Can luxury e-commerce be saved?

This week, two of the biggest players in the online luxury goods industry narrowly avoided bankruptcy.

Farfetch on Monday secured $500 million in emergency funding in a delisting deal that wiped out shareholders and bondholders, giving it a stake in South Korean e-commerce giant Coupang following reports in recent weeks that suggested its financial situation was deteriorating. announced that it would be sold. And on Wednesday, British retail group Frasers announced that it would buy Matches (until recently known as Matches Fashion) for 52 million pounds ($63 million), which will be acquired by private equity firm Apax. That's a fraction of the $1 billion valuation Partners reportedly received for the e-tailer when it acquired Matches. 6 years ago.

However, the fate of Youx Net-a-Porter remains up in the air after owner Richemont failed to reach a deal to sell its 47.5% stake to Farfetch.

These overwhelming exits were the latest symptom of the post-pandemic slump in luxury e-commerce. Companies have been able to avoid considering long-standing challenges to their business models, such as price competition, high logistics costs, and limited access to desirable inventory, as long as demand for luxury goods has soared. But rising inflation and interest rates are draining money-losing companies of capital and dampening the appetite of wealthy consumers to shop.

The multi-brand e-tailer “bought towards 2022 levels and then suddenly consumption growth stopped,” said Paolo de Cesare, former Matches CEO. “We had high inflation, high stock prices, and deep discounts. It was a perfect storm.”

Farfetch and Matches have each found their own “white knight,” and YNAP could too. But questions remain. Where does online luxury go from here?

To survive, luxury retailers must chart a path to profitable growth without relying on digital advertising promotions and discounts. Investing in creating a personalized shopping experience to increase loyalty and reduce the need to constantly chase new customers is an obvious starting point.

Under a new parent company, Farfetch and Matches have an opportunity. Both have better logistics and technological capabilities, allowing them to grow without wasting cash. Coupang and Frasers are no doubt hoping that their newly acquired luxury goods credentials will strengthen their position in the sector.

Through a joint venture with Tmall owner Alibaba, Farfetch, which was struggling to expand its business in China, was able to turn to South Korea, where Coupang is based. South Korea is the country where consumers spend the most per capita on luxury goods. The possibility of linking Farfetch's luxury products with Coupang's same-day delivery service Rocket could appeal to affluent consumers looking for near-instant gratification. Coupang will almost certainly be part of Farfetch's big-ticket deals, including Off-White operator New Guards Group, beauty retailer Violet Gray (which has already been announced for sale), and potentially brick-and-mortar boutique Browns. Eliminate some of your side projects so you can focus on your business. In the core marketplace.

Coupang and Farfetch share a business model but have little overlap in what they sell, while Matches and Frasers Group may have a more symbiotic retail relationship. Buyer Frasers Group, under chief executive Michael Murray, has invested heavily in an “elevation strategy” to lift the market, including in the Flannels division of its luxury multi-brand store chain. . Matches could accelerate the transition to a more focused, and hopefully more profitable, model by integrating the operational disciplines of the High Street Group.

YNAP's path forward is the most uncertain. Richemont had been counting on Farfetch to help it exit the unprofitable luxury goods retailer, which posted a loss of 128 million euros in the past six months, on top of a 500 million euro writedown. It would be difficult to find a buyer willing to take a loss of that magnitude. Luca Sorca, head of luxury goods research at Bernstein, said Richemont could shut down YNAP if it doesn't find a buyer.

At this point, the fate of all three companies is largely speculation. There are no absolute standards for running a luxury e-commerce business profitably.

The closest one might be Mytheresa. The Munich-based company leverages customer data generated on its platform to identify and attract customers who are willing to repeatedly spend large amounts of money. Mytheresa is also known for staging immersive real-world events for high rollers. The site generated a profit of €41 million before interest, tax, depreciation and amortization for the year ending June 2023.

Still, even Mytheresa is not immune to the broader downturn in the luxury goods industry and the challenges faced by competing e-tailers. GMV (a measure of goods sold on the platform) growth slowed sharply to 3% from 13% in the previous quarter. The stock has fallen 66% this year and is down more than 90% since its initial public offering in January 2021.

E-commerce players have sought to gain market share and broad appeal by combining luxury goods with affordable wardrobes such as $120 Nike sneakers, but they often end up with high-touch service, returns, and promotions. If you do, the second half of your business will often become unprofitable. will be considered.

“This is a business where you can make a very profitable business by selling the right products to the right customers in the right regions,” De Cesare said. “We are entering an era where e-commerce needs to be managed with sufficient focus and discipline, rather than chasing scale.”

News summary

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Edited by Diana Pearl.