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TECHNOLOGY BOOSTS FASHION INDUSTRY


“The State of Fashion: Technology” Report 2022 released by McKinsey & Company puts forth that with the increasing pace of technological advancements, fashion companies provide better services to customers, thus enhancing the efficiency of their businesses. According to the report, fashion companies that now embed artificial intelligence (AI) into their business models can see a 118 percent cumulative increase in cash flow by 2030.

Prepared by the US based global management consulting firm McKinsey & Company, “The State of Fashion: Technology” Report 2022 expresses that in 2021, fashion companies invested between 1.6 and 1.8 percent of their revenues in technology, adding that the figure is expected to rise to between 3.0 and 3.5 percent by 2030. Behind the predicted increase is a conviction that technology could create a competitive edge. Technologies such as robotics, advanced analytics, and in-store applications may help streamline processes and support sustainability, as well as create an exceptional customer experience.

Consumer habits changed with COVID-19

Consumer digital engagement rose sharply during the COVID-19 pandemic, as a result of more hours spent online, new shopping habits, and rising interest in gaming and virtual worlds. The report states that in 2021, people spent on average just below four hours on their mobile phones. Of the fashion customers who made the move to online shopping channels in 2021, 48 percent said the pandemic was the reason, 27 percent cited convenience, and 11 percent cited product availability and promotions. The pandemic also boosted digital brand relationships, with 72 percent of customers reporting they interacted with brands online in 2021. It is envisaged that by the end of the pandemic, digital interactions will stabilize at about 66 percent on average.

Looking ahead, it seems that the impact of technology on people’s lives will accelerate. By 2024, AI-generated speech could power more than half of human interactions with computers, McKinsey’s report shows. Soon after, more than 75 percent of enterprise- generated data could be processed by cloud or edge computing. This offers a more flexible, scalable foundation on which brands can potentially build their tech offerings. By 2030, more than 80 percent of the global population is expected to have access to 5G networks, enabling, among other things, faster connectivity and data transfer across Internet of Things devices.

Whoever invests in technology will be the winner

The operational potential of technology is becoming ever more apparent. McKinsey’s report shows that fashion companies that now embed AI into their business models could see a 118 percent cumulative increase in cash flow by 2030. Conversely, those that are slower to invest in digital technology will lag behind—and could see a 23 percent relative decline. Over the next three years, potential key areas in which executives in the fashion industry could make digital investments are personalization, store technologies, and end-to-end value chain management—areas in which digital can make a real difference to performance.

McKinsey’s report highlights five key themes that could help the fashion industry address some pressing challenges, as well as unlock potential opportunities: metaverse reality check, hyper personalization, connected stores, end-to-end upgrade, and traceability first.

Brands and retailers in the fashion sector and textile industry are leaning into technology not only to become more resilient to today’s volatile operating environment, but also to become more responsible and sustainable. McKinsey’s report highlights five key themes that could help the fashion industry address some pressing challenges, as well as unlock potential opportunities: metaverse reality check, hyper personalization, connected stores, end-to-end upgrade, and traceability first.

1. Metaverse reality check

Although the marketing value of digital fashion and nonfungible tokens (NFTs) is now clear to everyone, fashion brands will need to seize concrete opportunities in order to generate sustainable revenue streams presented by growing consumer engagement with the metaverse. Fashion companies focused on metaverse innovation and commercialization could generate more than 5 percent of revenues from virtual activities over the next two to five years.

Brands can engage in the metaverse across five dimensions:

  • Digital assets (e.g. branded virtual clothing or NFTs)
  • Digital experiences (e.g. concerts, exhibitions or other events in digital worlds)
  • Gaming (or gamified experiences) (e.g. online battle games such as Fortnite and Minecraft)
  • Platforms (e.g. asset marketplaces and digital-physical gateways such as NFT platforms like OpenSea)
  • Virtual worlds (e.g. games or other immersive social environments such as Roblox and Decentraland)

2. Hyper personalization

Highlighting that brands have access to a growing arsenal of personalization tools and technologies to upgrade how they customize and personalize their customer relationships, McKinsey’s report advises executives in the fashion and textile industries to harness Big Data and AI to provide one-to-one experiences that build long-term loyalty.

Consumers expect apparel brands to offer them personalized products, the recently released reports say. At this point, ensuring data privacy is of great importance, and it is seen that the data privacy regulation has spurred advertising’s efficiency to decrease and costs to increase. This means that companies need to have excellent analytical capabilities in this new era, which is dominated by personalization.

Pressure on the economics of operating stores has been mounting, particularly since more and more consumers began embracing the convenience and safety of e-commerce during the Covid-19 pandemic. But physical retail is far from dead.

3. Connected stores

The rules of physical retail are changing in many sectors, particularly including the clothing sector. Pressure on the economics of operating stores has been mounting, particularly since more and more consumers began embracing the convenience and safety of e-commerce during the Covid-19 pandemic. But physical retail is far from dead. McKinsey’s 2020 Survey of European Consumers showed that 60 percent of respondents wanted to see or touch products in-person before buying, while 50 percent shopped in stores so they can take items home immediately.

In line with the lifting of pandemic restrictions, McKinsey’s report expects a 3-percentage point fall in the percentage of customers shopping online, compared to 2021 levels across key markets, including Europe, the US and China. This presents an opportunity for players to reshape the role of stores in their overall retail mix.

McKinsey’s analysis shows that engagement with in-store technology can lead customers to spend up to four times longer shopping than customers who simply browse. But what is the right mix of technologies to attract customers to stores, and keep them engaged when they arrive? Ensuring the correct use of mobile applications as well as improving omnichannel journeys can be a good starting point to make that decision.

Top three reasons to visit or not to visit a physical store

McKinsey’s 2020 Survey of European Consumers, featured in the report, puts forth the main reasons behind the shopping habits of consumers. When asked about the top three reasons behind their decision to not visit a physical store and prefer online shopping, 50 percent of the respondents said that the top reason to not visit a physical store was that visiting a physical store is too consuming. While the second top reason (40 percent) was found to be the consumers’ belief that visiting a physical store is not safe due to Covid-19, the third top reason (25 percent) was being unsure about finding a product at the right price at a physical store. On the other hand, 60 percent of the consumers opting for physical stores said that they need to browse and touch products before they buy something. While 50 percent of the respondents said that they prefer physical stores when they need an item immediately, 20 percent said that they are dissatisfied with the delivery and return policies offered online.

Can new technologies replace face-to-face service in luxury shopping?

In a special section, McKinsey’s report features an in-depth analysis about how luxury brands should use technology to enhance customer experience. In his analysis, Marc Bain states that far from replacing the personal, face-to- face service at the heart of the luxury shopping experience, new technologies and digital channels are giving brands engaging and creative ways to enhance their customer relationships. Marc Bain’s analysis puts forth that around 80 percent of luxury sales are influenced by digital touchpoints, adding that even luxury fashion brands that do not sell core products such as clothing and leather goods online, such as Chanel - famous for its outstanding designs unveiled at avant-garde fashion shows - have websites, apps and social media accounts to connect with customers digitally.

The inexorable rise of e-commerce

The inexorable rise of e-commerce has forced fashion players to rethink the role of physical stores. Fashion industry executives can address consumer pain points by using in-store mobile apps to enhance the experience and micro- fulfilment technologies to leverage their physical retail networks for the quick- commerce era.

4. End-to-End Upgrade

Digital tools and analytics have transformed key parts of the fashion value chain, but these optimizations are often siloed within organizations, limiting the potential for cross-functional improvements. Brands should embark on end-to-end value chain integration to create more efficient and more profitable ways of operating.

Fast-changing consumer demand and persistent supply chain disruptions are among the factors adding to the complexity of operating a fashion brand today.

McKinsey’s report states that the fashion industry needs a new digitized value chain model that unites multiple internal processes and data sources, from demand forecasting to pricing. According to the report, digital applications need to be connected along such a value chain, which should be comprised of Design, Range & Assortment, Purchasing & Sourcing, Supply Chain & Logistics, Pricing &Promotions, and Store & Sales Optimization.

McKinsey’s analysis puts forth that integrating key parts of a value chain journey could make speed to market up to 50 percent faster, full-price sell-through up to 8 percent higher and manufacturing up to 20 percent less costly.

McKinsey’s report claims that the task for fashion decision makers is to consider how to harness technology to creativity, streamline operations, and create value from innovation that can be sustained in the years ahead.

5. Traceability

Traceability systems powered by traceability software and big data will help fashion brands reach far into their supply chains to understand the entire life cycle of their products, a key enabler for sustainability road maps.

More than ever, fashion brands and clothing manufacturers are being held accountable for their environmental and social impact. Over 50 percent of fashion decision makers say traceability will be a top-five enabler to reduce emissions in their supply chains, but many brands at best currently only have visibility over their suppliers or sourcing providers, with whom they have direct relationships.

It is seen that brands and vendors increasing their focus on traceability through their supply chains are better at addressing demands from regulators, investors, and customers for greater transparency.

As they aim to cut emissions and meet their environmental, social, and governance (ESG) targets throughout their production journey, brands could benefit from a common data language to enable comparability, as well as new labeling standards and tracking software.

Brands could consider joining forces with each other, start-ups, and industry bodies to establish a common data standard and to share data and knowledge via software platforms, open ledgers, and big data technologies.