the-state-of-fashion-2022

04. WARDROBE REBOOT To respond rapidly to changing preferences supply and demand. To achieve this, brands will amid next year’s wardrobe reboot, brands should need to collaborate with suppliers to carefully also strengthen the reactivity of their supply manage orders and inventories. They should also be chains and think differently about the highly aware of the need to balance consumer demand and seasonal nature of the traditional fashion business. pricing opportunities with the need for increasingly This means reimagining their collections and careful allocation of budgets to marketing and production cycles, while being prepared for uneven supply chain operations. Exhibit 8: Interest in categories that were down at the height of the pandemic, such as occasion dresses and workwear, is rebounding quickly NUMBER OF PAGE VIEWS ACROSS CATEGORIES ON LYST.COM, % CHANGE FROM PREVIOUS YEAR Aug 2021 YoY Aug 2020 YoY -50 0 50 100 150 200 250 Activewear Lingerie Handbags Knitwear Sneakers Heels Luggage Shirts & blouses Occasion dresses SOURCE: LYST, AUGUST 2021 51

EXECUTIVE INTERVIEW PVH: Harnessing Creativity to Cut Through the Noise The State of Fashion 2022 Stefan Larsson Chief Executive, PVH Corp The chief executive of the company that owns Since becoming chief executive Calvin Klein and Tommy Hilfiger believes of the group that owns Calvin creativity will be even more of a differentiator Klein and Tommy Hilfiger in in 2022 as fashion players move to better align February 2021, Stefan Larsson merchandise planning with demand in the has been clear and consistent face of escalating supply chain challenges. By about his mission at PVH Corp. further elevating the iconic status of PVH. “I keep coming back to the same brands and using persuasive design to drive [idea], which is our ability to stay engagement, Stefan Larsson sees opportunities true to the iconic DNA of our to gain market share. brands and keep connecting them closer and closer to where the — by Chantal Fernandez consumer is going,” he says. In a crowded and disruptive digital market, the seasoned executive considers creativity one of the most important differentiators. One way to accomplish more creatively, he suggests, is for companies to break down the traditional boundaries between internal and external activities, in favour of a “network” approach. 52

CONSUMER SHIFTS Like most of its peers, PVH But how does that focus on strategies and your sourcing is emerging from a period of being intimately connected footprint? great challenges, during which with the consumer impact the company moved to boost your global distribution We still as an industry have too its e-commerce channels and strategy? long lead times, and there is a reprioritise domestic consumers, big opportunity to better match especially in the US where It’s about growing with a mix planning and buying to demand, foreign tourists generated more in those channels that reflect and that’s something that we than a third of sales prior to the where the consumer is going. The learned when Covid hit. The pandemic. To gain market share consumer also wants to shop second-biggest learning is to in the year ahead and indeed at the likes of Zalando, About build resilience into the supply for the long term, “it’s never You, Amazon and Tmall. So chain now, with an awareness been more important to invite increasingly, it’s about winning that [crises like] pandemics in [voices from the outside], to in the digitally led marketplace, do happen. Also to build in a let [them] be heard,” Larsson and looking at it as an integrated geographic and partnership said, referring not just to design marketplace region-by-region approach where we are able to functions but sustainability and almost city-by-city. The compensate for what happened initiatives and workplace biggest opportunity to grow, during [an event like the] culture. “We have to be leading by far, is direct-to-consumer pandemic and continue to supply big companies and big brands in a e-commerce and third-party the business with goods. much more entrepreneurial way e-commerce, both with pure than before to win.” players like Amazon, and with How are you thinking about more traditional wholesale cutting down on lead times Europe is PVH’s largest region partners. next year? in terms of revenue, and its brands benefit from a healthier Most customers around For us, it starts with making sure wholesale market there too. the world have gradually that every single product in the Are there lessons that you started to return to their pre- assortment has an intent, and can take from your stronger pandemic lives or something our focus is on the most essential markets to apply to the North close to it, but international categories and then, within American market, where tourism is still depressed; in those categories, developing discounting and the shift to the US, most international hero products. Once we do that, digital have been disruptive? travel bans were only due to be we create the foundation for lifted in November 2021. How planning and buying inventory The consumer is moving and has this informed your view closer to demand, because we continuously moving fast — and on refocusing the business have fewer SKUs and more the barriers have come down, around domestic consumers? focused product silhouettes. Then and the noise levels have come we can work more with flexible up, and the consumer has all this Where we were the strongest and more agile supply chain choice — so it’s the importance with the domestic consumer set-ups, cutting the lead time of connecting with the consumer pre-Covid is where we weathered by getting much more focused through creativity and design Covid the best. And where we had and upfront in the categories that drives engagement. Equally the most dependency, or an over- and the product silhouettes that important is to connect with dependence on tourism, we had matter, and then getting closer technology and become more the most work to do to win more [to demand] when it comes to data driven to understand more with that domestic consumer. So deciding fabric, colour and where about where the consumer is strength has to be built into every in the world these products go. going. Having a systematic, market [in terms of the domestic repeatable operating model is consumer going forward]. Many companies have also going to be more important benefitted from reducing going forward. How do you see recent their inventory and focusing and future supply chain on their hero products, and disruptions permanently that’s helped them cut down changing your production on discounts and raise their 53

CONSUMER SHIFTS The State of Fashion 2022 average unit retail (AUR). Are there trade-offs when impact. So it’s a combination of What will distinguish the moving towards sustainability going big — where we see we can companies that are able to goals while also optimising go big right away, like sustainable keep that momentum going in the supply chain, whether products and VPPAs (virtual 2022 from those sliding back that relates to environmental power-purchase agreements), into bad old habits? concerns or workers’ rights? and the solar roof on our [distribution centre in Venlo, The winners will be those who Our experience is that most Netherlands], to testing circular keep developing a systematic often they go hand-in-hand. We design and circular product focus on building assortments just had our big yearly supplier initiatives — and testing small, so of products that [stand] out in summit. What I asked them that we can then learn and scale a sea of generic products. Next for, and what I committed to over time. [But most of all, it’s year, I believe we are moving them, was to tap into some of about] being humble enough to into an era in this sector where their innovation and expertise realise that we have 90 percent of creativity will become even more because a lot of them are the work still to do [in this area]. of a differentiator — style, taste, moving forward in making original creativity — and then more sustainable sourcing and What about opportunities technology will be an amplifier of production. One mega trend I in the metaverse and virtual that. But I’m surprised that there see overall in the sector is the goods? Do you see that as hasn’t been more conversation importance of breaking down something that could become about the importance of the traditional boundaries of a revenue driver for the competing with creativity. what’s in the company and [what business? is done externally]; what can Tommy Hilfiger was still be accomplished together as a One thing we learned through staging runway shows before network — whether it’s creativity, Covid, and the disruptions ahead the pandemic, but Calvin sustainability and supply chain, of Covid, is that when you see Klein no longer does, and both or technology. It’s looking at how those exponential growth rates of brands have been focused on we can follow the consumer and consumer-shifting behaviour, you collaborations. In our fast- maximise our positive impact by need to follow that, including the moving digital world, do you working together in a way that meta-world, and be open to how see collaborations as the best breaks down the boundaries of the consumer wants to engage — way to create halo moments what traditionally we said we and be open to the possibility that that attract customers to your wanted to do [internally] as a big it could, sooner rather than later, brands? company. be an income stream. The consumer appreciates the We’ve seen several textile “[Most of all, it’s iconic brands with staying power, recycling projects come out about] being humble where they have a certain level of both Tommy and Calvin. enough to realise of predictability. They also love What do you feel has the that we have 90 creative newness like never greatest potential to scale in percent of the work before, and the mix of those. the next year? still to do.” Staying true to the iconic nature of your brand, and then utilising Tommy has piloted something The fashion industry is that iconic nature as a platform called Tommy For Life, where we currently facing a talent to amplify new up-and-coming bring back old pieces and clean crunch. What does it mean creativity — it creates newness and repair and resell them. We’re to be a competitive employer and relevance for the consumer. taking a lot of action to try to see in 2022, and how might that The consumer is taking down what we can do, and what can be evolve going forward? barriers. They don’t look at it like, scaled. We’re moving forward “Is this Calvin or Heron Preston?” on a number of fronts, and we They’re saying, “Oh, I love Calvin, are increasingly looking at and I love what Heron is doing, identifying the big needle-movers and I love the mix.” So that, I that we can drive over the next believe, will just continue. few years to make a real positive 54

EXECUTIVE INTERVIEW Just like the consumer, team members also have a lot of choices. The traditional way of running a big company — where you told people what to do and the further down you got in the organisation the more you’d just execute — is going to be obsolete. If you’re really clear on the vision, you’re really clear on the priorities, you can empower team members across all levels of the organisation to make decisions to follow the consumer. It will put pressure on us to become much more inclusive, much more engaging and much more diverse. It’s going to be our job to invite team members, independently of where they are in the organisation, to engage and see that they have impact in not only driving to become one of the winners from a shareholder return perspective, but also doing it in a way that maximises our positive impact from a [diversity and inclusion] and sustainability perspective. This interview has been edited and condensed. 55

The State of Fashion 2022 CONSUMER SHIFTS 56

05. METAVERSE MINDSET As consumers spend more time online and the hype around the metaverse continues to cascade into virtual goods, fashion leaders will unlock new ways of engaging with high-value younger cohorts. To capture untapped value streams, players should explore the potential of non-fungible tokens, gaming and virtual fashion — all of which offer fresh routes to creativity, community-building and commerce. Burberry’s limited-edition NFT, Sharky B. Burberry. As digital environments come of age, they creatives, who are pushing the limits of possibility are transforming from linear and transaction- online. Brands, meanwhile, see the emerging focused spaces into multi-dimensional, “metaverse,” in which people work, play, socialise experiential and collaborative virtual worlds. and shop, as an opportunity to engage more deeply Tech-savvy and younger cohorts are spending and creatively with their customers and unlock new increasing amounts of time in these spaces — value streams. from social media and gaming to virtual realities — and are adopting multiversal identities along the “There are more and more ‘second worlds’ way. At the vanguard, digital assets in the form of where you can express yourself [but] there is virtual fashion and non-fungible tokens (NFTs) are probably an underestimation of the value being offering new ways for consumers to shop, exchange attached to individuals who want to express goods and inhabit those identities. themselves in a virtual world with a virtual product, [through] a virtual persona,” said Gucci’s Hyper-interactive and creative digital chief marketing officer Robert Triefus, citing the environments are a natural evolution of how 19 million visitors who came to the Gucci Garden people use technology and reflect the ever-growing within the Roblox gaming metaverse.146 amount of time consumers are online. Gen-Z spent an average of eight hours per day on screens The $176-billion gaming industry, which in 2020.144 Part of the appeal of virtual worlds attracts more than three billion players globally, is the chance to engage with others and build has a long history of community-building.147 communities — a need that was exacerbated when Meanwhile, the metaverse is becoming a big global Covid-19 lockdowns put an end to most business, with funding pouring in from investors. in-person social contact. As digital spaces become Epic Games raised $1 billion in April 2021 to more dynamic, some consumers are participating accelerate its work in building connected social in “digital campfires,”145 around which they can experiences across a metaverse of linked games and connect with others who share their values, have services.148 conversations, tell stories and co-create. As gaming increasingly becomes an These soaring levels of engagement have extension of the real world, and with the pandemic spawned a new generation of digital fashion supercharging participation, it has become a prime target for fashion brands. In many cases, 57

CONSUMER SHIFTS The State of Fashion 2022 engagement has taken the form of collaborations to try something new, so they use it to elevate their with gaming platforms to design virtual fashion social media. Then there are Gen-Z customers who assets. Ralph Lauren partnered with South Korean are on platforms like Snapchat or TikTok, where social network and avatar simulation app Zepeto video is becoming the main communication tool to create a virtual fashion collection, giving users rather than the still image.”152 the opportunity to dress their avatars in exclusive products, or appearance-altering “skins.” Gucci has Indeed, for some consumers, digital fashion created digital assets for gaming platform Roblox, is the natural extension of applying social media as well as for Pokémon Go and Animal Crossing. filters on platforms like Instagram and Snapchat, Some brands have set their sights even higher. After says Simon Windsor, co-founder and joint unveiling its Autumn/Winter 2021 collection in managing director at Dimension Studio, an agency the form of a fully-fledged video game,149 Balenciaga that worked with Balenciaga on its video game.153 teamed up with gaming giant Fortnite to unveil a “We’re just at the tipping point of this new era… It collaboration including shoppable virtual clothing starts to change the meaning of fashion itself.”154 and physical products. It advertised the partnership across traditional and metaverse channels.150 Beyond social media and gaming, artificial intelligence (AI) and augmented reality (AR) As gaming increasingly becomes technologies present additional opportunities for new business models leveraging virtual fashion. an extension of the real world, and Online fashion wholesale platform Ordre uses 360-degree view technology to present seasonal with the pandemic supercharging collections through online showrooms, offering a complementary channel to facilitate management participation, it has become a of luxury wholesale networks. Elite World Group and Tommy Hilfiger have recently partnered on prime target for fashion brands. various virtual ventures, including avatars of models walking 3D virtual runways.155 The opportunities in gaming are extensive and offer a platform to engage younger consumers, Much of the excitement around virtual as well as create buzz with cohorts that would not environments is directed towards NFTs, which usually interact with brands in physical formats. have seen an explosion of interest over the past Tapping into in-game merchandise further allows year. NFTs are unique crypto assets whose brands to monetise digital assets where it is the authenticity and ownership are verified on norm to pay for elevated experiences. blockchains and are bought, sold and exchanged in the metaverse, often with cryptocurrency. Their Virtual clothing is picking up momentum uniqueness means that the value of some NFTs across a range of digital environments. “Gamers can skyrocket: one created by digital artist Mike are famous for buying skins in games [but] we Winkelmann — also known as Beeple — was sold have two sets of [broader] customers,” said Daria at Christie’s auction house in 2021 for a record- Shapovalova, co-founder of DressX, a platform breaking $69.3 million.156 NFT platform OpenSea that estimates the total addressable market for exceeded $1 billion in sales in the first seven months digital fashion at $31 billion151 and has more than of 2021.157 100 partner designers offering digital fashion items. “First, there are those Millennials who Proponents of NFTs argue that the recent immediately understand the idea of digital fashion boom is no flash in the pan. “This is fundamentally and are active shoppers of luxury goods; they want going to change digital ownership, creative structures, the creative economy, how we view 58

05. METAVERSE MINDSET Exhibit 9: The global gaming industry grew rapidly in 2020 and is on track to be worth $219 billion by 2024 VIDEO GAME MARKET SIZE, USD BN +9% p.a. +23% p.a. 219 178 176 144 2019 2020 2021E 2024E SOURCE: NEWZOO, KEY NUMBERS 2021 money even,” said Karinna Nobbs, co-chief In 2021, there was a wave of NFT executive and chief experience officer of NFT engagement among luxury players, often via the marketplace The Dematerialised. “This is bigger gaming universe. For its 200th anniversary, Louis than the internet.”158 Vuitton launched a video game with collectible NFTs partially designed by Beeple. The game In fashion, NFTs have a wide range of contained NFT art that could be acquired by use cases, ranging from product authentication players in a story echoing the journey of the (see “Product Passports” on page 88) to serving brand’s founder.160 Burberry created NFTs within as collectable pieces in their own rights. With the Blankos Block Party game, featuring digital consumers seeking to collect and invest, digital vinyl toys that live on a blockchain. Adorned with fashion creators such as The Fabricant, DressX and Burberry’s TB summer monogram, the limited- RTFKT are finding audiences for digital clothing edition Burberry Blanko Sharky B NFT can be authenticated by NFTs. Meanwhile, some companies purchased, upgraded and sold. The collaboration are tapping into the excitement around NFTs by also includes branded in-game NFT accessories, experimenting with alternative engagement models: including a jetpack, armbands and pool shoes.161 Adidas attracted headlines when it collaborated with The Fabricant and model Karlie Kloss to launch a Beyond gaming, Farfetch has partnered with competition for creators to make their own NFT digital fashion platform DressX and Crypto.com, a versions of the WindRdy parka jacket.159 marketplace for NFTs, to launch a virtual collection. 59

CONSUMER SHIFTS The State of Fashion 2022 Dolce & Gabbana collaborated with Unxd, a curated investing in early-stage blockchain technology.166 marketplace for digital luxury and couture, to create At a minimum, fashion’s foray into the an inaugural nine-piece collection of NFTs sold alongside physical couture.162 metaverse promises new routes for consumer engagement. This will support creative branding With no shortage of marketing hype, strategies, enable immersive consumer experiences there are indications that digital fashion assets and generate excitement among highly sought-after can generate significant revenue streams. Dolce consumer groups. & Gabbana’s collection fetched the equivalent $5.7 million.163 Still, monetisation opportunities Looking ahead, the buzz around NFTs will are likely to be contingent on the psychology of continue to build as increasing numbers of fashion scarcity and limited editions driving NFT mania brands seek paths to differentiation and launch — together with the security of authentication and creative experiments. As consumers spend more the potential for community-building that they time interacting online, their interest in collecting provide. The most likely fashion segments to lead and displaying digital objects is likely to deepen. the way are luxury and streetwear. However, they will also seek out opportunities for co-creation and will expect brands to engage with What is undisputable is that fashion digital assets in a format that is native to the spaces industry leaders are interested in exploring the they inhabit, rather than content that repeats potential of virtual fashion. across channels. “We say to any fashion brand we work with: The crypto fashion opportunity will demand it’s experimental. It’s not always going to work significant investment, experimentation and a new and we can’t guarantee it will work,” said Amber playbook. Brands will need a strategic mindset and Slooten, co-founder and creative director of The a willingness to develop partnerships and harness Fabricant, a digital fashion house that helps brands a variety of talent to deliver high-quality content, create their own virtual products and has worked either in-house or via third-party collaborations. In with brands including Adidas, Marques Almeida an arena characterised by a large amount of hype, and Buffalo London.164 it will pay to seek out business cases that spark excitement but remain on-brand. Amid the hype, there are also reasons to exercise caution. One concern is the environmental The crypto fashion opportunity impact of the blockchain technologies that underlie NFTs and, in particular, the energy will demand significant investment, required to validate transactions. Cyber security is also a potential cause for concern (see “Cyber experimentation and a new Resilience” on page 97), with counterfeiting and security breaches a significant threat. A recent playbook. cyber attack on the artist Banksy’s official website caused a collector to pay £244,000 ($334,000) for a To do this, it may be necessary to take a new counterfeit NFT.165 lens on ROI, focusing on less measurable benefits such a brand awareness and marketing impact, as “To assume that… NFTs or more generally well as setting flexible targets that are calibrated blockchain won’t be an incredibly volatile to potential, rather than focusing exclusively on environment for the next five years is to have the bottom line. Flexibility will be key, and brands forgotten the lessons of history when it comes to should remain cautious in deploying their capital. the internet,” said Ken Seiff, a managing partner However, the risks should not deter them from at Blockchange Ventures, a venture capital firm engaging with this rapidly growing digital universe. 60

EXECUTIVE INTERVIEW Gucci: Testing Luxury’s Opportunities in the Metaverse Robert Triefus Executive Vice President and Chief Marketing Officer, Gucci Intangible products such as NFTs and digital The metaverse became one of fashion used in games and other virtual the fashion industry’s hottest environments are a fast-growing area of buzzwords in 2021, as interest interest for luxury brands, but will their in digital products linked to experiments in the metaverse pay off? Gucci’s blockchain-powered non- chief marketing officer Robert Triefus believes fungible tokens (NFTs) exploded, the immersive world signals a paradigm shift and activity on virtual reality and expects it to drive a ‘very significant new interfaces surged as the global revenue stream’ for the brand in the years fanbase of video games made ahead. their presence felt. Luxury brands raced to get a foothold in — by Robert Williams these fast-evolving virtual worlds, with Gucci among those leading the charge. In 2021, Gucci auctioned off its first NFT and issued its first-ever virtual sneakers, selling the 3D animated kicks for $12 a pair. Staging virtual brand activations on the Roblox platform and life simulation game The Sims, it has also created assets for Pokémon Go and Animal Crossing. The 61

CONSUMER SHIFTS The State of Fashion 2022 brand even hired a dedicated not 100 percent sure yet what around added value that comes team to work on developing that relevance is but we’re going with specific products, where digital products under creative to pilot [this], we’re going to there may be a narrative linked to director Alessandro Michele. experiment, and have some it. Digital collectibles may inspire Overseeing Gucci’s experiments learnings and insights as a result. physical manifestations. This will in the metaverse is Robert Triefus, take time, as brands are [ just] the brand’s chief marketing Why is the audience for NFTs beginning to understand how officer who has been a central an interesting market to they can add value through NFTs. player in a multi-year push to engage with? Is there really Then, as with any new technology, build a sprawling and highly significant overlap between the customer equally needs to engaged online community. But luxury consumers and the understand what’s in it for them, establishing Gucci’s foothold in market for NFTs? how you purchase NFTs, how the virtual realm isn’t just about you potentially resell them. That marketing, Triefus says. In the As we think about the Gucci learning experience is essential as years to come he expects the community, we do think a foundation. metaverse to become a “very about adjacencies, or other significant” driver of revenue communities and cultural groups Isn’t there also an issue growth. that potentially intersect. Digital around customers’ ability art has been a growing area of to enjoy them? It’s not As blockchain technology cultural intersection with fashion necessarily intuitive, how you burst into the digital art for a few years. would admire an NFT or show world with the emergence it to somebody. of NFTs, Gucci was quick to How valuable to you is the get involved, auctioning off intersection that NFTs have Yes. The ease with which the an NFT for charity in June with the cryptocurrency end-user can understand, benefit 2021. Since then, brands community? and appreciate what NFTs offer including Dolce & Gabbana, still has a way to go. Rimowa and Louis Vuitton Cryptocurrency is linked almost have also released NFTs. But inextricably to NFTs and that’s an NFTs’ valuations skyrocketed luxury brands aren’t known area with great future potential. in early 2021 but fell for being first adopters of new I think cryptocurrencies will significantly later in the year. technologies and NFTs remain progressively become better As a luxury brand, whose a niche market, so what is it understood, and also some of the business is based on selling about this space that has the issues surrounding [blockchain’s] things that are meant to industry in such a hurry to sustainability, which have been retain their value over time participate? of concern for NFTs too, will be and be quite durable, do you resolved. It’s an area of test and have concerns about the The industry has changed. learn, but I would suggest in reputational risk of being a Whereas back in 2000, naysayers probably a year or two these areas first mover in a space like this? were saying e-commerce could will be much more pervasive in never be a luxury experience, terms of how fashion brands are When you test and learn, today there is a deeper engaged. you always do that with an understanding that digital understanding that the learnings can lead to enhanced [client] The NFT space still feels like may move you not to proceed. Is experiences. When it comes to it’s only relevant to a fairly it better to test and learn or sit on NFTs, it’s going to require a lot narrow swathe of fashion the sidelines? If you ask me, it’s more time to understand what consumers. What evolutions better to test and learn. they can represent in terms of could help pave the way for customer experience or value- broader adoption? Speaking about the metaverse add. But you’ve seen a significant more broadly — whether it’s number of brands within the One is the actual application. NFTs or your recent projects sector saying, okay, we believe There are opportunities around on virtual reality interface that NFTs have relevance, we’re authentication, providing an Roblox, where you staged additional sense of authenticity a Gucci Garden exhibition and security to customers. Or and sold high-top sneakers — 62

EXECUTIVE INTERVIEW what are some of the top-line short while. This demonstrates solutions emerging for better learnings your team gained that they have become very compatibility? from these experiences? successful at understanding how to monetise virtual experiences. In terms of collectibles and digital There’s the dynamism of the We know that people are willing assets, we certainly want to try gaming world, which has grown to pay good money for NFTs, for to create value by allowing assets significantly, probably because digital collectibles, and to have to be used in multiple universes of [pandemic] lockdowns, but a second life in the metaverse. or metaverses. Where that isn’t also because of the innovation So the revenue potential is feasible, we have to look to create that is going into the experience. absolutely there. One has to something that is appropriate and Then there are more and more understand how to curate the authentic to a specific metaverse. second worlds where you can experience as in the physical With The Sims and with Roblox, express yourself. There is world, and make sure that the way we entered those probably an underestimation experience is delivering what the experiences and those worlds of the value being attached to customer would expect from the was to co-create with creators individuals who want to express respective brand. from those communities, who can themselves in a virtual world ensure there is authenticity. with a virtual product, [through] Still, with some initiatives in a virtual persona. The idea that the metaverse it’s hard not to Social media platforms everything has to be physical suspect the brand is doing it remain the “second world” is very quickly being disproven. for the headlines. How much of we’re most familiar with We had 19 million visitors to the the activity we’re seeing in this — and it’s one where Gucci Gucci Garden within the Roblox space is just tech-washing? is very active. Since the metaverse. pandemic, you’ve left the Of course, to be perceived as a fashion week calendar and Could you tell us a bit about brand that is innovative, that is have been setting your own how fashion brands’ deals are leading potentially the industry pace for releasing designs structured with emerging or the sector, those are great and content online. What’s players in the metaverse, like perceptions. But I think Gucci working and what isn’t right Roblox or The Sims? Are has been recognised as a brand now in terms of your social any brands actually seeing that is authentic, that doesn’t put media investments? revenue from these initiatives marketing ahead of trust with its so far, or is it more of a community. There’s too much Because of Covid, we decided not marketing investment? at stake in these innovations. to put on physical events [until] You’ve got to go into it with our first physical fashion show It depends on the objective. It your eyes open and a belief that for some time, [which was] on might be about branding, or a they can ultimately benefit the November 2nd in Los Angeles. revenue share, or a combination business and the brand. We have The way that we have been of the two. I won’t tell you how a dedicated team that is focused able to navigate these unusual we structured our different deals on this area. We really want to be circumstances has been to exploit [but] what I can tell you is that we able to understand what it is like all the digital platforms that are have proven to ourselves through to exist in the metaverse. available to us. In the West, I’m these collaborations that the thinking of Instagram, Snapchat, virtual world can create a very One thing that feels like a TikTok, Twitter, YouTube. Then, significant new revenue stream. sticking point with virtual in China and in the East, there’s products is that they’re another whole ecosystem. How significant? How often limited to one specific Each platform’s community is lucrative do you think the platform. Consumers are based around a certain type of metaverse could become for bouncing around between experience, and if you go on to brands and how soon can it be social networks and games, that platform with an experience monetised? so does it make sense to buy that isn’t relevant, it’s not going to a digital product that is only be successful. Roblox has a remarkable market usable in one of them? Are any capitalisation… and they’ve This interview has been edited and condensed. only been around for a very 63

The State of Fashion 2022 FASHION SYSTEM 06. SOCIAL SHOPPING 07. CIRCULAR TEXTILES 08. PRODUCT PASSPORTS 09. CYBER RESILIENCE 10. TALENT CRUNCH 64

06. SOCIAL SHOPPING Social commerce is experiencing a surge in engagement from brands, consumers and investors alike as new functionality and growing user comfort with the channel unlocks opportunities for seamless shopping experiences from discovery to checkout. Though use cases differ across global markets, brands should double-down on tailored in-app purchase journeys and test opportunities in technologies such as livestreaming and augmented reality try-on. The use of social media to discover and shop increasingly augmented with advanced technology. for fashion gained traction over the course of the Indeed, social commerce — from in-app checkouts Covid-19 pandemic as customers — unable to visit on social media platforms to sales transactions stores or socialise in-person during global lockdowns on livestreams — is already booming in China, — spent more time at home scrolling through their where super-apps like WeChat offer users a wider feeds. Indeed, 74 percent of consumers say that they array of functions than just social networking are now more influenced to shop via social media and messaging services, and social media players than they were before the pandemic, and 70 percent like Douyin and Xiaohongshu have boosted their cite clothing as one of the product categories they e-commerce capabilities.170 In 2021, sales from shop for most on social media.167 social commerce across all sectors in China are set to top $363 billion (which includes products or While Western markets may still lag China services purchased on social networks regardless in rates of adoption, social shopping has gained of the method of payment or fulfilment), up a global foothold and is poised to grow in the 35.5 percent from the previous year.171 This year ahead as social media giants from Facebook is approximately 10 times higher than social and Instagram to YouTube and Snap Inc. invest commerce sales in the US.172 heavily in shopping features and take advantage of new functionalities. Looking forward, in the Product discovery and engagement with US alone, annual sales through social commerce brands on social media is already commonplace are expected to surge from approximately $37 across most global markets, with customers used billion in 2021 to $56 billion in 2023 (this includes to seeing brand activity and references alongside sales of all products and services agreed on social social exchanges with one another and influencers platforms regardless of the method of payment or and within entertainment platforms. In fact, fulfilment).168 By 2027, worldwide social commerce nearly half of US TikTok users say they have sales are set to reach over $600 billion.169 purchased a product or service from a brand after seeing it advertised, promoted or reviewed on the In some markets, social media is fast platform.173 However, the next frontier for social becoming a preferred way of shopping and commerce in Western markets is at the narrow end interacting with brands, as social platforms are 65

FASHION SYSTEM The State of Fashion 2022 of the marketing funnel — seamlessly checking out Chen, Alibaba Group’s head of fashion and luxury in-app and paying for products within the social for the UK, Spain and Northern Europe.177 media ecosystem — where a reduced number of clicks to convert an impression into a sale offers a Nevertheless, interest in social commerce promising route to sales for brands. is growing fast in markets like the US, where the number of people who make at least one purchase As such, social media platforms are making on a social channel during the calendar year is moves to embed the entire shopping journey — expected to be 50 percent higher in 2022 than from discovery to checkout — into their core user it was in 2019, reaching 96 million customers.178 experiences with functionality ranging from In the UK, where consumers have been more livestream sales and integrated product catalogues hesitant, compound annual growth rates for social to augmented reality try-on. Fashion is the largest commerce usage are still expected to be more than single category sold via social media in the US, as 15 percent from 2019 to 2022, growing a further 9 well as the leading category for livestream events,174 percent in 2023 — suggesting that 15 million people suggesting that brands will find consumers willing will have made a social commerce transaction to shop on these channels. during that year.179 “There’s no reason to say that just because Social commerce consumers typically skew we [in the West] don’t have [companies like] young, meaning the medium has special appeal for Alibaba [whose platforms Tmall and Taobao brands targeting Gen-Z and Millennial consumers. have livestreaming functionality baked into This means there is still significant room to grow as their ecosystems], we won’t have [livestream] consumers become more comfortable with in-app e-commerce,” said Sophie Abrahamsson, chief payments and platform functionality improves. commercial officer at Bambuser, a B2B player Brands have a window of opportunity to tap into equipping brands with livestream technology local consumer needs and build strategies that that in 2021 entered into a master agreement with capture market share early. LVMH. “I don’t see it as an obstacle, it’s just a different starting point.”175 To connect brands with consumers, global social media giants are doubling down Engaging with social commerce formats on developing in-app shopping experiences. including those in livestream channels in China can Instagram, which launched its Shop feature in 2020 provide brands with learnings that are beneficial and partners with brands such as Chloé, Michael when adapted for other geographies and platforms. Kors, Oscar de la Renta and Marc Jacobs to make Tommy Hilfiger held a livestream in China that products shoppable either in-app or by steering attracted 14 million viewers and sold 1,300 hoodies customers back to their own websites, is ramping in two minutes, which encouraged the brand to up shopping features such as Drops. This is a new extend its livestream programme to Europe and destination within the app where consumers can North America thereafter.176 However, specific discover and buy the latest and upcoming product market characteristics in China — including drops from brands like Adidas.180 longstanding consumer comfort with in-app shopping and the outsized influence of key opinion Meanwhile, Snapchat is applying its leader (KOL) hosts for livestreaming — cannot be augmented reality capabilities to enable users simply replicated in other markets. to virtually try on clothes and accessories from brands such as Prada and Piaget, and TikTok “Tech, corporations and consumers need to has been expanding commerce partnerships and be at the same pace. In China, all three things came functionality, testing livestreamed shopping with together way before Europe and the US,” said Mei select brands.181 In the US, during Walmart’s first 66

06. SOCIAL SHOPPING shoppable livestream fashion event with TikTok, skews male, attracting attention from menswear it gained seven times more views than anticipated and streetwear companies such as sneaker and grew its TikTok followers by 25 percent, marketplace StockX, which joined Discord to according to William White, chief marketing promote its latest products.184 officer for Walmart US.182 In August 2021, the social video platform announced an expansion of Brands looking to leverage community- its partnership with Shopify including a pilot test specific platforms as a way of boosting the of TikTok Shopping with select merchants across discovery phase of social commerce should take the UK, US and Canada, which could help brands care to engage authentically with users. “You don’t enable social commerce.183 have to be like the audience, you don’t have to pretend [to be] one of them if you’re not, they’ll see Looking beyond tech giants and straight through it. All you have to do is show you incumbents, new venture capital-backed entrants, understand them,” cautioned Adam Harris, global such as Flip and Chums, are offering fashion head of Twitch’s brand partnerships studio.185 brands opportunities to engage with shoppers Meanwhile, outside the tech ecosystems of the US on hyper-immersive platforms, while platforms and China, specialist social commerce platforms such as Amazon-owned Twitch, Discord and are gaining ground such as Trell in India, which saw Clubhouse (which do not currently offer in-app investment from the likes of H&M Group.186 checkout features) enable brands to target specific demographic cohorts. In the case of Twitch and While social media channels have Discord, for example, their gaming-enthusiast user typically been viewed as a means to increase reach and drive traffic to brand-owned websites or Exhibit 10: Social commerce penetration in both China and the US will continue to grow E-COMMERCE RETAIL SALES, % SHARE OF TOTAL China US 15 10 5 0 2018 2019 2020 2021E 2022E 2023E 2017 SOURCE: EMARKETER, JANUARY 2021 67

FASHION SYSTEM The State of Fashion 2022 multi-brand e-tailers — owing to limited platform increase their time spent on digital platforms functionality, hesitation on the part of brands to and spark trends that are born on social media. relinquish control of checkout and payment data “Whether or not Gen-Z is your primary consumer, to third-party channels and previously lukewarm they definitely set the trends and drive brand heat. reception from consumers — social commerce is And when you look at where trends start and where reaching an inflection point. “The old ‘buy’ button things go viral, it is almost always with Gen-Z,” doesn’t work… you are taking your shopper away said Jenny Campbell, chief marketing officer at from their online experience to fulfil a purchase… Kate Spade.190 [so] you burst the bubble. You create what we call an ‘abandoned basket effect,’” said Maria Prados, head To capture the demand for social commerce, of vertical growth teams at Worldpay.187 brands will need to implement a strategy that can scale fast. The speed at which TikTok took the Soon, however, even seamless payments world by storm is just one example of the pace of will become table stakes, so brand laggards must uptake, so fashion brands will need to be agile to overcome the reluctance to surrender control and ensure they are meeting consumers in the digital increasingly have conversion in mind when investing spaces where they are spending time. As such, in social. With the number of fashion brands companies should tailor their approach for existing adopting Instagram as a sales channel growing, mainstream platforms, while conducting A/B more are likely to follow their lead next year, moving testing on emerging platforms to experiment with away from a focus purely on reach and seizing reaching specific customer segments. opportunities to generate paying social customers. However, brands will need to apply a tailored Largely thanks to WeChat, China has seen approach to users of each platform; while some might huge strides in frictionless payments, shortening welcome a more playful style of engagement, such as the sales funnel by reducing the time and friction those on TikTok, others are more conventional. There between discovery and purchase. The ability to are regional differences, too, with consumers in some interact with sales agents on WeChat to make Asian markets approaching livestreams with more purchase decisions, and the importance of mini- of a transaction-forward, deal-focused mentality programmes both on WeChat and other platforms than consumers elsewhere. While navigating these in the Chinese social ecosystem, point to a future nuanced considerations, brands will also need to integrated model that global platforms could look to stay abreast of the latest trends and innovations, as for inspiration.188 currently niche platforms could very quickly become mainstream — or currently buzzy platforms could Brands that may have had concerns about just as quickly lose their edge over rivals. relinquishing valuable customer and conversion data to third-party channels will need to devise Looking ahead, as shoppers place innovative ways to collect data, such as through increasing importance on convenience, brands discount code-driven sign-ups. Alternatively, that can unlock the potential of social commerce some brands are choosing to build their own by offering simple, frictionless shopping will be in-house social channels. For example, US retailer well-positioned to unlock revenue streams. Indeed, Nordstrom created its own livestreaming platform brands thinking ahead to the longer-term growth in 2021, where it hosted shopping events at which of social commerce and permanent changes in customers could chat and purchase products from global consumer shopping habits will use next year featured brands such as Burberry.189 to test and learn from approaches that leverage social media platforms to create seamless shopping Brands bold enough to test social-first experiences from product discovery to checkout. strategies will be rewarded as younger consumers 68

EXECUTIVE INTERVIEW Snapchat: Enhancing the Social Shopping Experience Rajni Jacques After years as a fashion director Global Head of Fashion and Beauty at Condé Nast titles Allure Partnerships, Snap Inc. and Teen Vogue, Rajni Jacques switched gears. In June 2021, Prada, Dior and American Eagle are among she moved to Snapchat’s parent the fashion brands harnessing Snapchat’s company, Snap Inc. to serve as its augmented reality lenses, which overlay digital global head of fashion and beauty images on the real world to create immersive partnerships. Jacques joined at user experiences or allow shoppers to virtually a time when the platform and try on products. As Snap Inc. works to make its its competitors were making big social platform more shoppable, the company’s pushes into social commerce, new global head of fashion and beauty launching more shopping partnerships, Rajni Jacques, is tasked with capabilities directly within their bringing more top brands into the fold. apps. For Snap, which considers itself a camera company first, — by Marc Bain those capabilities have primarily centred on augmented reality (AR) and features such as virtual try-on that have drawn brands and retailers ranging from Prada and Dior to American Eagle and Champs Sports. The aim thus far, however, has not been to turn shopping into a revenue stream by grabbing a cut of sales. Snap says it neither takes a commission nor charges fees for brands to use its AR products. Instead, the company, which 69

FASHION SYSTEM The State of Fashion 2022 derives effectively all its revenue has set up a Shop tab on its social platforms, particularly from advertising, views shopping profile page that users can since Snapchat’s audience may as a way to bolster its appeal to browse, much like a regular be smaller than some of its users and brand partners alike. e-commerce site, or there’s bigger rivals? Jacques’s mission is to attract and Dior’s approach with AR for its assist those fashion and beauty B27 sneakers to “Shop Now,” It’s all because of AR. To be able brands looking to use Snap’s which takes you to the product to play with a brand is exactly technology to connect with its on Dior’s e-commerce site. what Snapchat gives you [and] largely Gen-Z audience. What else is Snapchat doing to makes it very different in the make it easier or more enticing marketplace. AR allows you to Snapchat recently launched a for shoppers to buy products put [clothes] on. When it comes number of new products and directly in the app? to beauty, being able to swipe features to support shopping different colours on your eyelids, on the app, such as expanding We are long-term investing different colours on your cheeks, virtual try-on, improving the in augmented reality and or different lipstick colours. look and movement of fabric, personalisation for everyone. There’s nothing like having an and introducing API-enabled As consumers, we love immersive experience. lenses that let brands create personalisation. Snap has been content based on real-time laying the groundwork for an Are there certain categories product inventory. Why is the improved online shopping of products that shoppers are company investing so much in experience and creating value more willing to buy in the app? shopping? for the shopper but also for the fashion brands, to help reimagine Beauty is at the forefront of that, We think of ourselves as [a what their fashion [point of but then accessories: bags, shoes, camera company] first, and view] is [and] help reimagine jewellery. when it comes to AR, we have their campaigns. AR is really at about 200 million Snapchatters the forefront of this. And it is Is Snapchat doing anything engaging in AR every single day. working. For instance, Dior’s specifically to attract beauty That truly is revolutionising try-on campaign resulted in over brands and help them to how fashion and beauty brands [six times the] return on the ad engage users on the app? operate. We’re harnessing a spend. Gucci, when we did all different type of power when it their sneaker try-ons, and even Oh, yes. I work on that side with comes to shopping [and] when their beauty stuff, reached about the bigger companies, but then it comes to retail, unlocking a 20 million people. I also make sure to work with whole new range of experiences smaller companies, diverse for Snapchatters and people on But there are so many different companies. I partner with a the app to engage with products. ways brands can use our couple of smaller companies Everyone gets to try on a variety technology. We worked with [like] Ace Beauté [and] Kaja of different products from Farfetch and were able to do Beauty. They’re niche but they makeup to shoes to sunglasses to voice-enabled controls, where have such an array of product. jewellery, and there’s way more shoppers can say what they’re Allowing them to create lenses that’s coming down the pipeline. looking for, like “I’m looking — we have something called the We are investing heavily in it for a polka dot jacket.” We did Lens Web Builder — where because we know that brands are something with Prada where they can go in and create their looking to, in a way, future-proof they tapped into our gesture business profile and create their their businesses. recognition, where it allows you own lenses themselves, so they to stand in front of the camera don’t necessarily have to have There are different ways and with your actual hands swipe a tech arm to be able to do that. shoppers can discover and buy so you can change the colour. That allows them to be in the products through Snapchat game with your MACs or [other] right now. There’s the big companies. approach taken by retailers like American Eagle, which If I’m a brand, what’s the value One of the areas where of trying to attract shoppers Snapchat has really expanded on Snapchat versus other its capability is virtual 70

EXECUTIVE INTERVIEW try-on. You started with marketing plans: What can we beauty, the mission is to bring the Gucci and shoes, and more do that, one, shakes things up? best organic opportunities across recently expanded into other What can we do that, two, uses the Snapchat app, and Snap categories such as clothing our products in the best way Inc. as a whole. That’s the broad and accessories. Which other possible, so that everyone else scope of it: to bring the top brand fashion brands are using the can see all the cool things that we partners, really having them function and what sort of can create? be part of our ecosystem. We products are they offering? define organic as a non-revenue Are there any forms of opportunity. Hopefully, that Your Pradas, your Diors, your marketing that seem to work will lead to deeper investment Guccis. One of my favourite better on Snapchat than across Snap’s products from the activations we did was with others, specifically for fashion partners. We don’t want it to be American Eagle. We did this thing retailers? one-and-done. with Connected Lenses. Imagine it being social shopping, going When it comes to fashion, you Are there any lessons you back to the days where you went have to truly give an experience were able to bring from your with your friend to the mall and that someone hasn’t seen before, background in fashion media shopped. We created Connected or you have to give an experience that have helped in your role at Lenses to allow that immersive where they feel like there is an Snapchat? experience to happen. It helped emotional connection to what consumers experience the same you’re giving them. Dior did a I came from Condé [Nast] as lens together, so they’re in the lens for one of their fragrances, fashion director of Teen Vogue same room together, like friends and it changes your environment and Allure, but my job wasn’t are actually transported to the with all these flowers. You could necessarily just being the fashion American Eagle virtual store and be on the dingiest street in director. As magazines started to can live chat, select outfits and do New York City, and you use this get smaller it was about me doing all those things that you would do lens, and that dingy street gets a lot more. Not only did I look in real life. We’ve done something transformed into something else. over the covers and the centre of with Piaget where we have a wrist Allowing your customer to be book and stuff like that, but I also try-on, so you can actually put part of something and experience worked in brand partnerships. I your hand in front of the lens and something on their own using the also did branded content. I also see what a watch looks like on lens is what really seems to work. worked with the business side to your wrist. With Kay Jewelers we Gucci did a lens, and it was tied make sure that, alright, if we’re did earring try-on. There are so to when they did a collaboration going to have any experiential many different brands that use with The North Face. It’s a moments that tag back to that the AR lens. camping experience. You can editorial title that I was at, what literally go from day to night does that look like? Doing all Shopping directly on social through that, and it transports those things, being able to create, platforms in the US and you to being outside, and and using that head gives me a Europe still happens on really understanding what that broad range to use everything a relatively small scale collaboration is about. Anything that I learned. compared to China. For brands that allows someone to feel and retailers, the value is still something is obviously the way This interview has been edited and condensed. mainly as a place to market to go, as opposed to something to shoppers. How are brands that is very like, “Here is my shoe. using Snapchat as the top of Buy it.” It has to have a narrative, their marketing funnel? a story, a feeling behind it for people to connect. Brands look at Snap and say, “Wow, there is a lot of innovation Where do fashion and beauty there. How can we be a part of partnerships fit into Snap’s that?” I work with them to create larger goals as a company? top-of-the-funnel business pushes and help them with their Being the head of fashion and 71

72

07. CIRCULAR TEXTILES One of the most important levers that the fashion industry can pull to reduce its environmental impact is closed-loop recycling, a system which is now starting to be rolled out at scale, promising to limit the extractive production of virgin raw materials and decrease textile waste. As these technologies mature, companies will need to embed them into the design phase of product development while adopting large-scale collection and sorting processes. Fibre processed by The Billie System. Novetex Textiles. Globally, the fashion industry is responsible recycling using PET (polyethylene terephthalate) for around 40 million tonnes of textile waste a bottle waste, which does not address the need to year, most of which is either sent to landfill or recycle materials from the fashion industry and has incinerated.191 Textile production, meanwhile, been criticised for breaking the well-established consumes vast quantities of water, land and raw closed-loop process of recycling plastic bottles into materials. Engaging in closed-loop recycling is other plastic bottles.195 If the industry is to reduce seen as a critical opportunity to both reduce the the volume of waste going to landfill and limit extractive production of virgin raw materials and the extractive production of textiles, closed-loop limit textile waste. Closed-loop systems recycle recycling systems will be required at scale. materials again and again, so that they theoretically remain in constant circulation. The shift to more closed-loop systems is underway, driven in part by regulatory efforts Textile production is more resource- to support a circular economy, which aim to depleting than many other sectors. In the European relieve some of the pain points relating to waste Union, for example, the textile sector is the fourth- collection and sorting. The EU’s Circular Economy biggest consumer of primary raw materials and Action Plan, scheduled for adoption in the third water (following food, housing and transport),192 quarter of 2021, incorporates an objective to while the industry’s reliance on fossil fuel-based ensure circular economy principles are applied textiles like polyester only adds to the challenge. to textile manufacturing, products, consumption Yet there are pockets of the global fashion industry and waste management.196 Meanwhile, the EU’s that are starting to get serious about addressing Waste Directive Framework requires countries these challenges at scale by working towards to separate all textile waste by 2025, and several developing closed-loop recycling processes that European nations have implemented extended have the potential to limit textile waste, reduce producer responsibility schemes, making brands carbon footprints and partly upend fashion’s and retailers responsible for post-consumer extractive business model.193 waste and requiring financial contributions from producers for the collection, recycling and reuse of Currently, less than 10 percent of the global products.197 textile market is composed of recycled materials,194 and this is largely the product of open-loop “Regulators should keep on putting that 73

FASHION SYSTEM The State of Fashion 2022 pressure on markets,” said Patrik Lundstrom, percent of cotton was recycled in 2020.201 However, chief executive of Swedish textile recycling among recent initiatives, Hong Kong-based yarn company Renewcell. “Every country needs to take spinner Novetex Textiles, in collaboration with responsibility and create that circularity.”198 the Hong Kong Research Institute of Textiles and Apparel (HKRITA) has developed a method called China published a five-year plan in July The Billie System for the mechanical recycling of 2021 to develop its circular economy by promoting cotton blends. The system does not consume water recycling, remanufacturing and renewable or produce chemical waste and currently processes resources. In the US, the National Institute for up to three tonnes of fabric per day.202 Standards and Technology is making progress in its ambition to facilitate a circular economy To enable recycling of the various textile for textiles.199 Still, if the industry is to align with fibres on the market, more innovative recycling global climate objectives and its own commitments solutions other than shredding are required. For on sustainable materials, it will also need to take non-blended materials, a number of industrial- action at a brand level to make a difference. scale solutions are beginning to hit the market, and further capacity is set to become available. For One challenge the industry faces is example, Renewcell has partnered with brands achieving sufficient scale in closed-loop processes. including H&M and Levi’s and has an agreement However, recent innovations are starting to reach with Beyond Retro’s parent company Bank & maturity, moving from pilots to proofs of concept Vogue, which supplies post-consumer waste to on industrial levels. Renewcell.203 Renewcell is building a new plant that will be able to recycle 60,000 tonnes of textiles a If the industry is to align with year by 2022. Meanwhile, US materials company Eastman is investigating using polyester in its new global climate objectives and its $250-million recycling plant.204 own commitments on sustainable One of the technical challenges facing the industry is the high proportion of garments made materials, it will also need to take from material blends such as cotton and polyester, which make them hard to separate. Still, after years action at a brand level to make a of research and development and pilot ventures, this is another area that is reaching maturity and scale. difference. In Europe, viscose producer Lenzing and recycling company Sodra are working in partnership to Mechanical cotton recycling, through which increase the annual capacity of Sodra’s technology cotton is shredded into reuseable fibres, has been for blended fibre, with the goal of processing 25,000 in use for a long time. One example of mechanical tonnes of textile waste per year by 2025.205 In recycling is the large-scale pilot in Bangladesh by Turkey, denim company Isko has signed a licensing the Circular Fashion Partnership, led by the Global agreement for the “green machine” technology Fashion Agenda, which aims to capture and direct developed by HKRITA, which recycles cotton and post-production waste back into the production polyester blends.206 The technology is also being of new textiles, as well as developing solutions for scaled with partners in Indonesia.207 In Australia, deadstock. The partnership plans to roll out to BlockTexx is building a textile recycling facility for countries including Vietnam and Indonesia.200 polyester-cotton blends that aims to recycle 10,000 tonnes a year by the end of 2022.208 Mechanical cotton recycling has historically been more difficult to implement for garments that are already worn, mainly due to challenges in collection and sorting. As a result, less than 1 74

07. CIRCULAR TEXTILES A critical piece of the used clothes recycling Sysav waste treatment and recycling company puzzle is collection and sorting. “If there can be opened the world’s first industrial-scale, fully larger-scale collection and sorting, that would help automated textile sorting plant in 2020, with the us tremendously,” said Ronna Chao, chairman of capacity to sort 24,000 tonnes of textile waste a Novetex. “I have limited space where The Billie year.210 In the same year, Belgium-based Valvan System is housed, so I can’t be the collector, storer Baling Systems launched Fibersort, an automated and sorter all at once… [but] if we can partner with, sorting machine that can sort around 900 for instance, NGOs or other players within the kilograms of post-consumer textiles per hour.211 industry [in other countries], where they can do the collection and the sorting… then we can process Some companies are also pioneering digital that in a more meaningful way.”209 solutions to manage material flows. Sorting for Circularity, created by Fashion for Good in 2021, To that end, authorities, waste companies is planning to launch a digital platform on which and brands are making efforts to develop solutions. textile waste from sorters can be matched with These offer some promise, but further efforts recyclers. Brands including Adidas, Bestseller and are required, including moving from manual to Zalando are facilitating the project. In addition, a automated sorting at scale. For example, in Sweden, number of brands are helping to solve the sorting Exhibit 11: Technological maturity, changes to design processes and investment are considered most important in scaling closed-loop recycling MOST IMPORTANT1 FACTORS TO EFFECTIVELY SCALE CLOSED-LOOP RECYCLING, % OF RESPONDENTS 68 62 62 57 57 52 38 Technological Designing for Investment Consumer Sorting of Collection of Access to maturity of closed-loop and capital demand for textile and textile and feedstock solutions other material recycled other material products waste waste 1 Responded “very high importance” or “high importance” SOURCE: BOF-MCKINSEY STATE OF FASHION 2022 SURVEY 75

FASHION SYSTEM The State of Fashion 2022 problem by encoding detailed information about For that reason, some parts of the industry materials into products with digital identifiers (see are coalescing around common design standards, “Product Passports” on page 88). such as the Jeans Redesign Project by the Ellen MacArthur Foundation. By May 2021, 80 percent of A critical piece of the used the project’s participants had made fabrics or jeans that complied with the guidelines.214 Additionally, clothes recycling puzzle is designers have more access to software that can support design with recycling in mind, such as collection and sorting. the Circular Material Library from Circular Fashion, which showcases materials that have been While these initiatives show the industry tested and validated for future recyclability.215 is making progress, some issues remain to be Furthermore, innovations such as Ecocycle, a resolved. One significant challenge is that recycling dissolvable thread recently launched by industrial facilities are sometimes far from the source of the thread company Coats, are making the recycling feedstock, which could lead to significant emissions process more efficient, unlocking the removal of resulting from long-distance transport. non-textile components and facilitating easier sorting of materials from the same garment. “We’re taking clothes from [Asia] and bringing it all back to Sweden, making new “We know that it will be more challenging Circulose [material], stripping it back and then for some fashion brands — probably SMEs, for making new viscose fibre. However, our next plant instance — to invest in closed-loop solutions at this is going to be next to a harbour [and], of course, in early stage in the technology’s development,” said the long-term, we probably want to have a plant Shaway Yeh, founder of Shanghai-based fashion also in Asia, and maybe one in the Americas,” said innovation and sustainability agency Yehyehyeh. Lundstrom of Renewcell. “There will be capex “But designers really do need to make meaningful investment needed to make all this happen. How do efforts to embed this principle in their studios we make that as low as possible and manage that? now, if they haven’t already. The creative teams in So that’s another trade-off with going circular.”212 the business should be incentivised by leadership to harness some of their innate creativity to Experts mostly agree that closed-loop scale up circular material use. It’s just a matter of recycling will not realise its potential until priorities.”216 products are specifically designed for that purpose, for example by facilitating the easier separation As an increasing number of fashion players of materials through design. Claire Bergkamp, commit to circular materials, scaling will be chief operating officer at Textile Exchange, a essential in collection, sorting and recycling. nonprofit aimed at improving the environmental However, the rollout of industrial processes will standard of raw materials production, suggests drive down prices and boost demand for garments that this also means incorporating the intention to made from circular materials. To maintain a recycle into design curriculums and industry-wide competitive advantage and secure access to circular organisational thinking: “What’s going to happen textiles, fashion players may need to invest directly to the product when the first user is done with it? in recycling facilities and contribute to finding Is it durable? Will it have a long enough life? That’s solutions for collection and sorting. Scaling, of the crux. If you are intentionally making something course, will require capex and will mean decision- that is not long-lasting, it needs to be recyclable,” makers will need to look past the still comparatively she said.213 cheap costs of virgin materials. 76

07. CIRCULAR TEXTILES To be sure, closed-loop recycling processes a wider system change for circularity. “Recycled also present environmental challenges, including always has lower impact [than linear]. There’s no greenhouse gas emissions and significant water questioning it,” said Bergkamp. “It’s probably a use, with some critics suggesting that the reduction perfect solution for an imperfect situation.”219 in impact from closed-loop processes will not be enough to slow down fashion’s negative impact on While there is reason for optimism that climate change.217 “[Closed loop] is not the silver many closed-loop technologies will reach industrial bullet… the silver bullet is producing less stuff,” said scale in 2022, fashion leaders will need to approach Bergkamp of Textile Exchange.218 the challenge holistically, incorporating circular textile solutions into a wider effort to eliminate However, seen in the context of comparisons toxic chemicals, decarbonise the supply chain and with open-loop — or indeed linear — models, reduce emissions, if the industry is to significantly closed-loop processes are an important part of reduce its levels of environmental harm. Exhibit 12: The shift from linear to circular models requires closed-loop recycling technologies to be scaled Closed-loop recycling from In fashion, closed-loop post-consumer waste recycling is when textile product waste (both Closed-loop post-production and post- recycling from post- consumer) is recycled into new textile products so production waste that the materials remain in constant circulation Virgin Production of Consumer Landfill/ (garment-to-garment). Feedstock Clothing Use Incineration This process contrasts Open loop — recycled Open-loop upcycling with open-loop recycling, feedstock from other or downcycling (to non- in which one product is industries (e.g. PET bottles) clothing uses) recycled into a different product, simply delaying the material from going into waste once it cannot be recycled again. SOURCE: SIMPLIFIED FORM OF A NEW TEXTILES ECONOMY: REDESIGNING FASHION’S FUTURE, ELLEN MACARTHUR FOUNDATION WITH ANALYSIS BY MCKINSEY, NOVEMBER 2017 77

EXECUTIVE INTERVIEW Novetex: Encouraging Brands to Raise Their Game on Circularity The State of Fashion 2022 Ronna Chao Material innovations have long Chairman, Novetex Textiles been front of mind for Novetex Textiles chairman Ronna Chao, As fashion brands look to pursue closed-loop but full circularity is a more recycling solutions, it is increasingly important recent endeavour at her family to engage with suppliers who can help them business, which spins yarns like move toward sourcing circular materials. Merino wool, cashmere and Novetex Textiles has developed its own cotton to be shipped off to textile mechanical recycling process — a waterless, mills and knitters. In 2019, Chao mostly automated system that produces no negotiated a partnership with the chemical waste — but the company’s chairman Hong Kong Research Institute of Ronna Chao says reaching industrial scale Textiles and Apparel (HKRITA) and mass adoption of the new technology is a and the H&M Foundation to ‘chicken-and-egg’ conundrum. develop a patented mechanical recycling-process: one that is — by Rachel Deeley waterless, chemical waste-free and almost entirely automated. The six-step Billie System, named after Chao’s late grandfather and Novetex’s founder, sees unwanted fabric sanitised, separated from hardware like zippers and buttons, chopped to size, sorted by colour, shredded and sanitised again, then shipped as spools of fibre from Novetex’s Hong Kong headquarters to be spun into new yarn at its other factories in 78

FASHION SYSTEM nearby Zhuhai, mainland China. the way, that could be very other side, trying to convince As fashion brands’ interest in meaningful. The more people people, that “maybe [sourcing circular principles continues to get involved [and] join this recycled materials] is a little grow, Chao discusses some of consortium, the better… Maybe bit pricier than what you’d the remaining sticking points — storytelling is not the right term, expect, but this is something you from the limitations of recycled and advocacy sounds too political must do.” You may not be 100 fibres to logistical and regulatory — but really pushing it out. If percent circular or 100 percent roadblocks — and outlines where somebody is doing something sustainable from day one, but the industry’s biggest players good, why don’t they want to tell that has to be something that we need to step up. the world about it? That’s what move towards. I want to say, because when they You’ve previously said that tell the world about it, that could Are there issues with scaling all your clients — both textile really result in multiple layers and reaching that critical mills and consumer-facing of influence and a change in point of maturity in the brands — are now prioritising mindset and behaviour. technology? sustainability, and that Novetex’s work is just one part As a yarn producer, Novetex Well, [brands] don’t discuss of the bigger picture. What is quite far-removed from scale with us, because they’re else needs to change across the the final stage of garment not asking us for 20,000 pounds value chain to create a truly manufacturing. How of upcycled textiles. In the few circular economy for apparel? important is it that brands conversations that I’ve had with engage directly with you, brands where we’ve gone a little I really think brands can do a rather than relying on the bit beyond [that and] touched… great deal by sharing their stories, dialogue between yourselves on the topic of, “let’s close the and the biggest barrier that I and the next tier of suppliers? loop,” what I’ve heard would be think we at The Billie [System] [questions about] quality and see nowadays is that when a lot It’s very, very important, and I cost. Sometimes they do ask of these brands come to us, they think over the last two decades about scale, but it seems like want to work with us, and they’re our role has changed from just they expect quality to be very, very enthusiastic, but they do not dealing with the knitter to very very high [and for] the cost to be want us to mention their names, often dealing with the designer much lower. They’re giving us they do not want to tell a story, and the brands directly… which a mishmash of things, and they and so the good work that they’re is wonderful... We also have our want something that comes out doing in terms of sustainability role to play in pushing… the from all of that to be very useable and circularity is not widely movement forward. There are and uniform. Perhaps there’s a known. two [practical] ways to work disconnect between what they’re with The Billie [System]. One giving us, or what they think can How could brands tell a better is only to provide textiles for be done with their textile waste, story about the closed-loop processing without buying any and what they’re looking for. recycling that’s now available upcycled products from The from players like Novetex? Billie; the second is to purchase Cost is certainly a factor; all the knitted products from the recycled fibres are typically It’s not just [about] having a provided materials for a closed- more expensive than their label on the garment that says, loop cycle. virgin counterparts. When do “I used to be an old sock,” it’s you expect to see economies more advocacy, maybe working What are some of the of scale, so that the cost of with universities, working with remaining challenges when it recycled fibres will be just as research institutes... I think comes to integrating recycled affordable, if not cheaper? it’s also good to tell the story materials into existing apparel of partnership, so if it’s with supply chains? It’s a real chicken-and-egg a certain sorting company, or situation, because in order to working with a certain logistics That is a question that I would reach that scale, we would need company, the story of different love to hear the answer to from many, many more people to adopt types of partnerships along the brands. For us, we’re on the using recycled fibres and yarns 79

FASHION SYSTEM The State of Fashion 2022 in their design and production. industries and livelihoods very quickly, or they can just Everything is connected; if built around buying and decide, “Okay, we’re going to consumers demand more of it, selling bundles of used make 300 pieces of this using then the brands will make more, clothing. How do these our textile waste.” In most cases, and then they’ll place more such ecosystems form a part of a they’re willing to tell that story. orders with us. closed-loop, circular economy? One challenge with “In order to reach that I think it’s two separate things. I mechanical recycling is that often say, The Billie System is not it produces shorter fibres that scale, we would need a garbage processing machine. need to be blended with virgin We didn’t create The Billie so fibres to bolster the quality. many, many more that people can continue to make Is there a point where the more, and sell more, and throw technology will evolve enough people to adopt using away more. It’s really a tiny, tiny, so that it becomes truly self- tiny part of the solution. The sustaining? recycled fibres and greater effort needs to come from how we look at design, how We’re constantly in discussion yarns in their design we look at sourcing of materials, with HKRITA about how to how we look at merchandising, upgrade the parts in The Billie and production.” production, marketing and sales, System… Right now it’s only consumption and then disposal. under ideal situations that I can The Billie System currently process the [maximum capacity secures most of its feedstock Where do you see the potential of ] three tonnes per day... I don’t from B2B partnerships with for the fashion industry to know when we can achieve fashion companies and hotel really adopt circular design in that, where someday we will not groups, which can provide earnest? have to use virgin fibres. Unless unsold inventory, bedsheets consumers don’t mind [shorter, or old uniforms, but is there I think the larger the brand — and rougher fibres, but] I think an opportunity to bring post- this is a very personal observation [they] are very spoilt nowadays; consumer fashion waste into based on my experiences talking everything has to feel good, be textile-to-textile recycling? to these people — the bigger light, with all these performance the disconnect between the qualities; it has to be cheap, and it Right now, if there can be larger- departments. For instance, I can has to be beautiful. I won’t say it scale collection and sorting, that have a very, very meaningful and will never happen, but currently would help us tremendously. I enthusiastic conversation with I don’t see it happening within a have limited space where The the sustainability division of a short time. Billie is housed, so I can’t be the brand. They’re very helpful, they collector and the storer and the connect me with the different Your system can recycle sorter all at once. We always people in different locations textiles made from 100- talk about partnerships; if we to try to address the issue, but percent natural fibres, but can partner with, for instance, they may not be the ones to have what about those blended with NGOs or other players within any influence [over] design or synthetics? the industry [in other countries] merchandising. The design team where they can do the collection may also have strong opinions or In order to produce high-quality and the sorting, then let’s say initiatives about sustainability, recycled fibres, The Billie after six months they collect but they may not be as connected [System] prefers textiles from two tonnes of red sweaters, one to the material sourcing part 100 percent natural fibres. tonne of beige sweaters, then of the company. The smaller we can process that in a more brands that we’ve worked with Can The Billie System process meaningful way. are more nimble, because the textiles containing natural decision process and the range fibre blends, like a cotton-wool It’s interesting that you of influence is smaller. They can blended sweater or linen- mention other key geographies. make decisions quickly, and the cotton blended T-shirt? In Kenya and Ghana, for course of direction can change example, there are entire Yes. 80

EXECUTIVE INTERVIEW The Bille System factory. Novetex Textiles. How are fibres separated out, if at all? As a mechanical recycling system, we cannot separate the fibres through the upcycling process, so we prefer to collect items that have no more than two fibre combinations to maintain the purity of the recycled fibres. Regulators are increasingly turning their attention to environmental policies that will implicate the fashion industry, both directly and indirectly. How do you think the apparel industry can really seize this as an opportunity to become circular? Well, I’ll take ourselves as an example. [We have] difficulty shipping our fibres directly from our Hong Kong factory to our Zhuhai factory because there’s a rule against importation of waste. Now, I know that this rule probably came from many, many years ago when China was, like many developing countries, accepting other countries’ garbage… [but] the rigidity of that rule affects us because what goes through The Billie is sanitised three times, but it’s still labelled as waste. [As one company] it’s very difficult for us to go and lobby [regulators] to change that rule, so ideally, if… there are 20 people like us going to lobby them then it probably makes more sense for them to really take a stand, but if it’s just me and The Billie it’s harder for them to make a case. Those are the kind of things that we face, and it is frustrating. This interview has been edited and condensed. 81

The State of Fashion 2022 IN-DEPTH Time for Fashion to Raise Its Sustainability Ambitions to Deliver on COP26 Countries, companies and communities are mobilising around climate change. Amid mounting evidence of fashion’s climate impact, and the gathering of nations at the COP26 Climate Change Conference, there is a renewed impetus behind the need for decarbonisation and a much sharper focus on the imperative to adapt and mobilise private-sector capital to fund the required changes. A new era of climate action will therefore be required, meaning fashion leaders must focus not only on decarbonisation but also on building resilience and reversing nature loss as the effects of climate change take hold. by Harry Bowcott, Leigh Chantal Pharand and Libbi Lee The COP26 meeting in Glasgow, UK specific commitments or announcements of that took place in October and November 2021 broader sustainability initiatives, and provided was the latest in the United Nations’ series of an opportunity for collective discussion and conferences that aims to tackle climate change advocacy.220 Fifty textile, apparel and luxury and its impacts. COP stands for “conference of the companies announced their commitment to science- parties,” which refers to the UN member states based targets in the six months before the event, that are represented parties of the climate change which is more than three times the number in the convention, and this is the 26th year the secretariat same period in 2020.221 Fashion-focused events were met to discuss plans. Previous COPs have led also planned for COP26, including The Fashion to international climate treaties like the Kyoto Dialogue, featuring prominent speakers from the Protocol and the Paris Agreement. The COP26 global fashion industry, and the Fashion Industry on agenda focused on four goals: 1) securing global the Race to Zero.222 net-zero carbon emissions by 2050 and keeping the 1.5-degrees Celsius limit on global warming In addition, as COP26 heightened the focus within reach, 2) adapting to protect communities on communities and natural habitats — both of and natural habitats, 3) mobilising finance, and 4) which are for the most part negatively impacted by working together to deliver on commitments. the fashion industry — many companies honed their biodiversity agendas through “nature positive” For the fashion industry, the run-up to the commitments, aimed at proactively enhancing the event galvanised companies such as Arezzo & Co, resilience of the planet against climate change and Cartier, New Look, Prada, Soorty Enterprises, reversing nature and biodiversity loss. Under Armour and YKK Corporation into making While these commitments are all positive 82

FASHION SYSTEM indications that parts of the industry are keen to commitments. Every sector needs to focus on its change, the proof will be in tangible actions taken own breakthrough actions if it is to meaningfully over the next few years. While specific outcomes of and proportionately contribute to meeting the COP26 are not included in our analysis owing to the goal of halving emissions by 2030 and progress time of writing, below we outline the main goals of towards net-zero emissions by 2050. Within COP26 and what the fashion industry will need to the fashion industry, many companies have do to respond. already committed to ambitious reductions in greenhouse gas emissions. Some 125 companies COP26 Goal 1: Secure global net-zero have committed to drive the fashion industry emissions by 2050 and keep the 1.5-degrees towards net-zero greenhouse gas emissions by Celsius warming limit within reach 2050 through the UN Fashion Industry Charter for Climate Action, which launched in 2018.227 To get on the 1.5-degrees Celsius pathway Most public commitments made by fashion brands — or, in other words, limit the increase in in the run-up to COP26 were to reduce emissions global temperature to 1.5 degrees Celsius above by 30 percent by 2030 (from 2015 levels or later). pre-industrial levels — and make progress towards Some companies, such as Levi Strauss & Co., have net-zero carbon emissions by 2050, the world committed to reducing emissions across their needs to cut CO2-equivalent (CO2-e) emissions in supply chain by 40 percent by 2025, while others, half before 2030.223 Yet, the UN’s NDC Synthesis such as H&M, are striving to be “climate positive,” report published in September 2021, which aims reducing more greenhouse gas emissions than its to give a comprehensive picture of actions being value chain emits, by 2040.228 planned or undertaken by governments that impact greenhouse gas emissions, projected a 16 percent Every sector needs to focus on increase in emissions by 2030.224 its own breakthrough actions Within the fashion industry, key parts of the supply chain could still be at risk from if it is to meaningfully and climate change even if the 1.5-degree pathway is maintained. Despite these risks, fashion is still proportionately contribute to one of the least environmentally sustainable industries. It accounts for approximately 2.1 billion meeting the goal of halving tonnes of CO2-e emissions per year — that’s 4 percent of annual global emissions. More than 70 emissions by 2030. percent of these emissions comes from production processes, with the remainder from retail, logistics Sourcing more sustainable materials, and product use (such as washing and drying).225 including fibres that are recycled and recyclable, The fashion industry is resource-intensive, using regenerative and/or sourced responsibly, is significant amounts of water, land, wood and a critical component of decarbonisation. As pesticides for the farming of raw materials such as such, many brands are setting targets on their cotton. On top of this, 17.5 cubic metres of textiles use of materials. For example, Lululemon — the equivalent of one garbage truck — is either has committed to making 100 percent of its burned or sent to landfill every second.226 products from “sustainable” materials (that are recycled, renewable, regenerative or sourced Companies should consider both firming responsibly) by 2030, while Stella McCartney up and accelerating action on their near-term has committed to using 100 percent recycled polyester (from garments and plastic waste) by 83

FASHION SYSTEM The State of Fashion 2022 2025.229 Various alternative materials that offer smaller individual wardrobes, with more focus on reduced environmental impact compared to virgin longer-life garments and a flourishing resale and raw materials are also being developed: Nike, rental market.231 for example, is using a product called ELeather for its Flyleather shoes. ELeather is a reusable COP26 Goal 2: Adapt to protect communities leather, originally developed for seat covers in the and natural habitats transportation industry, which is made from either used shoes or scrap material.230 Although mitigating climate risk by reducing CO2-e will be critical in the long run, much Despite these commitments towards more of the warming likely to occur in the next decade sustainable materials, however, the reduction of will be the result of emissions that have already environmental impact by some of the alternative been produced.232 Over the next decade, when materials currently available is not sufficient. The experts agree that temperatures are likely to warm industry needs to scale up closed-loop recycling by 1.5 degrees Celsius, almost half of the world’s processes (see “Circular Textiles” on page 72) population could be exposed to a heat-, drought-, while acknowledging that no singular solution will flood- or water stress-related climate hazard, offer the key to emissions reduction on its own. To according to a recent McKinsey report.233 achieve tangible improvements, fashion will also need to invest further in areas such as material At their most extreme, these events innovation and improved industrial processes and could be life threatening. But another insidious manufacturing techniques to deliver on targets. impact is likely to be on people’s wellbeing and livelihoods. In a scenario whereby the world were While commitments to source and use to warm by two degrees above pre-industrial better materials are encouraging, fashion brands levels by 2050, the number of people exposed to will need to understand and address emissions in severe heat stress could increase to 15 percent of the entire production and consumption process the global population, compared with less than 1 down to the deepest tiers of their supply chain. This percent today.234 Chronic heat stress could make it includes establishing more sophisticated tracking impossible to work outdoors or in rooms without of emissions across all tiers in order to be able to air conditioning in some places, including parts first quantify the impact at each stage, and second of India, a critical region for cotton production.235 to design and implement mitigation measures. As climate conditions change and become more Technologies such as product passports (see extreme, yields of raw materials could also fall “Product Passports” on page 88) are scaling up to in their traditional growing regions, including help address these challenges. the south of the United States, Pakistan and Australia.236 Meanwhile, coastal and riverine Beyond decarbonisation of existing business flooding could jeopardise manufacturing sites in models, brands and retailers will also need to parts of Southeast Asia, such as Bangladesh and decouple from current volume-driven measures of Vietnam.237 This could significantly disrupt fashion success. The Global Fashion Agenda and McKinsey supply chains and affect business continuity, not to & Company’s “Fashion on Climate” report finds mention raise the volatility of demand in these key that if the industry could reduce the share of stock consumer markets. sold at a discount by 15 percentage points, it would achieve a volume and emissions decline of about Therefore, in addition to accelerating action 10 percent, without any impact on value growth. to decrease emissions, fashion leaders need to To realistically remain on a 1.5-degree pathway, build resilience against climate hazards into their the industry should reimagine a world with 84

IN-DEPTH plans. This will require making some tough choices, countries as they seek to secure the economic particularly when resources are scarce, on where to welfare of their populations. For example, as the invest now rather than later; where to either invest use of virgin materials decreases and recycled in protection of physical assets against growing materials increases, it will be the poorest and climate risks, or consider a managed retreat; and, most vulnerable, including farmers and workers critically, how to include community voices in at virgin fibre mills, who will likely suffer the most decision-making. financially. Business leaders should be prepared to make hard, long-term choices with the welfare of all In addition to accelerating stakeholders considered. action to decrease emissions, Establishing resilience is also about protecting and restoring natural environments, fashion leaders need to build as biodiversity and climate agendas are critically interdependent. It is estimated that around half resilience against climate of greenhouse gas emissions could be eliminated through natural measures such as reforestation and hazards into their plans. limiting land degradation. However, the fashion industry contributes to significant biodiversity COP26 has put resilience and adaptation to loss, with 23 percent of the world’s insecticide climate risks on a par with emissions reduction as a used in cotton agriculture and 25 percent of cornerstone of tackling climate change. Vulnerable industrial water pollution resulting from textile countries and communities need significant help, dyeing and treatment.239 Fashion companies that and COP26 offered an opportunity for a moment manage biodiversity in the same way they manage of global solidarity. Even in regions less vulnerable value creation use impact-weighted accounts to extreme climate hazards, such as Europe, the (which reflect financial, social and environmental impact of climate change is so severe that the performance) and establish measurable European Central Bank predicts a worst-case biodiversity targets. For example, Gucci’s “nature- scenario of a 10 percent drop in the European positive” climate strategy aims to proactively Union’s GDP and a 30 percent rise in corporate protect forests and biodiversity by restoring defaults as a result.238 mangroves, whilst investing in and incentivising farmers to shift to more sustainable practices, Fashion companies need to move quickly such as regenerative agriculture which supports to build resilience. In some cases, established soil health and water quality to enhance carbon technologies, such as flood defences or solar sequestration.240 powered air-conditioned warehouses for workers, can be deployed in the supply chain. In others, Shifting to alternative materials fashion companies will need imaginative solutions, and investing in materials that reduce such as securing multiple raw material sources non-biodegradable waste are also critical actions to mitigate the risk that extreme weather events for fashion companies to reduce their biodiversity destroy primary sources such as cotton. The impact. Several brands, including H&M, have been faster companies build resilience, the better changing their dyeing processes in an attempt to for employees, consumers and suppliers, and eliminate the need for water and chemicals that the greater competitive advantage established. pollute waterways.241 There is, of course, a tension between creating business resilience by relocating parts or all of Increasingly, investors will scrutinise the supply chain while supporting vulnerable companies’ climate resilience as they scrutinise 85

FASHION SYSTEM The State of Fashion 2022 decarbonisation efforts today and will expect billion over the two-year period between 2017 and companies to disclose their climate risk exposure 2018, reflecting an average increase of 25 percent and mitigation plans. Over the medium term, from the previous two years and a steady increase companies are likely to unevenly bear the cost of in financing from different types of investors — building resilience and transitioning to net-zero despite many investment budgets being restrained emissions, investing different amounts and causing during the Covid-19 pandemic. However, even the competitive landscape to shift. Customer though investment has reached record levels, demands are also changing, with environmental the annual investment that would be required credentials becoming a prerequisite to compete, to achieve a 1.5-degree scenario is estimated not a differentiating factor.242 As such, companies to be between $1.5 trillion and $3 trillion. Such should look to develop technological solutions to volumes of capital must come from mainstream climate hazards across their ecosystems, whilst finance: from corporations, banks and institutional stimulating investment and assessing the carbon investors. In 2017, only 1 to 2 percent of investments intensity of their full value chain. in climate adaptation projects came from the private sector.243 A core argument at COP26 is The investments and actions required will therefore that more money must be spent — up to not always demonstrate clear payback in the short 10 times more than in 2017 by 2030 for developing term, meaning companies will have to update how countries alone244 — and more of that money needs they measure ROI by adjusting the time frames to come from the private sector. This implies a they assess and how they effectively incorporate radical reallocation of capital and investment, with competitive advantage into these decisions. a particular focus on flows into countries whose economies are particularly vulnerable to climate Increasingly, investors will change, as well as into the technologies needed both scrutinise companies’ climate for decarbonisation and resilience. resilience as they scrutinise decarbonisation efforts today and Fashion companies are setting up grant will expect companies to disclose and venture funds which aim to target specific their climate risk exposure and sustainability challenges, in both their own mitigation plans. operations and their supply chains. These vehicles present an opportunity to harness external COP26 Goal 3: Mobilise finance innovation and build credibility and internal knowledge. For example, Kering’s Regenerative It is clear that decarbonisation and Fund for Nature provides grants to farming adaptation of operational practices both require groups, non-governmental organisations and other significant investment. COP26 is the first major stakeholders to scale regenerative practices in COP Climate Change Conference that has had such leather, cotton, wool and cashmere production.245 a sharp focus on the financial commitments needed Kering is also involved in a joint venture alongside to tackle climate change, especially by the private Stella McCartney, Burberry and the Apparel sector. Impact Institute, which focuses on improving the environmental impact of Italy’s luxury Climate finance tracked by the Climate fashion supply chain by establishing a platform Policy Initiative (CPI) reached an average of $579 for manufacturers to coordinate, fund and scale environmental programmes.246 At the same time, many companies are ramping up investments in 86

IN-DEPTH recycling technologies (see “Circular Textiles” on Brands need to drive sustainable decision-making page 72). One example is Infinited Fibre, which at the design stage, in their choice of materials, recently completed a funding round led by H&M production of waste and adoption of recycling. In Group and including players such as Adidas and many cases, brands and retailers should consider Zalando, during which it raised €30 million ($35 joining together to invest in research fields such million) to boost production at its pilot plant and as alternative materials and regenerative farming prepare for building its new 30,000 tonnes-per- to ensure progress is made fast enough to have year flagship factory.247 a meaningful impact. Coalitions are starting to form across the value chain, including the Fashion companies are setting Aura Blockchain Consortium, supporting the up grant and venture funds development of product passports for materials which aim to target specific traceability and transparency, among other things, sustainability challenges, in both and the Higg Index, which aims to standardise the their own operations and their measurement of value chain sustainability. While supply chains. multi-stakeholder initiatives can divide opinion, industry-wide collaboration will be required to Beyond specific funding vehicles, company drive progress beyond the current baseline. leaders across all sectors need to give significant attention to resource-reallocation issues. However, Ultimately, business leaders in the fashion there is still a lack of awareness and acceptance industry — as in other sectors — need to increase of the urgency and scale of the risk and the awareness of the environmental and social impact opportunity. Climate is still not tightly enough created by the industry and the end use of its integrated into organisational management — too products. This will mean embedding a climate often it is an individual agenda point and siloed into strategy to reach net-zero emissions as a core part teams, rather than something that underpins every of corporate strategy; being conscious that there decision and that is supported by executive-level is a competitive advantage in becoming a leader in advocacy. sustainability; forming an innovation ecosystem to support the development of new technological COP26 Goal 4: Work together to deliver on solutions; and finally, mitigating for the changes commitments ahead, including the impact on workers and jobs, by building resilience. The agenda set by COP26 for Fashion companies will need to work fashion is multifaceted, but it is essential to secure together with both upstream partners and the future of the industry. downstream retailers to make real progress on sustainability, as well as collaborating with Disclosure: As COP26 had not yet commenced at the time of writing, specific non-fashion companies and technological outcomes are not reflected in this text. specialists to catalyse change. No one part of the value chain can make enough impact by itself; Harry Bowcott leads the Sustainability Practice in the McKinsey London meaningful change requires a concerted effort Office, and Leigh Chantal Pharand manages the COP programme strategy. across the industry and sufficient investment Libbi Lee focuses on Sustainability in Apparel, Fashion and Luxury, including must be funnelled into relevant technologies. McKinsey’s research partnership with the Global Fashion Agenda on “Redesigning Growth.” 87

88

08. PRODUCT PASSPORTS In a bid to boost authentication, transparency and sustainability, brands are using a portfolio of technologies to store and share product information with both consumers and partners. To get the most from these digital ‘product passports,’ which can help brands tackle counterfeiting, differentiate themselves and build loyalty by enhancing consumer trust, businesses must coalesce around common standards and engage with pilot projects at scale. Digitally generated image of data. Getty images. Fashion businesses are pouring investment and permanent record than traditional sewn-on into digital technologies that allow unique labels), where and how it was made, and the working identifiers and other digital information to be conditions at the manufacturer.249 added to products. These “product passports” link information that is valuable to both consumers For example, Eon’s Connected Product and partners to individual products by leveraging Platform allows companies such as Pangaia and a combination of technologies centred around Yoox Net-a-Porter to create “digital twins” for their blockchain and supported by the likes of radio- products and private-label collections respectively, frequency identification (RFID), QR codes containing information that can be updated in real and near-field communication (NFC). Indeed, time, such as details on a product’s provenance.250 these technologies are helping businesses to Similarly, Reformation is partnering with tackle significant industry pain points, such as blockchain platform FibreTrace to give customers counterfeiting and the need for more responsible QR-code access to information on the lifecycles and transparent business practices amid rising of its denim garments, while TS Designs uses consumer engagement with climate change and QR-enabled passports to certify garments are made labour conditions in fashion. in the US.251 Though product passports are not a silver-bullet solution to sustainability concerns Demonstrating progress in sustainability — as companies still face the challenge of making is particularly important in gaining the trust of sure the data they get from suppliers is accurate — younger fashion consumers, as some 43 percent they are setting higher standards for supply chain of Gen-Zers say they actively seek out companies transparency and traceability for fashion. that have a solid sustainability reputation.248 One way to store and transparently share information Product passports are also supporting on a product’s sustainability credentials is circularity initiatives like resale and garment- through technology-based product passports. to-garment recycling. In providing detailed data This information could include details about the on materials, they facilitate easier collection and product’s materials (providing a more detailed sorting of garments for recycling at scale. Like Eon, closed-loop recycling platform Circular Fashion 89

FASHION SYSTEM The State of Fashion 2022 has developed an open data standard that can be significant demand on industry jobs boards.257 read by a variety of applications along the product For example, one feature of Eon’s digital passport lifecycle. The company has launched a pilot project is to suggest the price of a garment based on with fashion brands such as Armedangels, as well its history, including who wore and owned the as stakeholders in used clothes collection and product, as well as repairs history and advice on sorting, to test applications for scaling garment- marketing. Certainly, the digital authentication to-garment recycling (see “Circular Textiles” offered by product passports will help boost trust on page 72).252 Initiatives such as the European in second-hand luxury goods and collectibles, Commission’s European Data Space for Smart meaning resale platforms such as Vestiaire Circular Applications and the American Apparel Collective and The RealReal stand to benefit. and Footwear Association (AAFA)’s call for the digitisation of apparel and footwear labelling are The growth of resale businesses also supporting these kinds of efforts.253 means it has never been more “Consumers often remove labels from their garments, separating the garment from its legally important to prove authenticity mandated fiber content, identity, care, and origin information for the rest of its life,” wrote AAFA and track a product’s history, president and chief executive Steve Lamar in a 2020 letter lobbying the US Federal Trade Commission particularly in luxury. to support digitised labels in a technology-agnostic way. “[This] would reduce the likelihood that Another application of product passports the information gets separated from a product. is in anti-counterfeiting measures. Valued at Consumers, even secondhand consumers, would around $500 billion a year globally, counterfeiting have constant access to the information over the generates more than 60 percent of that value life of the garment, without having to sacrifice the from fashion and luxury goods.258 259 The China comfort of the garment.”254 Certification and Inspection Group is among the organisations to be making strides in the battle The growth of resale businesses means it has against counterfeiting with product passport never been more important to prove authenticity technology. Its “one item one code” technology and track a product’s history, particularly in luxury. allows customers to scan a code and see a simple Analysis from the BoF Insights report “The Future confirmation of a product’s authenticity.260 Brands of Fashion Resale” suggests that the resale market are similarly ramping up their efforts. Chanel is will reach $57 billion in sales by 2025, up from $27 launching a digital passport to replace physical billion today,255 while second-hand marketplace authenticity cards in its bags, which will be ThredUp estimates that resale will grow 11 times accessible through a scannable metal plate in the faster than the overall clothing retail sector over product. This will enable the brand and consumers the next five years.256 to immediately recognise authentic products and ensure after-sales services such as repairs are only As resale grows, product passports will provided for genuine bags.261 ease operational processes by offering readily available digital twins and standardised product Initiatives to develop product passports are information. These will support authentication emerging in both private and open-source forums. and valuation, as well as streamline a process The Aura Blockchain Consortium, a shared private that was historically manual, reducing reliance platform launched by companies including LVMH on authenticator specialists who have been in and Prada in spring 2021, leverages unique codes to 90

08. PRODUCT PASSPORTS provide authenticated product records, including resale markets and the need for authentication will ownership history, product authenticity data and encourage adoption, either as part of a collective provenance of materials. When a customer buys a initiative (such as Aura) or independently (as with product, he or she receives an encrypted certificate Chanel). While the cost of some product passport containing information about the production technologies has historically been a pain point process. In the open-source space, meanwhile, in scaling, costs are coming down: the price of an IBM and luxury and fashion non-fungible token RFID tag has fallen by 80 percent over the past (NFT) platform Arianee are partnering to pilot decade.264 digital product passports for brands such as Swiss A customer uses a smartphone to scan a garment label. Getty Images. watchmakers Breitling and Vacheron Constantin.262 In addition to supporting authentication and traceability, several brands are leveraging these product technologies to drive brand engagement, loyalty and repeat purchasing. Prada is rolling out NFC solutions to offer personalised information and purchasing suggestions to customers who scan NFC tags embedded in products with their mobile devices. Meanwhile, Paco Rabanne has launched its first NFC-enabled fragrance, which allows customers to access digital content such as interactive games and educational features by connecting their smartphone to an NFC chip, and Breitling is leveraging digital passports to share promotions with customers and demonstrate authenticity.263 Pressure to establish supply A success factor for widespread adoption chain transparency and adopt of product passports will likely be the industry’s circular business models will fuel ability to establish common standards. “Brands demand and help justify scaling are competitors, and there’s a lack of cooperation,” pilot projects to mainstream said Tyler Chaffo, sustainability manager at RFID applications. labelling and supply chain solution company Avery Dennison.265 Currently, some digital passports Looking ahead to 2022, a growing number only operate on closed platforms, while others of fashion brands are set to ramp up development are open-source and compatible across a range of product passports across various B2B, B2C of applications. Still, there are signs that players and C2C use cases. Pressure to establish supply are starting to converge around a few solutions, chain transparency and adopt circular business with Aura and Arianee frequently cited in many models will fuel demand and help justify scaling discussions.266 pilot projects to mainstream applications. At the same time, the growth of luxury e-commerce and 91

FASHION SYSTEM Accessibility and affordability will also be players that can expand their functionality across success factors in the burgeoning product passport use cases. For those who get it right, passport ecosystem. “It’s really important that there’s technologies will reinforce consumer trust, create been a democratic process so we could create a exclusivity, support repurchase and enable more governance structure and a standard that works for sustainable and responsible practices. To encourage both smaller brands and big brands,” said Timothy scaling, standardisation and compatibility should Iwata-Durie, Cartier’s global innovation director be top priorities. As these dynamics play out, the and a member of the Aura board.267 key for brands will be to keep pace with innovation and consider collaborations selectively to meet From a commercial perspective, product their business objectives. passports will deliver the most advantage to The State of Fashion 2022 Exhibit 13: Effective use cases are emerging for product passports relating to sustainability and protection against counterfeits MOST IMPACTFUL1 USE CASE FOR PRODUCT PASSPORTS, % OF RESPONDENTS 37 26 18 13 Traceability of Protection against Transparency of Connection to 5 product materials counterfeits product lifecycle digital experiences Other and supply chain and environmental and content impact 1 Respondents ranked 3 most impactful use cases out of 7, based on order of impact from 1 to 3. Only ranking 1 (most impactful) is considered in the exhibit above. SOURCE: BOF-MCKINSEY STATE OF FASHION 2022 SURVEY 92

EXECUTIVE INTERVIEW Aura Blockchain Consortium: Uniting Rivals to Make Luxury Goods More Traceable Daniela Ott Three competitors joined General Secretary, The Aura hands in 2021 to create an Blockchain Consortium unusual partnership in the form of the Aura Blockchain It can’t be easy to get a group of luxury firms Consortium. LVMH, Prada that have only just put their rivalries aside and Richemont-owned Cartier for the common good to march to the beat united behind Aura, a blockchain of the same drum, but Daniela Ott is tasked originally developed by LVMH with doing exactly that. As leader of the and technology partners Aura Blockchain Consortium, the former ConsenSys and Microsoft, to Kering executive must now use delicate solve critical challenges around diplomacy to persuade others to join the the traceability of luxury goods shared digital platform used by LVMH, Prada by giving each product a digital and Richemont-owned Cartier which creates identity that provides customers ‘product passports’ for luxury goods. with a secure, verified means to see its entire life, from the raw — by Marc Bain materials through to second- hand sales. Aura’s general secretary is Daniela Ott, a luxury veteran who spent more than a decade with Kering. Expanding this groundbreaking but tricky alliance is not without challenges. For one, the emergence of competing blockchain technologies could fragment the burgeoning product passport ecosystem. Aura’s effectiveness against 93

FASHION SYSTEM counterfeiting is also unclear, and I think doing it together as a of a watch brand, they would add a guarantee, a certificate of it has not yet persuaded some consortium helps. I would say authenticity, and they would be adding a specific certificate for prominent brands to sign up. Ott also I think they learned the watches that the watch actually keeps time. We are working right is nonetheless determined to lesson of being too late in the now on a diamond traceability certificate — this is the Aura create a “digital twin” featuring e-commerce space. I think it diamond traceability committee we are putting together with our theoretically tamper-proof digital helps that we have a private jewellery brands. Once we go live with that over the next few certificates of authenticity for permission-based blockchain months, you will be sure where the diamond has actually come every product sold in the luxury where they can decide which from, and also the grading of the diamond. industry — and to use Aura to do so. information to give access to or What share of goods made by Aura has been signing new not. In a public blockchain, it’s Aura’s members are already on companies up, but others very easy to see that you had a the blockchain? remain hesitant to join. Two drop in production. But it’s the big names that remain absent brand who decides whether, “I’m What I can say is that we have are Kering and Chanel. Why giving access to the consumer double-digit millions of products is that? Are brands concerned this information,” or “I don’t give on the blockchain. about revealing sensitive access to how many units I put information, such as their on the blockchain today.” I think Is the ambition to eventually suppliers, to competitors, or that also gives some reassurance. reach 100 percent of products? do they see creating their “Actually, it’s an That’s my end ambition, yes. I own product passports as a think every physical product needs a digital twin. I’m The State of Fashion 2022 competitive advantage if their advantage to use one absolutely convinced about that. system is somehow better? solution, especially if you have the same Do these digital twins enable a Actually, it’s an advantage to use new type of relationship with one solution, especially if you customers, or is it more about enhancing the methods brands have the same issues, you have issues, you have were already using? the same suppliers, you have the same suppliers, the same distributors, and you It’s definitely a new relationship. It’s on a different level, that kind have the same needs. Having you have the same of traceability which you can one system makes it easier for distributors, and you actually have from the beginning everybody. I think it’s more that of the value chain down to resale. Having an authenticity certificate we just launched in April [2021], have the same needs.” is new, having all these certificates and blockchain in itself is hard. in one place, being able to directly communicate, this is a whole new It’s not just that you need to have Aura’s member brands are level of touchpoint. Especially for your use case ready. You need at different stages in putting young consumers, authenticity to link it up internally in your their goods on the blockchain. and traceability are a must, so if organisation, to make sure you Customers can see the history [they’re] a must, how do you get have the data you actually put on of products from Bulgari and that in a cost-effective way to a the blockchain. Your marketing Hublot, for instance. But if I large number of products? We teams have to know the message were to check the information couldn’t do that before. you want to pass [on]. We make on the products currently it easy but still you must define available, what sorts of details what you want to do with your will I see? passport. [So] I think it’s a journey. There are brands who are Luxury companies are showing basic information: not known for jumping on when it was produced, the serial emerging technologies. What number, the price point, all the gives the companies leading fabric which is involved, where this charge confidence in the fabric is coming from — I blockchain? would say classic information about traceability. In terms 94

EXECUTIVE INTERVIEW For the product passport or other sectors. One of the buy fakes for their lower cost ecosystem to work well for consumers, it’s important to limitations is if you don’t have and counterfeiters continue maintain a certain degree of compatibility, but what a good relationship with your to get more sophisticated in about the actual interface? Will there be any sort of suppliers, or if you don’t have the ways they dupe shoppers, standardised interface for all goods on Aura, or will the information, it doesn’t help like some who have sold fake individual brands each launch their own app or site? you to have a blockchain. It’s not bags complete with fake Aura will be a non-profit, so our a magic wand which just makes NFC tags. Is the arms race aim is always to be agnostic. If you want to show the information it all good. You must know your between counterfeiters and via an app or a website, this is really up to the brand to decide. I suppliers down the line and luxury companies just going to think most brands will integrate it into their own storytelling. It’s then you can ask them to put the continue, no matter what Aura important that it’s the voice of the brand. information on the blockchain. If does? Could that storytelling be they put false information on the I would say especially QR codes, enhanced through blockchain, blockchain, it’s still going to be that’s probably the easiest, particularly around raw false and the blockchain doesn’t because you literally can cut it materials or production, by help you anyway. It’s garbage in out. For a tag in a handbag, you adding photos or video for and garbage out. literally would need to destroy the instance? A customer of Hublot can see handbag. The beauty of having What’s really nice about their watch’s information and a consortium is that we have blockchain is that you can put e-warranty simply by taking a the time to vet these different really high [quality], rich data on photo through an app. Is that solutions or actually invest in it in terms of videos. I have this going to be the model for most some of the solutions, advance dream that you can actually see goods, or will some require them further and try them out the person who manufactured physical markers like QR at separate brands. I think the the watch or the person who codes or NFC chips? technology which we are investing manufactured the bag. The nice in will always be more advanced, thing about it is this is not just for We are agnostic. AI image but definitely there are things to the first 10 customers. If I pass it recognition, which we are a big take account of. down to my daughter, maybe she believer in, I think will work for will be able to see that as well, or in resale. perfumes. How are you actually “The beauty of having going to recognise each perfume What about the transparency aspect? Are luxury brands bottle? Because that’s quite a consortium is that ready for the level of scrutiny tricky, and it’s really about the we have the time to into the environmental and light when you take this picture social impact of their products that comes with showing a of that bottle. This is the same for vet these different product’s history at a very buying spirits. For watches, it’s AI granular level, going back to image recognition. For clothing, solutions.” the raw materials? I think it’s more QR code. For In luxury, I think this is less of a question than in premium accessories like a bag, it’s easier to What new developments are put a chip in. For precious carpets, there around the corner? we are looking at an NFC tag. We are going live very soon There are these different tagging with Aura Light. We signed on solutions, and it depends on the a few members, which we will product itself. also announce over the next few One of the main advantages of months. We are also working on using blockchain — and indeed our NFT platform, which we hope one of the main motivations will go live in a few months. for competitors to unite What is Aura Light? around this technology in the first place — is that it can Aura Light is sort of our plug- give shoppers an easy way and-play. The [membership] to verify authenticity. But fee is much lower. Our standard some consumers knowingly [version] you can actually 95

The State of Fashion 2022FASHION SYSTEM A woman carrying a Prada bag. Prada is one of the founding members of Aura alongside LVMH and Richemont-owned Cartier. Getty Images. customise much more, so that is more for larger brands. The APIs and the [software development kits] are pretty much the same, but for Aura Light we have, for instance, landing pages which are available and the whole process is much easier. We actually manage the cloud for you. How can brands measure their return on the investment for joining Aura? Given that blockchain is so new, we don’t have ROI figures as such yet. If you want to have a quick ROI, it’s definitely a digital product, because that gives you additional revenue. When I say digital product, that can go either from digital collectibles like NFTs or virtual products. In terms of how much more you’re selling because you can provide a certificate of authenticity, ownership, a diamond traceability certificate, I think that will still take a little bit of time to have an ROI. This interview has been edited and condensed. 96

09. CYBER RESILIENCE As the digitisation of fashion businesses reaches new heights, companies face more threats of cyber attacks and growing risks relating to improper data handling. Amid increased sophistication in cyber crime and rises in consumer and regulatory pressure, brands need to act urgently to shore up their defences and invest more to make digital security a strategic imperative. Arguably, it has never been more confidentiality or availability of data in retail rose urgent for fashion leaders to build resilience by 152 percent in 2020 compared to 2019, and against cyber attacks. Cyber crime is becoming the number of security breaches increased by 33 increasingly common and sophisticated, and percent.270 Several fashion companies have already consumers are shopping online more frequently experienced severe attacks, such as Hudson’s Bay and enthusiastically, giving businesses access Company’s Saks Fifth Avenue and Lord & Taylor, to valuable data in the process. The concurrent which were victims of the theft of more than 5 growth of both activities leaves companies million credit and debit card numbers in 2018,271 increasingly vulnerable to risks associated with and Neiman Marcus, which more recently suffered data security and — ultimately — with company a data hack on the personal and payment data of 4.6 reputation. million online customers in 2021.272 The pandemic-induced acceleration of “[Cyber crime] is getting worse for two e-commerce uptake has played a role in heightening reasons,” said Lance Spitzner, senior instructor these risks. With e-commerce’s share of global at the US-based SANS Institute, a cooperative for fashion sales nearly doubling between 2018 and cyber security professionals. “It’s becoming more 2020 in some regions,268 momentum has been and more profitable, so cyber criminals are going building for further growth. By 2025, e-commerce to follow the money… [and they] are getting much is expected to account for one third of all global better at it, too. It’s become an entire industry now… fashion sales, reaching 40 percent and 45 percent [with] the cyber criminal community specialising in the US and China respectively. A record in different fields.”273 number of cyber attacks took place worldwide in 2020, resulting in significant data losses across If fashion leaders are to protect their industries.269 Retail, including fashion retail, was e-commerce growth in 2022 and beyond, they the fourth most-attacked industry, with companies must shore up their cyber defences. That means across different categories and value segments reducing data risks throughout the data handling suffering breaches. lifecycle, through collection, use and disposal, and in operations spanning the entire value chain. Events compromising the integrity, In product development, for example, 97

FASHION SYSTEM The State of Fashion 2022 processes including design, drafting of about their body shape and size. Not only does manufacturing standards, certification, sketching this increase the risk of improper data handling and prototyping have been widely digitised, and internally, it can also expose companies to risk the data is now routinely stored online, meaning externally when they share customer data with that intellectual property (IP) in the digital realm third parties — and when those third parties are requires more robust protection. With the rise of located in different legal jurisdictions, they are valuable digital assets such as NFTs, the need to subject to different privacy and data laws. protect online assets will only intensify. Another critical weak spot for In the e-commerce sales environment, distributed denial-of-services (DDoS) or fashion businesses is in customer ransomware attacks could lead to entire website or app shutdowns, directly impacting revenues. data collection and handling. For example, one of Brazil’s largest clothing store chains, Lojas Renner, faced a ransomware The shift to direct-to-consumer business attack on its e-commerce system in August 2021 models has both increased the potential to collect which resulted in the shutdown of its systems and consumer data and made brands more vulnerable operations.274 to breaches and attacks. In September 2021, fashion and beauty subscription service FabFitFun agreed Digital risks associated with sales are not to a monetary settlement of $625,000 in response confined to e-commerce, however. Stores are to a claim that it failed to adequately protect and increasingly augmented with technology, both secure consumer data against hacker data scraping, on the shop floor and at checkout. Premises with which resulted in a data breach that compromised virtual fitting rooms, in-store tablets and customer customers’ payment card information.277 apps are vulnerable to attacks that can cause operational failures. In food retail, the supermarket Attackers can harvest such data to sell chain Coop Sweden was the victim of a ransomware to third parties or to attack customers directly. attack on a software supplier in 2021, which led Furthermore, fashion brands’ presence on a to the closure of around half of its physical stores. growing array of social media platforms across The attackers demanded $70 million to restore international markets exposes both companies data from all companies affected by the attack.275 and employees to additional threats, including the Similarly, South Korean fashion conglomerate accidental or deliberate leaking of data that could E-Land suffered a ransomware attack in 2020 that cause harm to brands. caused 23 of its 50 stores to close.276 “Whatever cyber protection you had last Another critical weak spot for fashion year, last quarter, last month, yesterday, it’s not businesses is in customer data collection and going to be enough for tomorrow,” said Stefan handling. With the personalisation of customer Larsson, chief executive of PVH Corporation, experience increasingly playing a role in online the parent company of Calvin Klein and Tommy interactions and companies seeking out an even Hilfiger. “To me, it starts with an awareness wider array of data points to inform which products that the risk is… increasing, and getting really are brought to market, customers are sharing more close to it, [and then] getting humility across the personal data than ever before. This includes their organisation that this is a continuous ongoing work names, addresses, location history, preferences, of improvement.”278 payment card data, shopping history, loyalty programme information and even information Alongside financial and reputational drivers, there is growing regulatory pressure 98

09. CYBER RESILIENCE on fashion companies to tighten cyber and data that rules exist to regulate the use of their data, security, largely sparked by Europe’s General Data an increase from around 40 percent in 2015.284 Protection Regulation (GDPR). The consequences However, consumer attitudes remain uneven across for non-compliance can be severe. In July 2021, a jurisdictions. Consumers in the US and Europe Luxembourg government entity alleged that the EU are more concerned about corporate accumulation law had been breached by Amazon, prompting it to of personal data, while those in Brazil and China level a $886.6 million fine against the e-tailer.279 are more comfortable trading data privacy for personalised services.285 In the US, one example of increased legislation is the California Consumer Privacy In aggregate, the costs of data breaches Act (CCPA) which took effect in July 2021. It gives and ransomware attacks are significant. Direct consumers the right to know what personal data a costs could include penalties and fees, lawsuits, company has access to and who it is shared with.280 remuneration to customers and the cost of In Brazil, the Lei Geral de Proteção de Dados recouping data. Experience shows that significant (LGPD) came into force in 2021. The law imposes data breaches can cost companies tens of millions penalties of up to 2 percent of annual revenues on of dollars.286 There are also indirect costs associated companies that fail to protect customer data.281 with a potential loss of consumer trust and the Meanwhile, China’s new data security law which struggle to acquire new customers following came into effect in November 2021 will regulate an incident. how companies collect and handle personal data. It also aims to ensure data is protected when Though complex cyber security measures transferred outside the country.282 often require significant investment, there are ways for SMEs and companies with fewer resources to Alongside financial and take steps to improve their security. According to Spitzner, since the majority of attacks are still reputational drivers, there is somewhat rudimentary, company leaders should at least focus on the basics. “If you don’t know where growing regulatory pressure to start, start improving your defences in phishing and passwords,” he said.287 on fashion companies to In an increasingly complex online tighten cyber and data security. ecosystem, there is an imperative for fashion companies to boost their operational resilience “There’s a great deal of confusion, because when it comes to cyber security and allocate a there are so many standards out there [across greater proportion of their budget to such defences. different jurisdictions]… as well as a desire to That means assessing and actively managing cyber — if we can — get global harmonisation, or at and data risk exposure in the business itself, its least within the US have a federal standard that third parties and its value chain. Leaders will need supersedes state standards,” said Susan Scafidi, to take a risk-based approach, building in-house founder and academic director of the Fashion Law knowledge and resources while also considering Institute at Fordham Law School in New York. leaning on external support from cyber security “Hanging over all of this is this question of who firms. Other industries have concentrated these owns our personal data, and who has the right to efforts around a dedicated role such as the chief exploit it, and how.”283 information security officer, who closely ties into legal and privacy teams. There is evidence that consumers are increasingly aware of their data rights. In 2019, around 60 percent of European consumers knew 99

FASHION SYSTEM Data is becoming both a strategic asset and and handling of data. To prepare employees for a source of financial, reputational and operational the occurrence of a breach or attack, they should risk. To meet customer expectations and comply regularly organise cyber-attack simulations to test with regulation, companies should put in place their response practices in real time, including clear standards for the collection, use and storage the handling of communications to internal and of data. Moreover, they need to increase awareness external stakeholders. While there are many of — and accountability for — threats while testing competing items on the C-suite agenda, cyber risk their cyber resilience through initiatives such as cannot be neglected. training frontline personnel on the sensitivity The State of Fashion 2022 Exhibit 14: Investment in cyber security and data handling has ramped up, reflecting the risk perceived by fashion executives LIKELIHOOD OF EXPERIENCING A SIGNIFICANT EMPHASIS PLACED ON CYBER SECURITY AND DATA CYBER ATTACK IN 2022, % OF RESPONDENTS HANDLING COMPARED TO PREVIOUS YEAR, % OF RESPONDENTS 48 61 42 39 5 Unlikely Likely 5 0 Same More Very likely emphasis emphasis Highly Less unlikely emphasis SOURCE: BOF-MCKINSEY STATE OF FASHION 2022 SURVEY 100