innovate, with a particular focus on the productive and efficient use of technology within the fashion value chain. In 2022, the use and development of technology in the fashion industry is expected to grow exponentially, with artificial intelligence, virtual and augmented reality, blockchain, and mobile commerce taking a standout position.

10.3 Fashion and Blockchain

The fashion industry is showcasing its innovative spirit once again, using digital technologies and blockchain to break new grounds. In this respect, blockchain technology has become a tool that creates transparency, can reward users, and thus brings new shopping experiences. Fashion is going digital. The fashion industry is increasingly tapping into the virtual world, from digital influencers to the metaverse.

Fashion companies are switching their product development to 3D. This opens up new possibilities. Digital products can be marketed online and tried on via personalized avatars before they have even been produced. Fashion shows and fashion campaigns with digital models such as Lil Miquela, a digital model with over three million followers on Instagram since 2016[10], are becoming more and more popular in the fashion world.

Finally, the virtual world of the metaverse opens up a whole new area for digital fashion. Fashion brands can sell their products not only in the real world, but via non-fungible tokens NFTs in virtual games, because fashion plays an increasingly important role there as well, for example in the design of personal avatars. The trend toward digital fashion and consumer worlds opens up a growth market that needs to be developed. Players on this market will include not only classic fashion companies, which combine the digital and real worlds of fashion with each other according to their individual business concept, but also fashion companies specializing purely in the digital world of fashion.

According to McKinsey, the luxury and streetwear segments are particularly predestined for this new digital fashion world. The metaverse became one of the fashion industry’s hottest buzzwords in 2021, as interest in digital products linked to blockchain-powered nonfungible tokens (NFTs) exploded, and activity on virtual reality interfaces surged as the global fanbase of video games made their presence felt. Luxury brands vied to gain a foothold in these rapidly evolving virtual worlds.[11]

Blockchain technology has the potential to be harnessed and deployed on other levels as well. Among other things, it can serve as a means of combating brand piracy and counterfeiting. A chip replaces conventional QR codes that can be easily copied. The data on the chip cannot be manipulated. This means that the authenticity of the garment can always be proven. Especially for branded and luxury goods, this technology offers security against counterfeiting. The system is also suitable for second-hand business of high-value products, as buyers are guaranteed to purchase an original. The blockchain can help to make the origin, including any certificates and the history of products, transparent and therefore work as “Product Passports”.

For all the marketing hype, there are indications that digital fashion assets can generate significant revenue streams, with monetization opportunities likely dependent on the psychology of shortages and limited editions that are driving NFTs along with the security of authentication and community-building potential they offer. The most likely fashion segments to lead the way are luxury and streetwear.

10.4 Competition

Luxury fashion brands are ready to join the NFT party. Fashion NFTs had a pretty good run in 2021, with big-name brands jumping on the trend. 2022 is being announced as the year of fashion NFTs, driving competition among market-entering players.

Dolce & Gabbana's NFT sale shows that millions are at stake here. With its Collezione Genesi, a hybrid physical/NFT concept, the Italian fashion house generated more than USD 6 million. The nine-piece collection featured five NFTs that were accompanied by custom physical pieces and four strictly digital NFTs. The physical items and the NFTs were then sold together to customers, appealing to the more traditional high-fashion clientele and explaining the high price tag.

Recently acquired by Nike, digital fashion creator and NFT specialist RTFKT could be the next big name in the fashion industry. The company's business concept sets it apart from most of the current players dominating the industry in that very few of its products are physically tangible and the majority of its goods - more than 90 percent - are offered in the form of non-fungible tokens ("NFTs"), whether in the form of virtual sneakers or digital jeans, for example. The company generated more than USD 3 million with its Fewo Sneakers collection. The sneakers can be worn both in real life and in the Decentraland metaverse. Subsequently RTKFT has made developments to their lineup by partnering with the digital fashion house “The Fabricant” to create a new collection of 7 virtual items receiving 8 million USD in their latest round of fundraising. Nike plans to serve and grow RTFKT's creative communities and extend its digital footprint.

The British luxury fashion house Burberry has collaborated with Mythical Games to develop a non-fungible token (NFT) collection that can be used and resold in the digital party game Blankos Block Party.

Gucci's entry into NFT world came with the auction of its four-minute short film Aria as NFT, created and directed by Alessandro Michele, the brand's creative director, along with photographer Floria Sigismondi. The NFT was sold at Christie's for USD 25,000.

Louis the Game, a video game released by fashion house Louis Vuitton that can be downloaded to mobile devices, followed a more traditional path where players could search for thirty hidden collectible NFTs, by ten of which were designed in collaboration with the famous digital artist Beeple. NFTs in this game were open for collection and are not for sale to the public.

Givenchy took a similarly traditional route into the world of NFTs. Together with digital artist Chito, fifteen unique NFT avatars were created and sold on OpenSea, the largest marketplace for NFTs.

With the Balmain X Barbie collection, French luxury fashion label Balmain has partnered with U.S. toy company Mattel to create a collection of three NFT Barbie avatars that feature a unique set of Balmain fashions.

The high-end streetwear label Overpriced as sold for USD 26,000 on the platform “Blockparty” a wearable NFT-powered Hoodie as one-of-one piece with scannable V-codes that allow users to wear, authenticate and show off their unique NFT through a pop-up image link on any smartphone.

Another player within the NFT party is Auroboros. A digital fashion house inspired by biomimicry and pioneering an IRL X URL future that is sustainable and inclusive. Its products are digital couture purchasable as NFTs on Decentraland. Auroboros debuted as first-ver biomimicry digital ready-to-wear collection line at London Fashion Week 2021.

As a direct competitor in the Luxury Streetwear sector, Philipp Plein is positioning itself in the Metaverse Universe. According to NFT Culture, Philipp Plein may not be the first designer to bring clothing to the Metaverse. But, he is the first designer to have a brand new line made exclusively in Decentraland by humanoids. Plein bought a property there in February for over USD one million and named it Plein Plaza. Plein was also the first fashion designer to accept crypto payments last year.[12] Plein is launching his vision of Plein Sport, as a hyperfuturistic sportswear brand, as bringing Plein Sport NFT collection to life digitally, meaning no models and no catwalks but humanoid robots that guide you into Decentraland and give you an exclusive view of Plein Plaza. Following the motto be an art collector not just a sneaker owner, his new clothing line will feature a digitized sneaker collection in the form of NFTs, with each NFT accompanied by a physical sneaker.

The Luxury Brands Selling Luxury NFTs[13]

*Converted from ETH on 10.02.2022

** Digital collectable sneakers brand, acquired by Nike in December 2021

*** Collectable but not for sale

In terms of the fashion industry, the Metaverse is still a young market in the process of development. Nevertheless, the targeted entry of luxury fashion houses shows the importance of this new market and the potential it offers. The market has not yet been divided up, but claims are being staked out. Those who establish themselves now may gain a leading edge, set trends, reshape the fashion scene and may tap into new target groups and sales markets.