Fashion Industry to Rebound After Toughest Year on Record

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Shoppers pass an advertising boarding for a Polo Ralph Lauren Corp. store on Regent Street in London, U.K., on Monday, Dec. 21, 2015.
Shoppers pass an advertising boarding for a Polo Ralph Lauren Corp. store on Regent Street in London, U.K., on Monday, Dec. 21, 2015. Credit: Jason Alden/Bloomberg

The $2.4 trillion world fashion industry is poised to rebound in 2017 from one of its toughest years on record, according to a new report published Friday.

Improving global economies and restructuring measures by leading brands like Burberry and Ralph Lauren mean overall industry sales are likely to rise as much as 3.5% next year, consulting firm McKinsey estimates. Growth is seen accelerating from 2016's pace of 2% to 2.5%, though the days when the industry comfortably outpaced the world's main economies are likely over, according to the 92-page report, produced with website The Business of Fashion.

An industry upturn would come as a much-needed boost to clothing brands including Abercrombie & Fitch, Germany's Hugo Boss and Japan's Fast Retailing, all of which have reported plunging earnings this year. Companies are having to adapt quickly to meet the changing needs of consumers, particularly millennials, who are becoming more discerning and less predictable in their shopping habits, according to McKinsey.

"In 2017, we expect the fashion industry to see the glimmers of a rebound," the report said, predicting that the value and affordable luxury segments are likely to be the biggest winners. Many brands have undertaken significant cost-cutting and restructuring exercises and "are now primed to capture the benefits."

Optimism among industry managers is on the rise, according to the report, which cited a McKinsey survey of more than 1,600 executives. About 40% of those interviewed said they expect market conditions to improve in 2017, compared with the 19% who forecast a better climate a year ago.

The rosier outlook follows a year that turned out a lot worse than expected. About two-thirds of executives reported that conditions have worsened over the last 12 months, with sales growth slowing and profit margins stagnating.

High-end brands shouldn't expect a dramatic recovery anytime soon. Olivier Abtan, who leads The Boston Consulting Group's global luxury group, says they can expect average annual growth of 2% to 5% going forward, compared with rates of 8% to 10% over the last decade.

"The new normal tomorrow for the luxury industry is much weaker growth than in the past," Mr. Abtan told the Luxury Forward conference in Paris on Tuesday. "This is a fundamental change for luxury brands, and it's not temporary -- it's structural."

Former luxury consumers are trading down to cheaper options, McKinsey said, benefiting producers of affordable luxury like Michael Kors Holdings and ballet flat maker Tory Burch.

According to Mr. Abtan, there's no major luxury market poised to compensate for the global slowdown in Chinese spending. In addition, millennials have different needs than previous generations, with a greater emphasis on digital and experiences.

"We have consumers who are evolving in fundamental ways," Mr. Abtan said. "Brands must evolve."

-- Bloomberg News

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