Online Luxury's Biggest Players Are Struggling, Too
The retail reckoning isn’t just about department stores. MatchesFashion is going through a tumultuous stretch, while Farfetch is trying to get out from under steep losses. What's behind the market shakeout?
LONDON, United Kingdom — The luxury fashion industry’s e-commerce players are struggling to grow profitably.
Earlier this week, MatchesFashion, the UK-based multi-brand online retailer, reported its sales for the year ending in January 31 rose 27 percent, to £372 million. But the pace of growth was slower than the 44 percent recorded in the previous year. And operating profits plunged by 89 percent to £2.4 million, as the company added inventory and invested in a new warehouse to further its overseas expansion. Chief Executive Ulric Jerome abruptly left the company in August.
On Thursday, Farfetch reported that it sold $492 million worth of luxury goods on its marketplace in the third quarter, a 59 percent increase from a year ago. The company also reported an $85.5 million after-tax loss, slightly narrower than in the second quarter, and said it may be in the black by 2021. Investors, who have punished Farfetch in recent months over concerns about widening losses, applauded the results nonetheless, sending shares up 30 percent on Friday to $9.70. (For perspective, the company’s closing price on its first day of trading in September 2018 was $28.45.)
These companies and many others face intense pressure to grow as quickly as possible, either from shareholders in Farfetch’s case, or more often from private-equity backers hoping to use booming revenue to boost the value of their stakes ahead of a sale. Often that growth comes at the expense of profitability, as online brands and retailers invest heavily in marketing and building the infrastructure to quickly ship luxury products to customers around the world. Even Amazon reported a bigger-than-expected increase in fulfillment costs in its most recent quarter.
Competition is also intense; in addition to Farfetch and MatchesFashion, there’s market leader Yoox Net-a-Porter, plus Ssense, Mytheresa and LVMH’s 24S, and many, many other purveyors of luxury products. They must also contend with fast-growing resale sites like Vestiaire Collective and The RealReal, not to mention brands’ own e-commerce operations. On Thursday, Farfetch Chief Executive Jose Neves predicted that brands would pull out of multi-brand retailers online and operate as e-concessions on marketplaces instead, much as they have done in brick-and-mortar department stores.
Many e-commerce players have resorted to flooding Instagram and Google with advertising and offering discounts to hold onto customers. Both strategies are unlikely to succeed in the long run. Customer acquisition costs inevitably rise, and the type of shopper who clicks over to Farfetch from an Instagram ad promising a deal is unlikely to return.
Those tempting sales can also alienate the same luxury brands these online retailers need to survive. Prada and Gucci don’t want to see their products marked down. Rampant discounting at department stores is one reason luxury brands are pouring resources into building out their own store networks; many are now doing the same online.
“Farfetch is no Uber of luxury goods distribution: most of the luxury goods brands worth their salt already have limousines of their own,” Luca Solca, a Bernstein analyst, wrote in a research note on Wednesday.
Farfetch is trying some creative moves, buying sneaker reseller Stadium Goods in December and New Guards Group, the brand distribution and production platform behind Off-White and Heron Preston, in August. The company has struggled to explain how these acquisitions fit into its larger strategy of becoming the Amazon-like “everything store” for the online luxury world. A side business providing white-label e-commerce infrastructure to retailers like Harrods is a more obvious fit. A partnership with Gucci is helping to give Farfetch a clearer identity with consumers.
Matches is also attempting to scale, and running into many of the same problems as Farfetch.
Husband-and-wife founders Tom and Ruth Chapman started with a single boutique in Wimbledon in 1987, but the business expanded rapidly after the pair took their unique merchandising eye online in 2007. They sold a majority stake in September 2017 to private equity firm Apax Partners. The deal reportedly valued the company at £800 million, or about $1 billion.
Rapid expansion followed, including a major push in the US. Matches has also aimed to set itself apart from rivals like Farfetch and Net-a-Porter by offering what it bills as a more-personalised shopping experience. That includes a five-story townhouse in London’s Mayfair neighbourhood, which opened in September 2018. The space hosts events and offers personal shoppers for VIP clients.
Those efforts have paid off, when it comes to recruiting new shoppers and convincing existing customers to spend more. Matches said new customer growth was the main driver behind its growth in revenue in 2018, with the number of active customers rising by 34 percent to 474,000. The top 5 percent of customers were responsible for 40 percent of sales.
However, Matches reported spending £7.8 million on “exceptional items,” including a new distribution centre in North London, a creative and photo studio in East London and the relocation of its Hong Kong office. Earnings before interest, tax, depreciation and amortisation (EBITDA), dropped 43 percent to £14.7 million compared to £26 million for the 2017 financial year.
Luxury retailers are still figuring out their role, both online and off. (It’s no coincidence that high-end US departments stores like Neiman Marcus and Barneys have also struggled in recent years.) Online retailers in a sense created the problem they must now solve; they undercut brick-and-mortar retailers by flooding the market with luxury goods and the promise of free two-day, or even two-hour, delivery.
The question now is whether Matches, Farfetch and their rivals can find a way to grow that doesn’t require additional investment. Scaling is only going to get harder, given the intense competition for online luxury spending. Luxury shoppers also want a personalised experience and a sense the clothes being presented to them were chosen by buyers who share their (no doubt impeccable) taste. If they do get that, they have no obligation to remain loyal to a certain distributor.
Can Farfetch or Matches provide this experience and operate as a global e-commerce giant at the same time? And will the most desirable brands want to come along for the ride? Time will tell.