Retailers That Prioritize Inventory Accuracy Dominate McKinsey’s Global Fashion Index Leaderboard

McKinsey recently released the latest iteration of its Global Fashion Index. And if you think Store Grade Inventory Accuracy matters, you’ll be happy.

In its periodical study of more than 350 publicly traded companies, the leaderboard is dominated by the companies that first prioritized Store Level Inventory Accuracy and embraced the technology (called RFID) needed to achieve it. The chairman of parent company Zara (Inditex) has spoken openly about the strategic significance of RFID since 2014.

In 2019, the relationship between accuracy and profitability is clear. And in 2020 it has caught the attention of some of the major yearbook authors Fashion State report. The fact that their reports continue to make no mention of Store Level Inventory Accuracy does not make the topic — or the discovery of this relationship — any less significant.

In addition to Inditex, other companies such as Nike, Adidas, Lululemon, and Uniqlo (Fast Retail) were among the earliest to deliver this advanced capability to their business. Victoria’s Secret, PINK and Chinese powerhouse Anta Sports have become fast followers.

The same pattern has repeated itself in the Luxury segment, where Store Grade Inventory Accuracy is currently more of a “good to have” ability than a “must have”. Gucci (Dry) and LVMH each use RFID in many of their stores and do so much faster than many of their peers.

For those unfamiliar with the McKinsey Global Fashion Index, it tracks a large number of businesses — spanning all regions, product categories, and value segments. McKinsey ranks each of these companies according to the level of Economic Profit they create. Businesses that generate negative Economic Profits are called Value Crushers, and businesses that generate Economic Profits are called Value Creators. The cream of the crop is the best 20 players, crowned the Super Winner.

Economic Profit measures value creation by taking into account the amount of money invested by a business to generate its performance. It is calculated by subtracting from the company’s operating profit, taxes and the adjusted cost of capital.

Most Companies Are Now Value Crushers

This may come as a surprise, but nearly 70% of the companies studied by the McKinsey team made negative Economic Profits. They are Value Crushers.

While it may be tempting to blame this on the COVID pandemic, a closer look at the data reveals that this is simply a continuation of a long-running downturn. In fact, in 2015 the number of Value Creators and Value Destroyers was essentially the same.

60% Disappeared Last Year

In the past five years, and perhaps even longer, there has not been a single year in which 60% of medium-sized enterprises as a group has generated Economic Profit.

For the sake of simplicity, let’s assume that McKinsey studied exactly 350 companies. [In reality they indexed a slightly larger group.] At 350 companies, each quintile represents 70 companies. If only 31% of companies in 2020 are Value Creators, as discussed, then only about 110 companies are creating value and 240 companies destroying value. And any value created by the 40 companies occupying 71-110 places on the list is offset by the value destroyed by the 170 companies occupying 111-280 places.

Underline

As McKinsey notes, the Apparel/Footwear/Fashion sector has evolved into a “winner-takes all” competition. And the most profitable brand in the world is quietly pointing out that it is difficult to win without Shop Level Inventory Accuracy.