According to the BOF & Mckinsey State of Fashion survey, the fashion industry is not likely to return to 2019 levels until late 2023. The silver lining is the coronavirus crisis and ensuing lockdown continue to accelerate the consumer shift from physical to digital channels.
The “Digital Sprint”, driven by consumer sentiment and behaviour, resulted in companies’ profits booming. For example, in 2020, luxury e-commerce Farfetch became profitable for the first time since launching 12 years ago. Their revenue increased a whopping 64% to $1.7 billion. This is because of its digital-first approach, focus on sustainability, sights set on China, and new categories like beauty.
Major brands such as Adidas and Nike have announced ambitious plans to shift from a largely wholesale-driven towards a direct-to-consumer model. We expect this to make up 50% of net sales by 2025, as e-commerce doubles. An increasing share of sales is actualised by shipping individual parcels to consumers. This is instead of sending large bulks of products to wholesale partners. Individual product returns must be handled and omnichannel offerings are becoming more important. All of this increases the complexity in the fashion industry’s supply chain.
Sustainability takes on a heightened concern, with brands making science-based commitments to reducing their environment footprint. Consumers are now seeking justice. They demand transparency. They are demonstrating an increased focus on how retailers and brands treat employees, suppliers and workers all along their supply chain. Procurement practices are also beginning to reflect this shift. While reputations risk being called out, this also presents a huge opportunity for companies to make significant positive steps. Consumers will reward those companies as they become responsible brands of choice.
Due to the unprecedented pressure in 2020, the consensus is that there will be huge focus on restructuring supply chains to become much more resilient, agile and robust. A key theme is deeper partnerships with suppliers. Companies need to strengthen suppliers’ contracts and develop vertical integrations between mills and factories. They’ll also need to increase near shoring, onshoring, and demonstrate a continued drive to digitalise product development. Automating manufacturing and incorporating A.I into forecasting are further trends we can expect.
The Pandemic Winners!
Riding the boom in digital commerce and cloud computing, Amazon posted its best quarter ever in 2021 of $125.6 billion in revenue, up 44% from the year-ago quarter. Amazon’s clothing and shoe business is now the US newly minted No. 1 seller of apparel and footwear.
Wayfair, the home furnishing digital commerce leader, also had a stellar 2020 with a 50% increase in its NET revenue to $14.1 billion. This is largely due to the impact of lockdowns and the mass adoption of remote working. Home Depot also continued to benefit from the pandemic, with its revenue up 20% in 2020 to $132.1 billion. This is a direct result of consumers diverting expenditure away from travel and entertainment towards home improvement.
The retail and fashion industry is in a state of flux due to smart phones and the abundance of data. Consumers are driving this change for the first time in the 150-year history of mass retail.
China is at the frontier of this transformation towards social commerce. The Chinese market in ecommerce is almost twice the size of USA and Europe combined and is a pioneer in digital commerce innovation.
Notable in 2020 was the phenomenal rise of Pinduoduo [PDD], with a market value of more than USD $200 billion. Only founded in 2015, it has now overtaken Alibaba by annual shopper count. In 2020, it was China’s fastest growing internet stock, rising by more than 300% on the Nasdaq. It is predicted to turn profit this year.
The era of smaller businesses
Shopify became the 2nd biggest e-commerce group in the US – after Amazon – in 2020. It is ushering in a new era, where small merchants and entrepreneurs can compete with major brands. They can reach a mass audience directly without listing on Amazon and still retain brand identity. They also enjoy rates similar to what the biggest companies are getting in digital payments, shipping and fulfilment. Digital native brands Allbirds and Gym Shark were born on the Shopify platform. Gym Shark, founded only in 2013, is now bigger than the value of Reebok, due more to creativity rather than resources. Shopify is enabling this upheaval of the fashion industry dominated by small group of large players.
Hong Kong – The Global Sourcing City?
In the light of VF Asia’s (The North Face, VANS, Timberland) decision to relocate its product supply organisation to Singapore, is Hong Kong losing its edge?
According to KPMG: Future of Sourcing 2021 report, Global Sourcing Executives across the industry still maintain confidence that Hong Kong has the strongest appeal as a sourcing and supply chain hub.
It has the talent, expertise, speed, and efficiency which take decades to build. Even with factories moving out of China, components and raw materials are still predominantly from China. China will no doubt remain the dominant force for any product supply chain. Hong Kong links to the Greater Bay area also hugely benefit its role as a global supply chain hub.
The report also cites Hong Kong’s strengthening position as a major international trading hub, which in turn effects the fashion industry as well. According to the World Trade Organisation, Hong Kong’s global ranking of merchandise trading increased from number 12 in 2009 to number 8 in 201. This reflects the increase in capacity and efficiency of imports and exports of goods to other regions by land, air and sea.
Amid these developments, Hong Kong’s regional role is changing and driving supply-chain connectivity between Mainland China and Southeast Asia. Hong Kong is effectively transforming from being home exclusively to traditional sourcing. This is where businesses act as intermediaries between vendors and buyers. Today, Hong Kong and its many industry players are responsible for a fuller range of supply-chain management tasks, including a rise in higher-value-adding functions.
The World Intellectual Property Organisation (WIPO) published its list of Top 100 Science and Technology Clusters Ranking in the Global Innovation Index 2020. Shenzhen-Hong Kong-Guangzhou, as a cluster, came second.
Over the next few years, Hong Kong and Mainland China are expected to focus on higher added-value products as well as product design and development. This creates an increased demand for highly skilled creative and technical people. Flows of talent and technology into China are set to create a big opportunity for Hong Kong to reach the next level of being a super connector.
This article was originally published with our March 2021 edition of our Proco Thinking Newsletter. Read the full newsletter here.