How digital assets are changing the business of fashion
Digital assets like virtual fashion, gaming and NFTs are offering new ways for consumers to shop, exchange goods and inhabit identities, and in turn offering fashion brands the opportunity for increased revenue streams.
That’s according to the just-released sixth annual edition of The State of Fashion 2022 report from McKinsey in partnership with the Business of Fashion.
To capture untapped value streams, the report suggests that fashion players should explore the potential of intangible products – digital assets such as nonfungible tokens (NFTs), gaming and virtual fashion — all of which are a fast-growing area of interest for luxury brands and offer fresh routes to creativity, community-building and commerce.
Generation Z spending more time in the metaverse
Tech-savvy and younger groups of people are spending increasing amounts of time in the metaverse – from social media and gaming to virtual realities – and are adopting multiversal identities. Gen-Z spent an average of eight hours per day on screens in 2020, while 81% of Gen-Z having played video games in the past six months, averaging 7.3 hours per week.
Part of the appeal of virtual worlds is the chance to engage with others and build communities, something that was accelerated by the pandemic lockdowns when in-person social contact was limited.
These soaring levels of engagement have spawned a new generation of digital fashion creatives, who are pushing the limits of possibility online, and brands have the opportunity to engage more deeply and creatively with their customers and unlock new value streams.
How fashion is participating in the metaverse
The metaverse is becoming big business, with funding pouring in from investors, and for the fashion industry it has become the hottest buzzword in 2021.
As participation in the metaverse increased over the last few years, fashion brands have become increasingly interested in participating – in digital products linked to blockchain-powered NFTs, in virtual reality interfaces, and in gaming, the latter becoming an increasing prime target for brands.
In 2021, Gucci auctioned off its first NFT for charity and issued its first-ever virtual sneakers, selling the 3D animated trainers for US$12 a pair. Following this, brands including Dolce & Gabbana, Rimowa and Louis Vuitton released NFTs.
An increasing number of fashion brands are also collaborating with gaming platforms to design virtual fashion assets.
“There are more and more ‘second worlds’ wherever you can express yourself [but] there is probably an underestimation of the value being attached to individuals who want to express themselves in a virtual world with a virtual product, [through] a virtual persona,” Gucci’s CMO Robert Triefus told McKinsey, citing the 19 million visitors who attended the Gucci Garden within the Roblox gaming metaverse.
Rise of fashion in gaming
As gaming increasingly becomes an extension of the real world, and with the pandemic supercharging participation, it has become a prime target for fashion brands. This has mainly been via collaborations with gaming platforms to design virtual fashion assets.
Take Ralph Lauren – the brand partnered with South Korean social network and avatar simulation app Zepeto to create a virtual fashion collection, giving users the chance to dress their avatars in exclusive products, or ‘skins’. Gucci has created digital assets for gaming platform Roblox, and for Pokémon Go and Animal Crossing.
Balenciaga unveiled its A/W 2021 collection in the form of a video game and subsequently teamed up with Fortnite on a collab that included shoppable virtual clothing and physical products, advertising the partnership across traditional and metaverse channels.
According to the McKinsey’s report, opportunities in gaming are extensive and offer a platform to engage younger consumers and create a buzz with those who don’t normally interact with brands in physical formats. Delivering in-game merchandise lets brands monetise digital assets where it is the norm to pay for elevated experiences.
The role of NFTs in the fashion industry
Much of the excitement around virtual environments is around NFTs – unique crypto assets whose ownership is verified on blockchains and are bought, sold and exchanged in the metaverse mainly using cryptocurrency.
NFTs have witnessed an explosion of interest over the past year, following an NFT created by digital artist Beeple which sold at Christie’s for a record-breaking US$69.3m.
In fashion, NFTs have a wide range of use cases, ranging from product authentication to serving as collectable pieces.
In 2021, there was a wave of NFT engagement among luxury players, often via the gaming universe. For its 200th anniversary, Louis Vuitton launched a video game with collectable NFTs partially designed by Beeple. The game contained NFT art that could be acquired by players in a story echoing the journey of the brand’s founder.
Burberry created NFTs within the Blankos Block Party game, featuring digital vinyl toys that live on a blockchain. Adorned with Burberry’s TB summer monogram, the limited-edition Burberry Blanko Sharky B NFT can be purchased, upgraded and sold. The collaboration also includes branded in-game NFT accessories.
And Dolce & Gabbana collaborated with Unxd, a curated marketplace for digital luxury and couture, to create an inaugural nine-piece collection of NFTs sold alongside physical couture.
Opportunities to monetise, but sustainability and cybersecurity concerns
So, can digital fashion assets generate significant revenue streams? According to Coindesk, Dolce & Gabbana’s first NFT Collection fetched the equivalent of US$5.7 million.
That said, McKinsey’s report suggests that monetisation opportunities are likely to be contingent on the psychology of scarcity and limited editions driving NFT mania – together with the security of authentication and the potential for community-building that they provide.
“We say to any fashion brand we work with: it’s experimental. It’s not always going to work and we can’t guarantee it will work,” said Amber Slooten, co-founder and creative director of The Fabricant, a digital fashion house that helps brands create their own virtual products and has worked with brands including Adidas, Marques Almeida and Buffalo London.
The report suggests there are reasons to exercise caution, however. One concern is the environmental impact of the blockchain technologies that underlie NFTs, particularly the energy needed to validate transactions. Cyber security is also a cause for concern with counterfeiting and security breaches a significant threat.
A recent cyberattack on the anonymous British street artist Banksy’s official website caused a collector to pay US$334,000 for a counterfeit NFT, the BBC reported.
Approach to take in 2022 and beyond
Looking ahead, reports McKinsey, the buzz around NFTs will continue to build as increasing numbers of fashion brands seek paths to differentiation and launch creative experiments. As consumers spend more time interacting online, their interest in collecting and displaying digital objects is likely to deepen.
However, they will also seek out opportunities for co-creation and will expect brands to engage with digital assets in a format that is native to the spaces they inhabit, rather than content that repeats across channels.
The crypto fashion opportunity will demand significant investment, experimentation and a new playbook. Brands will need a strategic mindset and a willingness to develop partnerships and harness different talent to deliver high-quality content both in-house and in collaboration. In an area where a large amount of hype is involved, it will benefit brands to seek out business cases that spark excitement but remain on-brand.
To do this, say McKinsey, it may be necessary to take a new lens on ROI, focusing on less measurable benefits such a brand awareness and marketing impact, as well as setting flexible targets that are calibrated to potential, rather than focusing exclusively on the bottom line.
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