Fashion and luxury industry on slow road to recovery
May 15, 2020
A study by management consulting firm McKinsey on European consumer sentiment has outlined the possible scenarios for the fashion industry's return to a normal state of affairs. Nearly 40% of European consumers are expecting a fall in their income in the coming weeks, and fashion might turn out to be one of the sectors that will take the longest to recover.
McKinsey has developed four scenarios, which depend on the interaction of two main elements: the handling of the health situation and the effectiveness of state support for businesses. If both will turn out to be only partly effective, McKinsey is predicting a long, bumpy road to recovery for the fashion and luxury industries. If both elements will instead be well managed, recovery will be faster. If the health situation will be handled ineptly, recovery will be blighted by ups and downs, and if governmental economic policies will be ineffective, recovery will take a linear, but slower path.
Before the Covid-19 crisis, essential purchases accounted for 55% of consumption expenditure. In the crisis’ aftermath, the share of discretionary purchases might drop from 45% to 25%. In addition, global fashion and luxury consumption has been hit by the plunge in tourist expenditure, which has dropped by 80% to 90% depending on the country.
Economists are keeping a close watch on these variables, while consumers are monitoring their own indicator, personal income. Uncertainty is the name of the game: the majority of consumers surveyed in the study are “unsure” about the future, even in France and Spain, the countries where consumer sentiment appears to be the most pessimistic. At the time of the study, in mid-April, almost four European consumers in 10 expected their income stream to decrease in the near future. And 31% of them said they intended to reduce their expenditure, either a little or significantly.
Renegotiating supply terms
Fashion will have to fight hard to grab a share of this dwindling expenditure. Asked about their upcoming purchases in early May, both in-store and online, consumers from the UK, Germany, France, Portugal, Spain and Italy put apparel low on their shopping priorities. Germany appears to be the country least likely to snub fashion purchases, while Spain, Portugal and the UK are expected to do the worst in this respect.
This state of affairs is prompting fashion labels to renegotiate terms with their suppliers. Some 71% of them have already done so, aiming to pay less than half the agreed price for their existing orders. In 41% of cases, term renegotiation related to more than half of the order total. Also, 64% of labels have asked for extended payment terms. There will of course be repercussions: over the coming months, brands expect to see a sharp increase in defaults among their suppliers, affecting in their opinion over 50% of producers in the next six months. The domino effect of the crisis is already a reality, affecting both consumer income and manufacturers.
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