This article first appeared in The state of fashion: technologyan in-depth report co-published by BoF and McKinsey & Company.
In 2021, fashion companies invested on average between 1.6 and 1.8% of their revenues in technology. By 2030, this figure should increase to between 3 and 3.5%. Indeed, after decades of steady technological ramp-up focused on digitizing customer interactions, technological advances in fashion are now accelerating across the entire value chain. With widespread automation and sharper AI-powered analytics, technology is eating up fashion, from internal processes to customer experiences.
Why is this happening now? As experts point out, in the next decade we will see more technological advancements than in the past 100 years.
By 2024, AI-generated speech could power more than half of all human interactions with computers, while 50% of work across all industries could be automated by 2025, with profound implications for the skills businesses will need. Meanwhile, more than 75% of data generated by businesses will be processed by cloud or edge computing, which will improve website and application load times and enhance customer experience. By 2030, more than 80% of the world’s population is expected to have access to 5G networks, enabling faster connectivity and data transfer on Internet of Things devices.
Meanwhile, the digital adoption of fashion consumers, which has been cemented by the pandemic, is likely to endure. On average, people spent nearly 4 hours a day on the internet on their mobile phones in 2021. Among customers who switched from offline shopping channels to online shopping channels in 2021, 48% said the having done because of the Covid-19 pandemic, 27% cited convenience, 11% cited product availability and 11% cited promotions. The pandemic has also increased fashion customers’ digital interactions with brands, with 72% of customers saying they interacted with brands online in 2021. Over the coming year, this figure is expected to stabilize at 66% in mean.
Companies that have relied on technology to overcome the pandemic and other recent challenges have learned valuable lessons to excel in the digital ecosystems of today and tomorrow. Those who have integrated AI technologies into their businesses to increase operational efficiency and improve customer engagement could realize a cumulative 118% increase in cash flow by 2030. For businesses just starting out On this journey, implementing AI-driven initiatives by 2030 could generate a 13% increase in cash flow. Laggards without such an initiative before 2030 should expect a relative decline of 23%.
Now, fashion executives must rely on technology not only to grow their businesses and optimize profitability and cash flow, but also to address the industry’s most pressing challenges, whether achieve ambitious sustainability goals or reduce risk in their supply chains.
So while a significant portion of industry technology investment has so far been directed towards e-commerce, the digitization of internal processes is also becoming a priority. The top three areas where fashion executives plan to invest in digital by 2025 are personalization, store technologies and end-to-end value chain management.
Brands in all segments are increasing their investments in AI and machine learning for processes like demand planning and pricing. Inditex has pledged to invest 2.7 billion euros (about $2.9 billion) in online capabilities and technology solutions as part of its 2020-2022 plan, while Nike accelerates its transformation by investing in digital capabilities such as demand forecasting, information gathering and inventory management. At the same time, LVMH has partnered with Google Cloud to use cloud-based artificial intelligence and machine learning technologies to improve demand forecasting, inventory optimization and personalized services.
Such movements are creating a new paradigm for fashion, in which big data science, advanced analytics and digital workflows augment traditional creative processes. This transition will need to be underpinned by new talent capabilities as brands seek to hire more data scientists, engineers and analysts, while seeking partnerships and acquisitions.
As fashion leaders consider where to focus their attention and direct their resources, we explore five technology imperatives for the industry in this report:
• Metaverse Reality Check: Virtual Goods and Extended Reality
• Hyper personalization: marketing and e-commerce based on data and AI
• Connected stores: in-store customer experience with mobile apps and micro-execution
• End-to-end upgrade: AI-based value chain integration
• Traceability first: blockchain and tracking technology for sustainability
Decision makers must prioritize technology investments to seize these opportunities in a way that aligns with their business goals while preparing their organizations for a hyper-connected and rapidly changing era of industry. But integrating new technologies can be resource-intensive, especially if they don’t fit a strategic strategy or lack ease of use and are therefore not adopted by employees. Thus, technology investments need to be made wisely and geared toward managing business change as much as the core technologies themselves.
Regardless of the investment approach, leaders will need to understand their company’s appetite for change, creating an environment that enables a new digital culture, from factories to shop floors. For those who embrace change, the competitive advantages are obvious.