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Accents tomorrow's fashion. Consumer Industries & Retail Group


1 Consumer Industries & Retail Group Akzente 1 17 Tomorrow's fashion A new study detects the trends and future growth areas in the fashion industry. Digitization I How the consumer goods industry can benefit from the Internet of Things in three ways Survey In which product categories the brand has the greatest relevance for customers' purchasing decisions Interview How McDonald's boss Holger Beeck wants to inspire the target groups of the future for burgers Digitization II Self-learning systems optimize the order process for fresh goods in food retailing. Cost management How to effectively and permanently reduce administrative expenses in the company

2 2 Contents 4 McKinsey News Current analyzes Cover story: The ten trends that will shape the fashion industry in 2017. Page 8 Photo: istock How digitization affects the labor market; what attracts millennials to shopping malls; why the integration of refugees pays off; why companies fail to exploit the potential of big data; what requirements personalized marketing needs; why the energy transition will be even more expensive 8 Cover story: Fashion 2017 A new study measures the performance of the industry and shows growth areas 16 IoT as a growth driver The Internet of Things opens up new opportunities for consumer goods companies 22 The brand makes the difference Relevance study: Why brands are becoming more and more important to Germans New Study: The importance of the brand as a status symbol is growing noticeably. Page 22 Veggie yes, organic no: Holger Beeck, head of McDonald's Germany, in an interview. Page 28 Photo: Dieter Mayr Photo: istock 28 The burger has never been as sexy as it is today, McDonald’s boss Holger Beeck explains what is changing at the fast food giant 34 The smart way to always fresh goods Self-learning systems are revolutionizing the management of fresh products in retail 40 Agile Insights know earlier what customers want New standards in market research bring competitive advantages 46 The key to success How companies can sustainably reduce their overhead costs 52 Workshop Current McKinsey initiatives 53 Imprint

3 Akzente Editorial Will everything stay different? The McKinsey Global Institute (MGI) has examined one of the most exciting questions of these days: What consequences will digitization have for the labor market? The answer from our colleagues you can read a summary of the results in our news is differentiated. On the one hand, the analysis showed, production and trading can automate more than half of all activities. On the other hand, very few jobs can be completely replaced by robots and computers with artificial intelligence. The debate about the effects of automation on the supply of jobs has been raging since the beginning of industrialization. So far, the optimists have been proven right: technical progress, from the use of the steam engine to the computerization of offices, has always created more jobs than destroyed over time. Higher productivity and prosperity fueled supply and demand, the economic system worked. How will it end this time: Does the digital revolution have a different quality than the technological advances before? Is there a threat of mass unemployment this time? Klaus Behrenbeck, Senior Partner at McKinsey and publisher of Akzente mckinsey.com Tobias Wachinger, Senior Partner at McKinsey and Head of the Consumer Sector DACH mckinsey.com Photos: McKinsey As is so often the case, the answer should be somewhere in the middle. It is true that less human labor is required for the same amount of goods and services, but at the same time new offers are created and demand will grow with prosperity. In addition, digitization makes outsourcing work to low-wage countries less attractive, with part of production moving back. Our colleagues at MGI do not expect mass unemployment in the future. But in interaction with robots and avatars, the way we work will change fundamentally. New qualifications, lifelong learning and a high degree of flexibility are required from management and the workforce. Then the digital revolution becomes a success story from which everyone benefits. And that's not a bad prospect. We hope you enjoy reading

4 4 News Work 4.0 In production and trade, more than half of all activities could be automated. No risk of the robot taking over: the work of cattle breeders can only be automated to 25 percent. Photo: istock Industry 4.0 and machine learning are not only revolutionizing business processes, but also the world of work. Which jobs can be replaced by robots in the future and which cannot? This question is investigated by an analysis of around jobs in more than 800 occupations on the US labor market. The sectors examined also include manufacturing and retail. Almost all professions affected The study results are more nuanced than expected. In fact, only a fraction of the jobs practiced today will be completely replaced by machines in the next decade. But almost all of them will be affected to a greater or lesser extent by automation depending on the types of activities associated with them. The study differentiates between seven typical activities, each of which has different degrees of automation, measured by the proportion of time that it occupies in the overall job: For example, only 9 percent of the activities of a manager can be replaced by machines, while so-called predictable physical work can be automated to 78 percent. These include above all activities in industry, such as assembly, processing of food or the packaging of products. In principle, the following applies: the higher the demands on decision-making, social or creative skills in a job, the lower its potential for automation. Nevertheless, the conclusion that brain work equals man, manual labor equals machine falls short: In fact, many physical activities outside of industry, for example construction work or the rearing of cattle, can only be done by machines to 25 percent, as they are less standardized and predictable. Conversely, typical office work such as collecting and processing data can be automated to more than two thirds. Industry and retail ahead The manufacturing industry, which also includes consumer goods, is, as expected, high on the list of sectors that can be automated. Here, 59 percent of all activities could be taken over by machines across the board. On closer inspection, however, there are major differences: While activities in customer service, for example, can be automated to less than 30 percent, 90 percent of the work of a welder could be done mechanically. In retail, the automation potential is also high at 53 percent. But here too, the possible uses of machines vary greatly. They are just as far-reaching for inventory management, packing and logistics as they are for generating and maintaining sales figures or customer data. As soon as it comes to activities that require emotional intelligence and judgment, technical solutions quickly reach their limits. The work of a salesperson in the store can therefore only be automated to 47 percent, while that of the accountant and revisionist in the back office is 86 percent. Implementation also a question of costs The technical feasibility is not the only criterion when deciding whether work should be automated or not. In addition to customer acceptance, the costs associated with automation are at least as relevant. In particular, low wages are still a frequent argument against machine solutions. On the other hand, these often promise higher productivity and lower error rates, which can make the use more economical than the employment of cheap labor. More on the topic in the student contributions Where machines could replace humans and Harnessing automation

5 accents Refugees: Integration pays off Malls for millennials Is the shopping mall dying? Not if she serves 18 to 35 year olds properly. Photo: McKinsey With the migrants, a lot of economic power comes into the country. Photo: shutterstock You are online around the clock. They search, compare, buy and now form the strongest consumer group on the internet: Millennials. But like the generation of their parents, they too do not want to do without real shopping with family and friends, in real shops and in attractive surroundings. New store concepts in demand But what exactly is attractive for this target group? A new infrastructure analysis from the McKinsey office in Dubai has now examined important components of the shopping experience of millennials in shopping malls of the generation of today's 18- to 35-year-olds who were the first to grow up with digital technologies. Retailers should adapt the offerings in their stores to the needs of the target group. Millennials visit shopping malls not for the range of goods, but for the experience. If you want to lure them out of the house, you have to offer them sensual experiences, for example live product tests in cooking classes, fitness sessions and make-up tutorials. The operators of the malls, in turn, should create variable, dynamic spaces for different store concepts: rotating shop window facades, pop-up stores for short-term sales promotions or showrooms for online retailers. In this way, you get an exciting mix of different providers, provide topics of conversation in the social networks and thus increase the number of visitors to your mall. Digital features are a must The same applies to the real shopping experience: Without a digital connection, nothing works for those under 35. Attractive features are navigation panels, virtual reality zones or magic mirrors, smart mirrors that recognize faces or silhouettes and provide personalized information. Used correctly, digital features bridge the gap between online and offline and give the smartphone generation the feeling of being completely at home in both worlds. For the retailer, the seamless shopping experience brings more sales and satisfied customers. The full analysis, which also contains findings on the experience components of entertainment and gastronomic equipment, is available at under the title Meeting millennials where they shop. Millennials visit shopping malls primarily for the experience. The effective integration of refugees is not only a social must, it also brings economic benefits. Around 1.3 million asylum seekers, who are expected to be recognized in Europe, could make a contribution of 60 to 70 billion euros to the gross domestic product as early as 2025. This is what the current study Europe s new refugees from the McKinsey Global Institute (MGI) reports. Compared to previous migration movements, current immigration has a unique demographic structure, according to the authors: 70 percent of those arriving since 2015 are men, around 80 percent are younger than 35 years. The economic potential of the refugees is correspondingly high. Adequate preparation for the job market is a prerequisite, however. Above all, this includes access to education, technical and interdisciplinary qualifications and investments in language acquisition. One thing is certain: the influx of refugees to Europe will not remain a temporary phenomenon. Geopolitical instability and economic imbalance will continue to drive people to migrate to wealthy industrialized countries. The full report is available for download at www. mckinsey.de/integration-vonfluechtlingen

6 6 News Hidden Treasures Companies derive only a fraction of the economic potential from big data. Translators wanted: the data is there now it is important to translate the knowledge into business activities. Photo: istock The times for data gold mining have never been better than today. The amount of information available worldwide doubles every three years. Digital platforms, networked sensors and billions of smartphones continuously generate new data. At the same time, the costs for storage are falling and the possibilities for analysis are increasing thanks to increasingly powerful computers. Measured against the rapid pace of technological development, however, the companies' output from their data analyzes is still unsatisfactory. Across five sectors, including public administration and health care, the value potential of big data analyzes has so far only been exploited to around 30 percent. This is the result of a current US study from the McKinsey Global Institute (MGI). Market brakes and technical hurdles The most effective users of modern data analysis include providers of location-based services such as navigation or mobile advertising. They raise up to 60 percent of the economic value that their data conceals. Their biggest obstacle is the lack of market penetration of mobile devices that can use their services. US retail follows in second place. It converts up to 40 percent of its data capital into economic value. The recovery is slowed down primarily by silo structures in the company's own IT systems and by the lack of available analysts. If the retailers were to fully leverage their data gold, they could increase their net margin by 60 percent and achieve productivity growth of up to 1 percent per year. In industrial production, there is still more potential left unused. There, only 20 to 30 percent of the data is used economically, although with full utilization the product development costs could be reduced by half and the operating costs by a quarter. Here, too, the reasons lie in outdated and unconnected IT systems, but also in the skepticism of top management with regard to the value-adding effect of comprehensive data analyzes. Good times for translators One of the biggest hurdles on the way to becoming a data-based company is finding the right employees. Above all, experts are in demand who can draw economic conclusions from data analysis and translate them into business applications. Such translators are currently extremely rare, up to four million of these specialists are currently being sought in the USA alone. Accordingly, the salaries for translators in the US labor market have recently increased by more than 16 percent per year. Other professional activities only increased by an average of 2 percent in the same period. According to the study authors, this trend will continue. Even if companies and universities try to fill the gap with appropriate training programs, the need for data specialists with economic implementation competence will increase faster than the supply in the coming years. Technology is not everything Many companies are already investing large sums in their technological equipment in order to uncover the wealth of information. However, in order to get the maximum value out of the holdings, a fundamental shift towards a data-driven company is required. Strategies and organizational structures need to be adapted as well as working methods and interactions. Further recommendations for action and all study results can be found in the more than 100-page MGI report The age of analytics. Competing in a data-driven world

7 Akzente Energiewende: More expensive than expected Relevance decides Personalized marketing drives sales and lowers costs. Not only the CO 2 emissions in this country are far above plan. Photo: istock Customers decide within seconds whether an advertising message appeals to them or not. Personalization, i.e. the exact tailoring of messages to the individual preferences of consumers, is now regarded as the ideal solution for effective marketing. Customers benefit from tailor-made offers, while companies achieve tangible business advantages. Great opportunities, hardly used More than a hundred McKinsey studies over the past five years have shown that personalized advertising increases sales by up to 15 percent, reduces customer acquisition costs by up to 50 percent and increases marketing returns by up to 30 percent. Still, companies find it difficult to do personalized marketing on a large scale. Many limit themselves to selected product lines or segments and give away hard cash. In fact, three steps are enough to introduce personalized marketing: Create microsegments. The starting point is the behavior of customers in the course of their customer journey. The formation of microsegments is key here. These can be determined from the behavioral patterns of individual consumer groups at certain contact points. Eight to ten segments often form the starting point for 1: 1 marketing. Target group: individual consumers: Personalized marketing increases sales by up to 15 percent. Send out trigger messages. Consumer activities such as browsing, posting, clicking, and buying give companies many opportunities to respond with appropriate offers. Such trigger messages are three to four times more effective than conventional advertising. To do this, companies need learning algorithms that correctly interpret customer signals and a library of individually tailored messages that can be precisely positioned. Set up War Rooms. Event-related individual marketing requires one thing above all: agile teams from creation, online, analytics and IT that develop and test personalized messages in a concentrated manner in a war room. Experienced war room teams generate one or two new triggers per day.Not a millionth thing Intelligent technologies and a test and learn working culture are the basic requirements for personalized marketing. This does not require a budget of millions: Successful companies start small, aim for quick wins and only then invest in more extensive automation. Photo: istock How expensive will the energy transition really be? It is already foreseeable today that annual energy costs will increase by 14 billion euros to 77 billion euros by 2025. The rapidly increasing development of expenditure could seriously jeopardize the goals of the energy transition for 2020. This is the result of the current energy transition index, which McKinsey collects every six months. The spring figures are not very optimistic: Central goals of the energy transition are being missed or are becoming increasingly distant. Of the 15 key figures in the index, ten have deteriorated since the last survey in autumn 2016. The furthest away from their targets are energy consumption, the development of electricity prices, network expansion and, above all, CO 2 emissions. The latter is currently 916 Mt, more than 100 Mt above plan. Only subsidized goals such as the construction of photovoltaics and offshore wind turbines will be achieved with certainty. At the same time, costs continue to get out of hand. The future increase will be driven by the electricity price increases in the wholesale trade, closely followed by the continued rise in expenses for network expansion and network interventions and, last but not least, by the EEG surcharge. All index results are there

8 8 Fashion Industry Fashion 2017 Where is the global fashion industry headed? A new study measures the performance of the industry in detail for the first time, identifies the most important trends and identifies the growth areas of tomorrow. Photo: istock

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10 10 Fashion Industry By Achim Berg, Leonie Brantberg and Saskia Hedrich Glamor, Glanz und Gloria This is what the clothing, shoes and accessories business has always stood for. The fashion industry is not only one of the most colorful industries the economy has to offer, but also one of the most productive. With a market volume of 2.4 trillion US dollars, it is one of the largest and most value-creating businesses in the world, more important than media, advertising or transportation. If the fashion sector were a country, its economic output would be seventh worldwide, ahead of India and Italy. Years of untroubled growth No question about it: the global fashion industry wrote one of the success stories of the decade between 2005 and 2015. With an average of 5.5 percent per year, it grew faster than the global gross domestic product, however, the industry had to accept a setback: with only 2.5 percent growth in sales, it posted the weakest result since the financial crisis. Terror attacks, the Brexit vote and China's capricious capital markets troubled the globally networked industry. At the same time, smartphones, social media & Co. have created a new type of buyer: today's fashion customer is autonomous, enlightened, demanding and increasingly difficult to calculate. The forecasts for 2017 are better, albeit with a maximum growth of 3.5 percent, still below the level of previous years. And not everyone is already sure that they get a lot from the cake. Which market segments and product categories have chances for further growth and for whom will it be tight in the highly competitive fashion market? How do industry experts assess the prospects of their industry and what are the defining trends in the industry in the 2017 fashion year? The State of Fashion provides the answers in a new study that McKinsey carried out in cooperation with experts from the fashion website Business of Fashion (BoF). The report combines industry surveys and McKinsey analyzes with a trend view for 2017 and beyond. Top managers and industry experts from all fashion segments were interviewed for the study. At the same time, McKinsey evaluated data from 450 companies worldwide and developed the first comprehensive benchmarking for the industry: the McKinsey Global Fashion Index (see text box on the right). We summarize the most important results of the study here. Winners and losers Percent of the top managers surveyed expect better business in 2017, compared to the previous year, more than two thirds expected a deterioration (Figure 1, page 12). The reason for the new confidence is not solely due to macroeconomic improvements; many companies have now also done their homework: programs to cut costs and restructuring are now bearing fruit and creating space for new growth. However, not all market participants participate equally in the upswing. The 2017 winners include the fashion segments of affordable luxury (below the luxury brands) and value (priced somewhere between discount and mid-market) with growth rates of up to 4.5 percent. Both groups benefit from customer immigration from the respective neighboring segments of luxury, mid-market and discount. As a result, it is precisely the providers at the upper and lower end of the price range as well as in the middle price range that have the lowest growth: In luxury and mid-market, the growth rates will practically halve compared to the top decade from 2005 to 2015. The growth of fashion discounters is even at an all-time low of 2 to 3 percent. In the ranking of the product categories, sports and fitness fashion continues to be at the top with growth of up to 7.5 percent, followed by bags / luggage and other accessories with up to 5 and 4 percent more sales respectively. The remaining categories of clothing, shoes and watches / jewelry increased their sales moderately between 1.5 and 3 percent (Figure 2, page 13). Two-digit growth rates are therefore a thing of the past in all categories with the exception of the athleisure subcategory: According to current industry forecasts, the combination of sports and leisure clothing is one of the fastest growing product groups up to ten pioneering trends But what are the growth drivers in 2017 and what influences still affect the fashion business? For sure

11 Akzente is: With the new year there are also new developments in global economic terms, at the consumer level and in the business system of companies. The study identified a total of ten trends that will shape the 2017 fashion year. They were derived from quantitative analyzes, expert interviews and new findings from the work practice of BoF and McKinsey. Global situation: Politically insecure, economically promising More volatile world. Geopolitical destabilization creates a pervasive sense of insecurity in companies around the world. At the same time, latent or already acute trouble spots threaten the global value chain of the fashion industry. Nevertheless, according to McKinsey surveys, almost half of the top managers surveyed expect further, albeit unevenly distributed, growth. In this volatile New Normal, companies would do well to rely on agile structures and diversification when it comes to cultivating markets, designing brand portfolios and managing supply chains. China's comeback. The world power China will remain a key market for the global fashion industry in the future. The Chinese middle and upper classes will grow by a further 28 percent to 247 million households by 2025; this is where the world's largest target group with purchasing power will emerge. At the same time, the United States had just 126 million middle- and higher-income households. China's consumption is also being stimulated by the population's easier access to international products via smartphones and tablets. The fashion industry in particular benefits from this. Urban growth drivers. In the course of global urbanization, a new class of rapidly growing affluent cities is moving into focus, which is gaining relevance for the further development of the fashion industry as a production location as well as a sales market. In 2017, provincial cities such as Pune in India or Harbin in China will have a population of around 8 million, comparable to London or Paris. Others like Tianjin in China are developing into the engine of the jewelry market, while others like Kuwait City are becoming the hub for creation. The McKinsey FashionScope, an analysis tool for identifying urban hotspots, helps fashion companies in the denser global New bar for the fashion industry: The McKinsey Global Fashion Index The global fashion industry is one of the largest industries in the world and one of the least explored when it comes to the detailed Measuring business success is all about. The McKinsey Global Fashion Index (MGFI) now fills this gap for the first time, it creates a comprehensive benchmarking for the entire fashion industry. The index evaluates data from more than 450 companies that together cover almost 50 percent of the global fashion market. At the same time, it shows a representative cross-section of all market segments, regions, product categories and operating models. Three key figures form the basis for the performance measurement: turnover (sales), operating result (operating profit) and economic profit (economic profit). The latter measures the added value minus the opportunity costs of the capital invested. The performance indicators are collected for six different price segments in fashion: luxury, affordable luxury, premium / bridge, mid market, value and discount. Typical representatives of the respective segments are the companies Chanel, Michael Kors, Nike, Zara, TJ Maxx and Primark. In detail, the index covers the fashion categories clothing, shoes, sportswear, bags / luggage, watches / jewelry and other accessories.

12 12 Fashion industry Percent of decision-makers expect better business for the fashion industry in 2017 There were only half as many business developments in the fashion industry Share of respondents in percent Better Worse Unchanged Source: BoF-McKinsey Global Fashion Survey, September 2016 Urban jungle the most rewarding goals track down for their business. Consumers: unpredictable and complex smart shoppers. The behavior of fashion customers has never been more difficult to predict than it is today. Non-stop online, well-informed and fully networked, they act more spontaneously than ever and make the highest demands: They expect personalized offers, cross-channel service, shopping around the clock. Price comparison portals and social networks make purchasing decisions easier and the alternatives are just a click away. The 2017 consumer picks the best from all ranges and shops, loyalty is a thing of the past. For fashion companies, the task is to create seamless customer experiences for today's hybrid consumer, to optimize online channels and to adapt store formats. At the same time, brand management should use the digital networking of customers to learn as much as possible about them. Investments in the right technologies are becoming an important competitive factor. Generational split. Two consumer groups will ensure growth in the next few years: the retirement baby boomers and the millennials. By 2030, half of urban consumption growth in mature markets will be attributable to the 60-plus generation, equivalent to US $ 4.4 trillion. Millennials, in turn, will have purchasing power of around 7.5 trillion US dollars in the growth markets alone by 2025. The challenge is to serve both customer groups equally well. For Millennials, careful segmentation is recommended to capture their wide-ranging preferences for quality and brand image. For the 60+ generation, on the other hand, it is important to find the balance between generation-independent approach and age-appropriate fashion. Fashion factor wellness. Feeling good is the new looking good: Consumers are increasingly opting for fashion with a feel-good factor, the boundaries to the booming wellness market are becoming fluid. Many manufacturers are already adding their own sport and casual lines to their range. But the potential has not yet been exhausted. In addition to physical activity, the wellness trend is increasingly also encompassing aspects such as environmental awareness and sustainability. A holistic view of the Feeling good clientele opens up new growth opportunities for the fashion industry.

13 Accents Providers in the segments of affordable luxury, premium / bridge and value are growing the fastest Global growth of the fashion industry, in percent Global industry total 2.5-3.5 luxury 1.5-2.5 Affordable luxury 3.5-4, 5 Premium / Bridge Mid-Market Value 3-4 Discount 2-3 Clothing 1.5-2.5 Shoes 1.5-2.5 Product Category Sportswear Bags / Luggage 4-5 6.5-7.5 Watches / Jewelry 2-3 Other accessories 3-4 Source: McKinsey Global Fashion Index 2016 Business system: New rhythm, new player fashion ad hoc. The type and speed in which fashion is produced, presented and sold are currently changing radically. The principle of see now, buy now, in which new collections go on sale immediately after the show, is one of the revolutions that the business is currently experiencing. Vertical fashion chains were the first to break the classic seasonal cycle with the introduction of fast fashion. Established manufacturers in the higher price segments are now following suit: more than 15 major fashion brands are already producing their collections on the basis of see now, buy now. Whether the model is widely accepted depends largely on its economic success this year. Above all, luxury and premium manufacturers will have to ensure that the creative process does not suffer from the increased number of strokes. Growth from within. The high phase of expansion into new markets and channels is over for now. The year 2017 belongs to organic growth, achieved by maintaining existing brands, stimulating local demand and deepening existing relationships. Increase in value takes precedence over increase in volume. This trend is also due to the fact that spatial expansion, combined with tough price wars, is gradually reaching its limits. Successful growth from within, however, requires strong brands with a convincing value proposition, effective customer loyalty and state-of-the-art

14 14 Fashion industry 3. Investments in customers, channels and new technologies are the key to the fashion successes of tomorrow Areas in which the fashion industry is planning investments in 2017 (multiple answers possible) Share of respondents in percent Omnichannel integration, e-commerce, digital marketing 62 Customer Relationship Management, customer loyalty programs 41 Customer experience in stores 40 Development of IT capacities to digitize the supply chain 24 Expansion into new product categories 22 Source: BoF-McKinsey Global Fashion Survey, September 2016 Customer Analytics Tools. This is especially true for the luxury segment. Digitization at scale. The digital revolution is reaching the backstage area of ​​companies. After the digitization of customer contact points and sales, new technologies are now also being used behind the scenes to reduce purchasing costs, accelerate processes in the supply chain or improve procurement. Fully automated production is also no longer a taboo: the first steps can already be seen, for example in the Speed ​​Factory of the sporting goods manufacturer adidas. New ownership. Fashion groups, primarily from the luxury segment, will in future concentrate even more on their power brands and sell less lucrative brands. This brings new players onto the scene, often from outside the industry. The demand for acquisition targets in the fashion industry is increasing, especially in the private equity sector, which has well-stocked its coffers: In 2016, the available capital of the investment companies was a record amount of 818 billion US dollars. Some investors have already gained industry experience by joining fashion brands such as Valentino or Versace. There was no shortage of takeover targets in 2017 either. This is especially true for the affordable luxury and premium / bridge segments, in which the providers are highly fragmented and the differences in performance are large. Both are among the fastest growing segments in the fashion market for investors an incentive for financial commitment. Outlook: Investing in the future The trends outlined here point the way in which the fashion industry will head in the coming years. After the growth damper in 2016, the signs are now pointing to recovery and realignment. The global framework, new customer preferences and changed business systems demand a lot from the actors. The greatest challenge for the industry remains the volatility on the world markets, followed by the generation of further growth and competition among online providers.

15 Akzente Forward-looking companies are now positioning themselves by further deepening their existing relationships with customers and partners and investing in new technologies along the entire value chain. Improvements in customer and channel management, customer experience and the digitization of the supply chain are therefore right at the top of the agenda for many top managers this year (Figure 3). With these and other investments in the future, the fashion industry is taking steps in the right direction to arm itself for the market challenges of tomorrow and to continue the success story of the past. Have questions or comments? The authors look forward to your letter. Please to: The complete study report The State of Fashion is available for download at files / the_state_of_fashion_2017.pdf Key statements 1. The new McKinsey Global Fashion Index allows a performance comparison from the luxury to the discount segment and thus provides the first comprehensive benchmarking for the fashion industry. 2. Fashion providers below the luxury segment and above discount are among the growth winners in 2017; Sports and fitness fashion remains the strongest product category. 3.Global volatility, confident consumers, faster fashion cycles and investors from outside the industry are the defining trends in the industry; digital transformation is becoming a success factor in the fight for the market share of tomorrow. Authors 1 Dr. Achim Berg is Senior Partner in McKinsey's Frankfurt office and head of the global Apparel, Fashion & Luxury Group. He advises industrial and trading companies from the clothing and luxury goods segment primarily on questions of strategic orientation. 2 Leonie Brantberg is Associate Partner in McKinsey's London office and member of the Apparel, Fashion & Luxury Group. Her core themes include growth and transformation in the fashion sector. 3 Saskia Hedrich is Senior Knowledge Expert in the Apparel, Fashion & Luxury Group in McKinsey's Munich office. The focus of her consulting work is on growth strategies and procurement issues.

16 16 Internet of Things growth driver IoT The Internet of Things makes it possible: Intelligent everyday products will simplify our lives in the future. New growth opportunities are opening up for the consumer goods industry. By Markus Berger-de Leon, Thomas Reinbacher and Dominik Wee Tools, game consoles, kitchen appliances, a lot of what we use professionally or privately already communicates with one another via the Internet. But the so-called Internet of Things (IoT) is only just beginning. According to a market analysis by McKinsey, the intelligent networking of machines and devices in Germany could generate sales of around 23 billion euros in 2020, while IoT sales were still below 10 billion euros annually, so the potential will increase within five years than double. The most important fields of application are the digitization of manufacturing (Industry 4.0) with a potential of almost 9 billion euros and connected vehicles with around 4 billion euros. But the networked home also promises growth. The USA is leading the way: there, the number of smart homes rose from 17 million in 2015 to an estimated 29 million in The merging of the virtual and real world is intended to make life easier for people, save time and money and ensure greater security. More and more everyday objects that were previously dependent on manual control are likely to become smart in the future. McKinsey estimates that consumers in Western Europe will be spending more than 12 billion euros annually on smart devices and applications and thus on consumer IoT by 2020. At the beginning of the year, the Consumer Electronics Show in Las Vegas again presented numerous IoT innovations: from the intelligent hairbrush, which draws conclusions about the condition of the hair from the brush noises, to the sports shirt that measures the heart rate, through routes that have been run the built-in GPS records and forwards the data to the associated app. Is it just a gimmick? Mere niche products? Maybe. But one thing is already certain: In the years to come, networking will continue to gain momentum, with far-reaching consequences for the entire consumer sector. Why consumer IoT is attractive for manufacturers The Internet of Things has the potential to fundamentally change business models and value chains in companies. Because in the long term it is no longer just about intelligent refrigerators or fitness wristbands, practically every product can be connected to the Internet at low cost. Why not, for example, equip a school satchel with an IoT sensor that measures location (via GPS) and movement (via acceleration sensor)? Parents can then follow in real time where their child is and where they are going. The sensor would also indicate falls or other accidents. Such a product has long been technically feasible; the cost of a corresponding sensor is around 10 euros. Consumer goods companies need not be afraid of the upcoming changes, on the contrary: The Internet of Things offers them considerable opportunities (Figure 1, page 18): deepening customer understanding. Consumer goods manufacturers usually have only a few direct points of contact with the customer, apart from user involvement in product development (embedded customer) or product tests. After the sale, the manufacturer often only finds out, if at all, how his product is performing in everyday life through customer service.

17 Akzente Photo: istock Where are you walking? If an IoT sensor is built into the school satchel, parents can track where their children are.

18 18 Internet of Things 1. Consumer goods companies can derive threefold benefits for their business from smart products, for example with a networked satchel Deepen customer understanding Generate additional sales Strengthen customer loyalty How often is the satchel put on and taken off? Which movement patterns can be recognized (running, walking, sitting)? When is it only worn at school or also during the holidays? How is usage distributed over the day? How long does it take to get to school? Source: McKinsey Chargeable features Alarm function when leaving school one-time fee when using the subscription model Automatic opening of the front door can be booked monthly after the sale Engage Keep regular contact with customers via app Explore Determine and analyze customer preferences Bind Offer new product features via software update Photo: istock What do customers complain or ask most often? Which feature is used the most? It's quite different with smart products: Here the manufacturers move closer to the users, they stay in contact over the entire product life cycle and continuously collect application data. For example, how long is the satchel worn every day, how often is it put on and taken off? The needs of the users can be understood and met much better on the basis of the information obtained. In return, however, manufacturers have to invest significantly more in their relationships with end customers. And ultimately, their greater proximity to consumers will also fundamentally change their relationship with retailers. Generate additional sales. Smart products create more value because manufacturers can generate recurring sales beyond the one-time sales price. A chargeable feature in the intelligent school bag could be an alarm function, for example: if the child is unplanned more than a kilometer away from kindergarten or school, the parents are notified immediately. Each triggered alarm costs 5 euros. Other functions could be booked on a monthly basis, for example that the sensor automatically unlocks the apartment door when the child comes home. Strengthen customer loyalty. Successful manufacturers manage to build an emotional relationship between the customer and the product. This increases customer loyalty and the recommendation rate. Networked products offer a wide range of binding options: For example, functions can be regularly renewed or expanded with additional features via updates, so that the entire customer journey becomes a special experience. The advantages for manufacturers and consumers are therefore great. However, lasting success with consumer IoT will only be achieved by companies that understand exactly what the market wants and what it doesn't.

19 Akzente Nothing works without a partner The Internet of Things creates a spirit of optimism. Akzente spoke to Moritz Diekmann, Managing Director of Telefónica Germany NEXT, which was founded in 2016. The subsidiary of the German Telefónica Group has set up the Geeny platform, which consumer goods companies can use to develop IoT solutions and bring them to market maturity. Photo: Telefónica Germany Next GmbH Akzente: Mr. Diekmann, what exactly do you offer with Geeny? Diekmann: We help companies to make their products and services smarter. On the one hand, we rely on an extensive ecosystem of partners that includes system integrators, design agencies, domain experts, hardware specialists, start-ups, connectivity experts and business strategists. On the other hand, we rely on our technical platform. Geeny works as software as a service from the cloud and offers all the building blocks that are required to quickly implement consumer IoT solutions and bring them to market. One example is value-added services that can be used to build end-use applications. So while we take care of the more complicated technical components of digital solutions, manufacturers concentrate on what they do best: to market optimal offers in established or new sales channels. Akzente: Smart devices are not without controversy. What role does the data protection debate play? Diekmann: Data protectionists see problems in the fact that more and more highly sensitive data is on the move on servers around the world without the producers still having access to it. Such a loss of control actually scares many people. Others, on the other hand, freely put their personal data online themselves. Here, companies have to manage the balancing act between collecting data and protecting data. The Geeny platform takes into account the needs of consumers to freely decide about their data and thus also the possible applications. Do I want to share the data on my fitness bracelet with friends or the doctor? Should my bracelet also be able to be used by other family members with their own account? We offer solutions that give customers control over the use of their data with the highest data protection requirements. Akzente: It is currently only possible to estimate how great the actual potential of networked devices will be. How do you see the future opportunities of Consumer IoT? Diekmann: I assume that in a few years there will be a huge number of networked devices. Smart consumer goods companies will open up new segments. Think, for example, of intelligent skis in which sensors built into the bindings constantly measure and analyze driving behavior. Networked devices simultaneously give companies new insights into the behavior and needs of customers, which of course can also be used for the further development of analog products. In addition, there are new cross-selling and upselling opportunities. For example, a pet food manufacturer may offer a dog health tracker. The app that goes with it then analyzes the animal's movement behavior, gives tips on healthy nutrition and makes product recommendations. Last but not least, smart companies are likely to see a significant boost in their image.

20 20 Internet of Things What hurdles still exist Many customers are currently still skeptical about the Internet of Things. There are various reasons why Consumer IoT has some catching up to do compared to other industries. The most important: Many of the products offered so far do not bring any real added value to the majority of consumers. Manufacturers are currently rushing to network everything and everyone. But they also bring some questionable products onto the market, such as gadgets like the sock, which recognizes when you fall asleep in front of the television and pauses the film with a signal. Products that solve more pressing customer problems should promise more success. Many consumers are also reluctant to buy smart devices because they fear that this will limit their options. Every device today has its own specific applications that do not run on other devices. A fitness tracker only works with the manufacturer's smartphone app, and the smart light bulb usually cannot be connected to another manufacturer's intelligent socket. A consistent separation of hardware and software would significantly improve the market conditions here. However, this requires cross-industry partnerships and the consistent implementation of technical standards. A third reason for the continuing skepticism: Many important questions about data protection and data security are still unanswered from the customer's point of view. What happens with my data? Where are they stored? Who do they belong to? Who has access to it and what does the company do to prevent access by unauthorized third parties? And it is not just the customer's privacy that appears to be threatened. Security gaps can also lead to smart devices being hijacked and used for digital attacks. What companies should do now While Consumer IoT promises attractive growth potential, many traditional consumer goods and branded goods manufacturers still lack the know-how and the necessary skills to develop a convincing IoT product and bring it to market quickly. In practice, four success factors have emerged: Build a network of partners. The implementation of IoT products is demanding and sometimes very complex technically. Without a closed system of partners, the task is hardly manageable (see interview, page 19). These can be technology or content partners who deliver the relevant data and content. Digital pioneers like Facebook, Amazon or Google have built entire ecosystems around their platforms, with a pool of hundreds of thousands of specialized developers. Google, for example, employs around internal developers for its Android applications and also has access to other external ones. Such ecosystems are also being built in traditional industries: One example of this is the HERE map service, which a consortium of three German automobile manufacturers bought as a joint asset on the way to autonomous driving. Invest in internal skills. As important as partners are, consumer goods manufacturers will not be able to avoid developing their own software and big data capabilities, far beyond what is already available. You should consistently pursue the goal of developing yourself into a technology company. It is important not only to build up digital skills in individual company areas. The entire organization needs to understand what the Internet of Things can do today and what working methods and skills are necessary to use it effectively. Start concentrated and learn. Digital networking should not start with the product with the highest turnover in the portfolio, but rather with a niche product that is ideally aimed at a tech-savvy but fault-tolerant target group. Nevertheless, the aim must be to inspire customers with a really revolutionary product. Automobile manufacturer Tesla entered the market with an electric roadster, although it still had a number of flaws. It was bought by customers who didn't care about perfection from the start. Building on the first experiences, more and more products can then be provided with IoT applications. Develop innovations in an agile manner. Collaboration is the key feature of an agile operating model. Cross-functional teams, with the involvement of external partners, suppliers and, above all, customers, develop products and services that meet market needs and do so as quickly as possible

21 accents as required by the digital world. New approaches such as hackathons should also be used. At these events, which originally come from the IT scene, employees sit down in one room to advance new ideas in time-limited sessions or to sharpen unclear product ideas by building prototypes. Agile product development also includes the courage to take risks. It should be allowed to fail with ideas. The important thing is to try new things and, if successful, then consistently move on. Incidentally, this applies not only to development, but to all business areas. In short: In the future, more Silicon Valley will be in demand in classic branded goods production. The Internet of Things will change the consumer goods industry in the years to come. Manufacturers who are now tackling the subject in a concentrated manner are gaining advantages over competitors, including those who are pushing into the market from other industries. Key messages 1. The Internet of Things offers consumer goods manufacturers the opportunity to renew their business model and develop growth potential. 2. Those who want to benefit early on should both build a network of partners and invest in internal skills. 3. The best start is for those who bravely start with a niche product and then consistently expand their IoT approach. Have questions or comments? The authors look forward to your letter. Please to: Authors 1 Markus Berger-de Leon is a digital partner in the Berlin office and responsible for McKinsey Digital Labs in Germany. He primarily advises clients on the development of digital business models. 2 Dr. Thomas Reinbacher is a consultant in the Munich office of Digital McKinsey. He particularly supports his clients in questions relating to digitization and the Internet of Things. 3 Dominik Wee is a partner in McKinsey's Munich office and head of global digital practice in the automotive & industrial sector. His main areas of expertise include connected cars, autonomous driving, Industry 4.0 and the Internet of Things.

22 22 Study on brand relevance The brand makes the difference Orientation, security, image enhancement brands have never been more important to Germans than they are today. This is especially true for consumer goods and retailers. By Sascha Lehmann and Tim Linsser Again and again, especially shortly before birthdays, the cry echoes from German children's rooms: I want a new smartphone! And woe to you, there is a device of the wrong brand on the gift table. The disappointment of the dear little ones is often hard to miss and the mood is lastingly clouded. Brands as a means of identification: The brand plays the most important role in mid-range cars, but cell phones and sunglasses also increase in their ideal value. The preference for branded products is by no means limited to the mobile phone market or to young consumers.Brands are more important than ever to Germans across all categories and consumer groups. This is shown by the fifth study on the development of brand relevance in Germany, which McKinsey carried out in collaboration with Professor Dr. Marc Fischer from the University of Cologne. According to this, the importance of the brand in purchasing decisions on a rating scale from 1 to 7 is now 3.6 and thus around 8 percent above the result of the last study by The most recent result is based on a survey of more than German consumers; the sample was evenly distributed across all age groups and both sexes. On a scale from 1 (doesn't apply at all) to 7 (applies completely), the participants indicated the role brands play in their purchases and contracts. In doing so, they not only assessed the relevance of brands in general, but also the three central functions that they have for consumers: information efficiency (brands help with rapid orientation in the thicket of offers), risk reduction (brands create trust and thus make purchasing decisions easier ) and ideal use (brands serve for self-realization and / or image gain). Photo: istock

23 Accents Of the total of 30 analyzed categories, 14 belong to the general category of consumer goods / products, 11 to the area of ​​services and 5 to the retail sector. This structure has remained unchanged since the first edition of the brand relevance study in 2002, so that long-term comparisons are possible. It turns out that the development of brand relevance is by no means uniform everywhere. Rather, there are clear differences between the respective brand functions (information efficiency, risk reduction, ideal use), the above-mentioned main categories and individual categories such as laptops, beer, paper tissues, department stores or delivery services. The brand's comeback as a status symbol Above all, the ideal use of the brand has played a steadily growing role since the start of the study: in the past ten years alone, the corresponding value has increased by a third from 2.23 in 2006 to 2.96 now (Figure 1, page 24). Brands are therefore increasingly used for self-realization, for image enhancement or the feeling of belonging to a social group. As a result, the top ten categories with the highest brand relevance include a total of eight that are visibly used or consumed for others: mid-range cars, cigarettes, cell phones, beer, laptops, PCs / computers, sports shoes and designer sunglasses. There are many indications that the trend towards brand purchases is favored by low unemployment and rising real wages. Consumers have more money at their disposal again, which is why they are apparently increasingly turning to brands and are happy to show it off. The values ​​for the other two brand functions of risk reduction and information efficiency were already at a consistently high level in earlier surveys

24 24 Study of brand relevance 1. The importance of the brand increases most at all levels, but its non-material benefit for consumers grows. Development of brand relevance in the functions of risk reduction, information efficiency and non-material benefit , 07 3.90 3.90 3.77 3.77 3.77 3.76 2.23 2.32 2.75 2.% risk reduction information efficiency ideal benefit 1 N (2006) = 4,154; N (2010) = 2,610; N (2013) = 3,337; N (2016) = Source: McKinsey study on brand relevance, 75 points also increase again to values ​​around 4.0. The increase is probably due to the fact that brands increasingly serve as a guide in the increasingly dense and competitive jungle of product and service offerings. They also create trust between brand providers on the one hand and consumers on the other. Above all, they reduce the perceived risk by the consumer of making a wrong decision in one of the numerous, often quickly successive, purchase situations in everyday life. Cigarette and beer brands en vogue again The brand relevance is not increasing continuously across all sectors, as the consideration of the main categories shows. The importance of the brand in consumer goods and services even decreased slightly in 2013 and is now increasing again significantly. It is still true, however, that brands play a much greater role in products than in services and retail (Figure 2). There is also movement in the individual categories. The shifts become visible with the help of the so-called psychometric measuring scale on which the brand relevance study is based. It can be used to derive a numerical value for each category, which in turn allows a percentage comparison from year to year and between the categories. The medium-sized car category currently has the highest brand relevance with a value of 4.55. But

25 Accents Brand relevance is still highest for products, followed by services and retail. Development of brand relevance in the three main categories of products, services and retail. Average value from N 1 ratings on a scale from 1 to .92 3.66 3.54 3.92 3.00 3.33 3.26 3.45 3.11 2.89 3.14 3.24 Products Services Trade 1 N (2006) = 4,154; N (2010) = 2,610; N (2013) = 3,337; N (2016) = Source: McKinsey study on brand relevance 2016, even with traditional consumer goods, brand relevance has risen again: After brand relevance for cigarettes fell by 21 percent and for beer by 19 percent in 2013, both are now among the winners again achieved second and fourth place in the ranking with 4.44 and 4.27 points (Figure 3, page 26). In the case of cigarettes, the introduction of shock images on packs in the past year could also have played a role. Since then, smokers have possibly been more oriented towards the familiar brand name when making purchase decisions. As a result, brand relevance for cigarettes has increased by almost a third. High-tech products also experienced a trend reversal: Whereas brand relevance for cell phones, PCs and laptops had reached a low point in 2013, it is now climbing to record highs with values ​​of 4.25 and above. Above all, this shows the strong position of the major smartphone brands. Their popularity has led, among other things, to the fact that, according to the Interbrand ranking, Apple is by far at the top with a global brand value of almost 180 billion US dollars and exceeds the gross domestic product of entire countries such as Romania, New Zealand and Qatar. Competitor Samsung is also one of the top ten brands in the world, according to Interbrand, with a brand value of around 50 billion US dollars. At the end of the list of product categories in the study you will find everyday goods. The brand relevance here has recently decreased significantly and

26 26 Brand relevance study 3. Brands play the greatest role in products that are visibly used or consumed from the outside. Invisible consumption Visible consumption Top 7 categories with the highest brand relevance Average of N 1 ratings on a scale from 1 to 7 Top 7 -Categories with strongest growth in brand relevance Change compared to 2013 in percent medium-sized cars, cigarettes express- 4, delivery services 4.44 cigarettes + 31 cell phones, beer, laptops, PC / computers, investment funds, 4.31 investment funds, 27 casual clothing, 26 designer sunglasses, 25 mid-range cars, 18 cell phones N (2016) = Source: McKinsey study on brand relevance 2016 only achieved values ​​of 3.31 (detergents) and 2.71 (paper tissues). When it comes to leisure clothing, branded items have become much more important to Germans since 2013 (current value 3.44); however, this product group does not even come close to the top categories. Retail: department stores and mail order companies at the front For retailers, mail order companies open up the field from behind. In this category, brand relevance rose by 11 percent to a value of 3.51 after a low in 2013. In view of the strong competition, it is increasingly important for mail order companies to set themselves apart from their competitors with strong brands. Another winner in the retail category are department stores, which are continuing their upward trend (current value 3.36), while the brand relevance in DIY stores tends to decline (current value 2.87). In the services category, investment funds are the clear winners with a value of 4.18. This is followed by express delivery services, in which the brand relevance increases by a third (to 3.83 now): Apparently, consumers are not only relying on well-known providers from mail order companies. They also want to be sure that the items they buy arrive quickly and reliably and they also use strong brands for their delivery services. The results of the brand relevance study send a clear signal: consumer goods company, individual

27 Akzente Retailers and service providers should, in addition to product development and pricing, as well as sales strategies and channel management, always promote the development of their own brand (s). This is especially true in a world in which communication is becoming more and more important and the interaction between provider and customer is less and less limited to one-off purchase transactions. Strengthening the brand should therefore not only be a priority for the brand manager, but should also be on the agenda of the board of directors. If you keep an eye on your brand (s) in this way, invest in them and consistently develop them further, you are one step ahead of the competition when in doubt. This can also be seen when you compare the performance of the 40 most important global brands with the development of the listed companies that are included in the MSCI World Index: The portfolio of the top 40 brands has increased in value by 60 percent since 2000 than the companies in the entire index. Key messages 1. The representative long-term study by McKinsey shows: Brands have never been more relevant for purchasing decisions in this country than they are today. 2. The importance of the ideal use of the brand (gain in prestige, self-realization) is currently increasing the most. 3. It is more worthwhile than ever for manufacturers of products with an external impact to invest in their brands. Have questions or comments? The authors look forward to your letter. Please to: Authors 1 Sascha Lehmann is a partner in McKinsey's Frankfurt office and head of the European Branding Service Line of Marketing & Sales Practice. His consulting focus includes brand strategy and implementation as well as data-driven optimization of marketing expenses. 2 Tim Linsser is a consultant in McKinsey's Munich office and a member of the European Marketing & Sales Practice. He supports a large number of clients in the development and repositioning of brands.

28 28 Interview The burger has never been as sexy as it is today Despite the veggie trend and calorie counting, McDonald’s boss Holger Beeck is optimistic about the future. In an interview, he explains where he wants to lead the number one in the fast food market. Fast food is unhealthy and makes you fat? Holger Beeck, CEO of McDonald s Germany, reacts slightly annoyed to the question: Look at me: Of course, I often eat at McDonald s and I weigh 80 kilos, which is okay at 1.80 meters. He makes conscious decisions about what he eats and goes to the gym twice a week: We are not part of the problem, we are part of the solution. With us, you can eat a balanced diet. Beeck made it from trainee to head of Germany at McDonald s and has been with us for 32 years. Right now he and his team are facing major challenges: The current tasks range from the digitization of the business to the competition of the noble burger roasters and the reaction to new nutrition trends to the organization of a reliable and affordable delivery service. In an interview with Akzente, Holger Beeck talks about what the new McDonald's concept restaurant of the future will offer, what customers want today and why there are still vegetarian dishes on his menus, while organic burgers have been removed. Akzente: Mr. Beeck, how has McDonald's business changed since you started in 1984? Beeck: Above all, expectations, desires and behaviors have changed completely. Today our guests are much better informed about everything to do with food and drink. You not only want a standard offer, but also the possibility of putting your meal together individually and that should still be as fast as you are used to with standard orders. They want to be comfortable, anytime, anytime. Accents: McDonald s is the market leader in the fast food industry worldwide and also in Germany. Does that make you proud or does it burden you because the number one is constantly attacked by the persecutors? Beeck: First of all, it makes me proud, of course, because who doesn't like being the number one boss? The big challenge is not to get comfortable and not to underestimate the others. Akzente: After decades of growth, there was a kink in the sales curve in 2013/14. What was it? Photo: Dieter Mayr

29 Akzente We are the most democratic restaurant in the world. Everyone comes to us, poor and rich: Holger Beeck has been running McDonald's Germany since 2013.