Fashion companies that adapt to shifts in the industry’s merchandising model can create a competitive advantage, according to McKinsey, which recently said in an insight note that given the current economic environment and unprecedented uncertainty, the need to get merchandising right is even more urgent than usual.

For that reason, many companies are seeking out new approaches to turn more efficient, and many are adding cutting-edge digital tools to their armories, the note said.

About 97 per cent of fashion executives expect their cost of goods sold as well as selling, general and administrative expenses to rise in 2023, spurring appetite across the industry to simplify assortments and manage costs. For many executives, the trend echoes their longer-term thinking, McKinsey said.

With inflation running at a 40-year high in many markets, the cost of running a fashion business is rising fast. In periods of economic uncertainty, there is an urgent need for brands to embrace leaner business models so that each dollar earned, and saved, goes further, the note said.

Sustainability is climbing the agenda. Shifting consumer attitudes are driving change and regulatory intent is hardening, requiring the industry to clean up its act. In response, companies need to reduce waste, prioritise sustainable materials, design for circularity, and ensure a sustainable, responsive supply chain, it said.

To grow, brands will likely need to diversify their channel mix, including wholesale and third-party marketplaces, alongside direct-to-consumer.

Looking ahead, fashion brands can reduce margin pressure by rethinking discounting and promotions, the note said.

The authors of the insight note are David Barrelet, Matthew Chapman and Erik Eklöw, McKinsey’s associate partners in Munich, London and Stockholm respectively; Julia Huang, consultant in the New Jersey office; Felix Rölkens, partner in the Berlin office; and Hannah Yankelevich, partner in the Minneapolis office.