COVID-19 impact on

Apparel & Fashion

21 April, 2020

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company
is strictly prohibited
Topics today

Part I
Implications on the apparel & fashion
INDUSTRY

Part II
Early perspectives on paradigm shifts in
SUSTAINABILITY

McKinsey & Company 2

The fashion industry is heavily exposed to the
negative implications of this crisis
Market capitalization evolution JAN 1 st – MAR 18 th 2020

Weighted avg. YTD local currency shareholder returns by industry in %1. Width of bars based on market cap on Jan 1
Average market
capitalization of apparel,
Basic
Conglom- Materials
Apparel, erates
Fashion
& Luxury
Chemicals &
Agriculture
Business Services Medical
Technology
fashion and luxury players
has decreased by 35%
Transport & Infrastructure Healthcare
Logistics Electric Supplies &
Other Healthcare Payors & Trading Power & Distribution
Aero- Financial Natural Gas
space &
Defense
Services
Healthcare Facilities
Consumer
Durables Chinese Personal & Consumer
since January 1, 2020
Auto- & Services Banks Office Goods Services
Oil & Air & Insurance motive & Real Advanced Food & High
Gas Travel Banking Carriers Assembly Estate Electronics Media Beverage Tech Telecom Pharma Retail
0
This reflects investors'
-5
expectation of future
earnings due to
-10

-15
COVID-19
-20

-25

-30 As highly discretionary

-35 good, apparel, fashion &
-40 luxury is heavily affected
-45

-50

-55
1. Data set includes global top 3000 companies by market cap in 2019, excluding some subsidiaries, holding companies and companies who have delisted since
Source: Corporate Performance Analytics, S&CF Insights, S&P McKinsey & Company 3
Depending on the length
of lockdown, a majority
of industry players No signs of distress 62%
could enter financial 34%

distress situations 11% 7%

Signs of distress 38%

66%
− Distress meaning negative EBITDA or 89% 93%
net debt/EBITDA > 4
− Includes 71 listed EMEA apparel &
fashion companies, >250mn net sales

Pre-crisis 1 month 2 month 3 month

closure1 closure 2 closure3

1. 1 month store closure and 1 month lost sales in ramp-down, ramp-up - equivalent to 17% FY revenue decline
2. 2 month store closure and 2 month lost sales in ramp-down, ramp-up - equivalent to 33% FY revenue decline
3. 3 month store closure and 2 month lost sales in ramp-down, ramp-up – equivalent to 42% FY revenue decline
Source: CapIQ, March 2020
McKinsey & Company 4
Apparel & fashion companies also face operational implications

Discount Adjustment in Flexibility in

Digital Push
Acceleration Cost Structure Supply Chain
Acceleration of digital Massive excess stock Need for adjusted cost Increased flexibility in
required as consumers get drives players into steep structure due to low supply chain required
increasingly used to online discounting and raises consumer sentiment and due to production halts
and social channels, which questions how to re- cutback on discretionary and closed warehouses
recover faster than offline infuse value in products spending

35-40% 35-45bn EUR 73% Top 5

of all sales are in excess stock from of consumers with apparel import
online in the next 6 Spring/ Summer >2 months impact countries heavily
months (Apr-Sept) season on their spend impacted

Source: McKinsey Global Fashion Index (MGFI); expert estimations; McKinsey & Company Consumer Pulse McKinsey & Company 5
 Consumer sentiment remains negative, especially in Europe
Compared to last week’s
Confidence in own country’s economic recovery after-COVID-191 survey results
Percent of respondents

China US Europe2 UK Germany France Spain Italy

Optimistic: The
April 1-6 April 1-5 April 2-5 April 2-5 April 2-5 April 2-5 April 2-5 April 2-5
economy will rebound
within 2-3 months and
grow just as strong or 16 15 15 15 14
stronger than before 25
COVID-19 37
53
Unsure: The economy
will be impacted for 6- 50 45
54 58 54
12 months or longer
and will stagnate or
show slow growth 64
thereafter 47

Pessimistic: COVID- 44
19 will have a long 35 40
30 27 32
lasting impact on the
15 12
economy and show
2
regression / fall into
lengthy recession
1. Q: How is your overall confidence level on economic conditions after the COVID-19 situation?
Rated from 1 Very optimistic to 6 very pessimistic; Optimistic = 1 + 2 ; Unsure = 3+4; Pessimistic = 5+6
2. European data consolidates: UK, Germany, France, Portugal, Spain, Italy
Source: McKinsey & Company COVID Europe Consumer Pulse Survey week 6th April 2020 across Italy, France, Germany, Spain, UK, Portugal N = 5,645 Sampled and weighted to match gen pop 18+ McKinsey & Company 6
years; China N = 1,048 including Hubei province; US N=1,119
China shows recovery of consumer sentiment is possible with
offline consumption already at ~80%
China offline general consumption by day
100%= avg. general consumption in Dec 2019

During COVID peak/ After peak/

Prior to COVID Pre-Chinese New Year
Partial lockdown Relaxation of lockdown
% 100% 125% 39% 79%
250

200

150

100

50

0
12/01 12/08 12/15 12/22 12/29 01/05 01/12 01/19 01/26 02/02 02/09 02/16 02/23 03/01 03/08 03/15 03/22 03/29 04/05

First confirmed 2020 new year Wuhan lockdown most local lowered
case in Wuhan Chinese Lunar New Year emergency response level1

1. On March 8th, 21 provinces of China announced to lower the epidemic response level, which involves over 70% population of the country.

Source: MIYA payment data engine, McKinsey analysis McKinsey & Company 7
But recovery after COVID-19 will take time – Scenarios for the
Economic Impact of the crisis Basis for A&F
GDP Impact of COVID-19 Spread, Public Health Response, and Economic Policies recovery scenarios

Rapid and effective

Control of Virus Spread
B1 A3 A4
Strong public health response succeeds
in controlling spread in each country
within 2-3 months Virus contained, but sector damage; Virus contained, growth rebound Virus contained; strong growth rebound
Virus Spread & lower long-term trend growth
Public Health Effective Response, but
Response (regional) Virus Resurgence B2 A1 A2
Effectiveness of the public Public health response initially succeeds
health response but measures are not sufficient to prevent
in controlling the spread viral resurgence so social distancing Virus resurgence; slow long-term growth
Virus resurgence; slow long-term growth Muted World Recovery Virus resurgence; return to trend growth
and human impact continues (regionally) for several months Strong World Rebound
of COVID-19
Broad Failure of
Public Health Interventions
B3 B4 B5
Public health response fails
to control the spread of the virus
for an extended period of time Pandemic escalation; prolonged Pandemic escalation; slow progression Pandemic escalation; delayed but full
(e.g., until vaccines are available) downturn without economic recovery towards economic recovery economic recovery

Ineffective Partially Effective Highly Effective

Interventions Interventions Interventions
Self-reinforcing recession dynamics Policy responses partially offset Strong policy responses prevent
kick-in; widespread bankruptcies and economic damage; banking crisis structural damage; recovery to pre-
credit defaults; potential banking crisis is avoided; recovery levels muted crisis fundamentals and momentum

Knock-on Effects & Economic Policy Response

Speed and strength of recovery depends on whether policy moves can mitigate
self-reinforcing recessionary dynamics (e.g., corporate defaults, credit crunch)

McKinsey & Company 8

Scenario A1 was voted most planned for in a survey with >2100
executives from around the world Basis for A&F
Most likely scenario, % of respondents1 recovery scenarios

Rapid and effective

B1 15% A3 16% A4 6%
Control of Virus Spread
Strong public health response succeeds
in controlling spread in each country
within 2-3 months Virus contained, but sector damage; Virus contained, growth rebound Virus contained; strong growth rebound
Virus Spread & lower long-term trend growth
Public Health Effective Response, but
Response B2 11% 31% 6%
(regional) Virus Resurgence A1 A2
Effectiveness of the public Public health response initially succeeds
health response but measures are not sufficient to prevent
in controlling the spread viral resurgence so social distancing Virus resurgence; slow long-term growth
Virus resurgence; slow long-term growth Muted World Recovery Virus resurgence; return to trend growth
and human impact continues (regionally) for several months Strong World Rebound
of COVID-19
Broad Failure of
B3 3% B4 9% B5 2%
Public Health Interventions
Public health response fails
to control the spread of the virus
for an extended period of time Pandemic escalation; prolonged Pandemic escalation; slow progression Pandemic escalation; delayed but full
(e.g., until vaccines are available) downturn without economic recovery towards economic recovery economic recovery

Ineffective Partially Effective Highly Effective

Interventions Interventions Interventions
Self-reinforcing recession dynamics Policy responses partially offset Strong policy responses prevent
kick-in; widespread bankruptcies and economic damage; banking crisis structural damage; recovery to pre-
credit defaults; potential banking crisis is avoided; recovery levels muted crisis fundamentals and momentum

Knock-on Effects & Economic Policy Response

Speed and strength of recovery depends on whether policy moves can mitigate
1 Surveyed from April 2 to April 10, 2020; n=2,121 participants representing the full
range of regions, industries, company sizes, functional specialties, and tenures self-reinforcing recessionary dynamics (e.g., corporate defaults, credit crunch)

McKinsey & Company 9

In scenario A3 European A&F sector down by 35-38% - in scenario
A1 the decline is even more dramatic with 47-50%
A3: Virus contained, growth rebound A1: Virus resurgence, muted world recovery
China Europe China Europe
Monthly sales for Apparel & FTW vs. 2019, % Monthly sales for Apparel & FTW vs. 2019, %
US US

0% 0%

-50% -50%

Global sales vs. 2019 Global sales vs. 2019

2020: ~EUR -410-460bn 2020: ~EUR -630-680bn
2021: ~EUR +30-60bn 2021: ~EUR -140-170bn
-100% -100%
J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D
2020 2021 2020 2021

Global Global
Return of sales Return of sales
to 2019 levels
Q4 2020 Q2 2021 Q1 2021 Q4 2020 to 2019 levels
Q2 2021 Q3 2023 Q1 2023 Q3 2022

2020 vs. 2019 -15-18% -35-38% -30-33% -27-30% 2020 vs. 2019 -36-39% -47-50% -43-46% -41-44%

2021 vs. 2019 +5/+7% -2-0% +2/+4% +2/+4% 2021 vs. 2019 +0/+2% -19-21% -17-19% -9-11%
Source: McKinsey Global Fashion Index (MGFI) McKinsey & Company 10
 10 themes beyond COVID-19 for Apparel & Fashion

The 'New Consolidation of the industry, fueling Drop in consumption of lower-

the ‘winner takes all’ dynamic income segments most impacted by
job loss and financial instability

Normal' Digitization of consumer journeys as Supply chains engineered for

consumer acceptance broadens across flexibility, with focus on near- and on-
demographics and profiles shoring, inventory pooling, etc.

Heightened health consciousness, Adoption of new business models,

with a focus on safety and quality such as digitally-enabled subscriptions
and alternate payments

Conscious consumption with

Accelerated store network
increased awareness for
optimization, store closures and
sustainability and higher bar to
reduction of total sales space
connect with consumer values

Accelerated off-price dominance – New ways of working as a standard,

2020 becoming a year with hardly any especially for product dev. and buying teams
"full-price" retail (e.g., virtual sampling, digital approval)

McKinsey & Company 11

Topics today

Part I
Implications on the apparel & fashion
INDUSTRY

Part II
Early perspectives on paradigm shifts
in SUSTAINABILITY

McKinsey & Company 12

Across industries, sustainable stock is less
impacted by the crisis – with long-term trajectory
ESG Equity Top 25 US equity FTFs

Flows into equity ETFs: ESG v Market While stock markets

Daily flows, cumulative ($bn) plummeted sustainable
Top 25 US equity FTFs stock was less affected
ESG Equity
35
12 Flows in ESG ETFs
30 (environmental, social and
10
25
corporate governance) are
8 increased during the
20 Covid-19 crisis, while
6 overall equity flows
15
decreased sharply
4
10
2 5 Government policy
measures and bail-outs are
0 0 likely to reinforce this trend
in the long-run
-2 -5
Jan 2020 Mar

McKinsey & Company 13

Sources: Morgan Stanley Research; Bloomberg
Sustainability is likely to remain a priority over the longer turn, Positive impact on

despite the uncertainty created by COVID-19 sustainability

Negative impact on
sustainability

Key trends Examples

Increased awareness of link SIMA study showing that atmospheric particulate matter can act as a carrier for viruses
between health and and allows contaminants to remain in the air for longer and areas with poor air quality
environmental issues are harder hit

Slowdown seen as opportunity Numerous companies see sustainability as a source of competitive advantage that will
to get ahead of the game help them come out of the crisis

Hope in the economic stimulus Widespread perception that governments might retain increased control of the
supporting decarbonisation economy and dictate the new agenda and players across industries are keen to ensure
agenda that economic stimulus are focused on decarbonisation

Customer enthusiasm for positive Pictures of clear Venice canals with schools of fish received over 1 m likes on Instagram
environmental impact

Increased concerns about The Plastics Industry Association has been advocating the hygiene advantages of single
hygiene and food safety use plastic wrapping

Fears of emissions relapse due to Historically recessions have led to negative environmental impact in the mid-long term
economic recovery due to increased fossil fuel usage during economic recovery and suspended investments in
decarbonization projects

McKinsey & Company 14

For fashion consumers particularly, shift towards
more purpose-driven and sustainable behaviour

45% Survey on apparel & fashion

customer sentiments in 4
Agree they like when retailers / brands showed concern & contributed European countries
to the social or medical agenda around resolving the Corona crisis

23% Surveyed a total of 6000

consumers, n= 1000 per
Agree they will buy more locally to support local businesses country between March 26th
and 29th

16%
Agree they will buy more socially and ecologically sustainable clothing Asked participants about
overall shopping sentiments
and purchasing behaviors
21% towards apparel & fashion over
the past & next 4 weeks
Agree they want to reduce my clothing consumption

Source: McKinsey & Company COVID-19 Apparel & Fashion survey, N=>6,000, 27/3-29/3/2020 McKinsey & Company 15
Surcing countries and suppliers are heavily
impacted Positive outlook/less impact
Cautious outlook/moderate impact
Negative outlook/high impact

Extent to which region is

Current impact of COVID
experiencing challenges with5…
a/o April 7
a/o April 2

Top 5 origins to Confirmed

Days to Gov’t response Capacity &
USA (~64% of cases per Logistics Cash flow
double3 stringency index4 labor
total)1 million2

China 57 57 67

Vietnam 3 15 100

Bangladesh 1 3 95
McKinsey/Sourcing
Journal survey
“Sourcing in the Age
Indonesia 9 9 67
of COVID-19” sheds
light on how sourcing
India 3 5 100
managers respond to
the COVID-19 induced
USA 1204 7 67 N/A
crisis…

Sources: 1. Sourcing journal, 2018, 2. ECDC as of April 7, 3. Based on ECDC rate of cases doubling as of April 7, 4. Oxford University government response tracker, McKinsey & Company 16
5. Better Buying institute self-reported by suppliers, n=250-300
Most brands are cancelling less than 25% of
orders entirely

"How is your company handling existing purchase orders of finished goods at

your suppliers this year?"

Cancellation of orders
With assortment
revisions under way,
Not used 20%
volumes are affected
by reduction in
Less than 25% of orders 53% number of orders and
in quantities per order

25-50% of orders 16%

~1/3rd of sourcing
managers expect no
More than 50% of orders 9% changes for more than
50% of their existing
orders

Source: Sourcing in the Age of COVID-19 survey, preliminary results, April 20th, Percent of respondents, n=87 sourcing managers of fashion retailers and brands McKinsey & Company 17
Renegotiation of terms and deferred payments are common

Renegotiation Deferral
of terms

25

31%
>50% of orders 45

Used
state to pay as agreed on 40
more than half of their <50% of orders 29
existing orders this year1

Not used 20
29

No answer 6 6

1. "How is your company handling existing purchase orders of finished goods at your suppliers this year?"

Source: Sourcing in the Age of COVID-19 survey, preliminary results, April 20th , Percent of respondents, n=87 sourcing managers of fashion retailers and brands McKinsey & Company 18
46% of sourcing managers believe that more than half of
their suppliers move into financial distress in 6 months time
"What economic impact do you expect for your suppliers?"
Percent of respondents
Moving into distress in Moving into distress in
the next 4 weeks unless the next 6 month unless
Already in distress increased cash flow increased cash flow

None of our suppliers 9 7 6

Few of our suppliers (<50%) 72 75 37

Most of our suppliers (>50%) 14 10 46

Source: Sourcing in the Age of COVID-19 survey, preliminary results, April 20th , Percent of respondents, n=87 sourcing managers of fashion retailers and brands McKinsey & Company 19
NOTE: rest of respondents ticked "I don't know"
Supporting the criticial supplier base is becoming essential

"What measures have you taken to reduce distress at (Very) high

your suppliers?" impact rating

Collaboration in overall
cost reduction efforts
45 44%
Only 22% use
Forward looking collaboration
in R&D or product design
30 22%
pre-payment of
orders despite
Payment of raw material
and fabrics
29 59%
rating its
efficiency
Customer based supplier credits 24 30%
highly Pre-payment of orders 22 66%
Source: Sourcing in the Age of COVID-19 survey, preliminary results, April 10th ,Percent of respondents, n=87 sourcing managers of fashion retailers and brands McKinsey & Company 20
The Crisis is accelerating sourcing and supplier
management trends

Companies will Product development More integrated

increasingly enter will become more regional supply
closer partnerships flexible and result in chains will deve-lop
Sustainable materials with suppliers and sourcing with shorter Product development (and reduce depen-
will become reduce transactional lead-times and smaller and sourcing processes dency on international
mainstream supplier relationships batch sizes will be digitized fabric imports)

74 77 74
Acceleration of trend 54
59

Same 34 16 14 16 20

Trend slowdown 10
7 5 2 2
No answer 5 6 7 8 11

Source: Sourcing in the Age of COVID-19 survey, preliminary results, April 20th , Percent of respondents, n=87 sourcing managers of fashion retailers and brands McKinsey & Company 21
NOTE: rest of respondents ticked "I don't know"
Opportunities for a Paradigm Shift

Sustainabality as a competitive advantage to conquer the new normal

Ongoing role-modelling of transparency and communication of companies' prupose

True supplier partnerships with joint investments in sustainable production and materials

Lasting innovation in (over-)stock management

More collective action in defining common standards and scaling new business models

Public stimuluous and regulatory changes shaping a sustainable recovery plan

McKinsey & Company 22

Thank you!

For questions please contact:

karl-hendrik_magnus@mckinsey.com

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company
is strictly prohibited