Fashion technology report: Industry set to double down on tech investment to stay competitive

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This article is brought to you by Retail Technology Review: Fashion technology report: Industry set to double down on tech investment to stay competitive.

Over the next decade the world will experience more technological progress than in the past 100 years. In the fashion industry, technology advancements are now accelerating across the entire value chain. The State of Fashion: Technology report, released by The Business of Fashion and McKinsey & Company, explores how industry players need to use this period of accelerating change to reshape their strategic priorities and turn challenges into opportunities that create new tech-enhanced competitive advantages.

As the report reveals, fashion companies are expected to ramp up their investments in technology, from between 1.6% and 1.8% of sales in 2021 to between 3% and 3.5% by 2030.

Meanwhile, external investors are pouring capital into technologies that make fashion commerce more nimble, sustainable and engaging to shoppers. In 2021, the value of the top 50 investments in technology related to fashion grew 66% compared to 2019, reaching $16.2 billion, according to a McKinsey analysis for The State of Fashion: Technology report, based on data from business information platform Crunchbase. These investments went towards either fashion retailers or businesses selling products and services to fashion firms. E-commerce, having benefitted from the pandemic-driven surge in online shopping, received roughly 55% of the overall investment amount. The remainder largely comprised payment technologies, including “buy now pay later” firms, social commerce and resale, followed by supply chain and logistics companies and those working in NFTs or technologies like virtual reality. 

Presently, few brands have successfully embraced technology with a competitive mindset but those who invest could see an impact on their bottom lines. Companies that are already embedding AI technologies into their businesses to increase operational efficiencies and improve customer engagement, realising a 118% potential cumulative increase in cash flow by 2030. For those just starting on this journey, implementing AI-driven initiatives between now and 2030 could generate a 13% increase in cash flow. 

These tech investments and advancements are impacting all segments of the industry, from fast fashion to luxury, albeit in different ways. In luxury, for example, where around 80% of sales are influenced by digital touchpoints, personal, face-to-face services remain at the heart of the shopping experience and clienteling apps, among other tools, are becoming part and parcel of how store associates enhance customer relationships, as industry experts in the report reveal. 

The 2022 fashion technology imperatives

The State of Fashion: Technology report identifies five key themes companies across all value segments need to consider as they level up their technology strategies.

1. Metaverse Reality Check: Virtual goods and extended reality

Though spending on virtual goods is increasing year on year, industry-wide success in the metaverse — the interconnected, virtual ecosystem that overlaps with or offers an alternative to physical reality — is still largely dependent on how quickly it will become accepted on a wider scale. According to The State of Fashion estimates, brands could generate up to 5% of revenues in the next two to five years from metaverse-related opportunities.

2. Hyper Personalisation: Data- and AI-led marketing and e-commerce

Competition for customer attention is intensifying and conversion costs are rising amid new privacy restrictions and limits on third-party data collection. But brands have access to a growing arsenal of personalisation tools and technologies to upgrade how they customise and personalise their customer relationships. The opportunity for executives now is to provide one-to-one experiences that build long-term loyalty by harnessing Big Data and AI, according to the report.

3. Connected Stores: In-store customer experience with mobile apps and micro-fulfilment

The inexorable rise of e-commerce has forced fashion players to rethink the role of physical stores. But despite the acceleration of digital shopping habits, research shows that customers still want to shop in stores so they can browse and touch physical products before making purchases. The report reveals how fashion executives can address consumer pain points by using in-store mobile apps that enhance the experience and micro-fulfilment technologies that leverage their physical retail networks for the quick-commerce era.

4. End-to-End Upgrade: AI-powered value chain integration

Digital tools and analytics have transformed key parts of the fashion value chain, but these optimisations are often siloed within organisations, limiting the potential for cross-functional improvements. Many fashion executives are now looking to embark on end-to-end value chain integration to create more efficient and more profitable ways of operating. As the report explains, machine learning and cloud computing are among the key technologies enabling brands to achieve that goal.

5. Traceability First: Blockchain and supply chain tracking technology

Brands are largely ill-equipped to monitor and manage social and environmental practices across their supply chains. If fashion brands are to achieve sustainability objectives, ranging from better materials sourcing to improved regulatory compliance to emissions reduction, they will need to establish full line of sight into how their products are manufactured. The report examines how traceability systems powered by tracking software and Big Data will help fashion brands reach far into their supply chains.

Imran Amed, Founder and CEO of The Business of Fashion, said: “The pandemic cemented technology’s critical role in the fashion industry, particularly in terms of e-commerce adoption. But now, the industry must lean even further into new technologies by experimenting in the metaverse, embedding fully digitised workflows across their organisations, and investing in traceability tools to help them reach sustainability targets. Those who choose to wait on the sidelines risk being left behind.” 

Achim Berg, Senior Partner and Global Leader of Apparel, Fashion & Luxury at McKinsey, said: “Last year, fashion companies invested between 1.6 and 1.8% of their revenue in technology. We are convinced that this figure will double by 2030 because technology can help brands gain a competitive edge both in customer-facing activities – where companies have mostly focused to date – and increasingly in operations. Even more importantly, technology can support companies in addressing sustainability issues.”

Anita Balchandani, Senior Partner and EMEA Leader of Apparel, Fashion & Luxury at McKinsey, said: “Much of the investment in Fashion Tech over the last decade has been in customer-facing innovation. In the next decade, we expect this to be complemented with innovation that transforms the operating backbone of Fashion players – expect to see algorithms and AI playing a role across the value chain – from smart pricing to identifying bestsellers and to reducing returns. Europe, home to half of the top-20 global Fashion players is well-placed to foster and accelerate this innovation that could create a more profitable model for fashion players.”

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