2021’s hottest fashion trend will be widespread industry consolidation

2021 is likely to see distressed fashion companies like Topshop taken over by bigger, stronger rivals.
2021 is likely to see distressed fashion companies like Topshop taken over by bigger, stronger rivals.
Image: Reuters/Simon Dawson
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In 2021, the gap between fashion’s winners and losers is set to widen even further, creating the conditions for a wave of consolidation in the industry, according to a joint report by consultancy McKinsey and trade publication Business of Fashion (BoF).

Companies with healthy balance sheets will be on the lookout for smaller upstarts and floundering rivals they can scoop up. At the same time, shoppers are expected to spend less on clothing, while companies plan to trim their product ranges to reduce the complexity of their operations and focus on what they feel certain they can sell. In various ways, the industry as a whole is poised to shrink.

It won’t be an easy year. Even though much of the industry started to recover from the first round of global lockdowns more quickly than McKinsey expected and vaccines are now beginning to roll out in several countries, new cases of Covid-19 are spiking in different regions and it will be some time before populations develop immunity widespread enough for life to return to normal. Much of the global economy will see diminished growth. With uncertainty lingering and spending power down, demand for clothes among shoppers is likely to fall.

McKinsey predicts sales across the fashion industry in 2021 will be as much as 15% below 2019 levels. What’s more, it forecasts the industry won’t see a full recovery until the third quarter of 2022 at the earliest. If Covid-19 proves more difficult to get under control than anticipated, it could take until the end of 2023.

In this environment, there will be more store closures, more job cuts, and more bankruptcies in the fashion business. Not all companies will feel the downturn equally, however.

Even before 2020, a shrinking group of fashion companies was generating all the industry’s economic profits, a measure similar to regular profit that also takes into account a company’s cost of capital to gauge how much it’s investing to generate its performance. In short, most fashion companies have been losing money or failing to earn returns from their investments. The pandemic has only exacerbated the situation. While it has caused even the strong to stumble, it has hobbled many of the weak entirely.

So far, those most resilient have been luxury companies, online retailers, discount chains, and makers of activewear. Companies with a high proportion of sales in Asia—especially China, where sales are on the rebound—are also faring better than the competition.

But everyone will be looking for strategies to navigate the challenging year. One popular option will be reducing the range of products they sell. For years many companies have expanded their assortments, offering more individual styles in more categories and with more variations, such as different color choices. But more products mean more complexity in the supply chain, and the further companies stray from their core products, the greater their chance of making duds that don’t connect with customers. Of the 290 executives from across the fashion industry surveyed by McKinsey and BoF, 61% planned to slash the number of different products they sell in order to avoid overstock. Companies such as Nike and Coach have already started on efforts to streamline.

No matter what, many companies will need financial support, creating openings for bigger predators and private equity firms. During a Dec. 2 talk at BoF’s annual Voices conference, Achim Berg, global head of fashion and luxury for McKinsey, predicted “massive consolidation” in the first two quarters of 2021. He said while it’s currently difficult for companies to get boards or investors to approve deals in the present situation, that should change as pandemic conditions improve. Once vaccination levels rise and the weather eventually warms, bringing down infection levels, “I think some of the investors…will become brave,” he said.

“Secondly, we expect that many governments will at some point start reducing the support they provide,” he added. “At that point in time, and with the end of this in sight, the consolidation will play out.”

In the meantime, some acquisitions are already starting as companies grab up healthy but smaller labels that give them a chance to expand. VF Corp recently bought Supreme, Moncler acquired Stone Island, and now JD Sports, the UK’s biggest sportswear retailer, has announced its purchase of US retailer Shoe Palace.

By the end of 2021 the fashion industry will look very different than it did going into the year. The pandemic looks to be changing consumer shopping habits for the long term. Companies are having to respond by investing more in digital sales and focusing on the clothing categories likely to get them a share of the smaller pool of shopper dollars available. The strongest will also use the opportunity to grow even stronger, while the weak will do what they can just to survive.