The Trouble With Luxury E-Commerce
This week, Ssense said it laid off 138 workers, and MatchesFashion received a $73 million cash injection from its shareholder. From more niche players to giants like Farfetch, the pressure remains high for luxury e-tailers.
Luxury brands mostly shook off the economic gloom of rampant inflation and collapsing consumer confidence last year — despite the deteriorating macroeconomic picture, sales grew an estimated 22 percent, according to Bain.
The picture hasn’t been as rosy for luxury’s multi-brand e-tailers, however: In August, Richemont took a €2.7 billion write-down on Yoox Net-a-Porter as it spun the e-tail group off into a joint venture at a far lower valuation than what it had paid.
And in December, Farfetch shares plummeted by a whopping 35 percent in a single day after the platform reported its first-ever year-on-year drop in sales on its marketplace. In a telling sign, multi-brand luxury e-commerce’s biggest player keeps shifting its focus to licensing activities and white-label services for brands.
“The Farfetch core [online marketplace] business is not a good business, despite Farfetch being the champion of the world at it,” analyst Luca Solca said in a note to clients.
This week, news suggested that smaller rivals — whose focus on tight product curation was meant to set them apart in the sector — are facing troubles, too.
Montreal-based fashion-forward retailer Ssense confirmed it had laid off 138 employees (roughly 7 percent of its headcount), citing “a shift in consumer online shopping back to pre-pandemic levels as well as the macro-economic environment.”
London-based MatchesFashion received a £60 million ($73 million) injection of capital from its owner Apax Partners, suggesting that even after losing £24 million last year the company still needs more support to fuel a hoped-for turnaround under CEO Nick Beighton (the company’s fourth chief executive in as many years).
Even Germany’s MyTheresa — which has staked its reputation on a more cautious approach, protecting profitability by balancing the costly process of acquiring new customers with efforts to identify and retain high-spenders — has struggled to maintain investor support. Even as rising interest rates and a cloudy economic outlook drove investors away from cash-burning businesses in favour of more prudent (read: profitable) companies, shares in the New York-listed e-tailer have fallen 65 percent since its January 2021 IPO (compared to a 9 percent increase in the S&P 500).
Simply put: it’s tough out there for luxury e-tailers at every size.
To be sure, internet companies well beyond luxury e-tailers are feeling the pinch after a period of cheap debt and rapid growth. In recent weeks, layoffs have hit tech giants Meta and Google as well as fashion start-ups including StitchFix and GymShark.
But long-standing challenges for luxury‘s digital retailers such as securing inventory from A-list brands, the high costs of maintaining logistics and technology platforms, and fierce price competition due to instantaneous comparison shopping show no signs of abating. And those challenges are harder to paper over in an economy where investment capital has become more scarce and borrowing has grown more expensive.
Meanwhile, the costs of generating traffic from sources like Instagram and Google has also gone up — thwarting client acquisition — at the same time as e-tailers are facing increased competition from the brands they sell, which have ramped up their own digital efforts considerably since the pandemic. Brands have also upgraded and expanded their physical retail networks, eroding online ordering’s appeal.
“On the one side, you need money to acquire the collections, then on the other you have to need money to get the traffic from Meta and Google — which costs a fortune. In most markets, this equation is impossible,” said Michel Campan, an e-commerce consultant who has worked for brands including Hermès and Christian Dior.
Pivoting to e-concessions — in which brands pay commissions for sales through virtual “shop-in-shops”, but hold stocks themselves — is one way e-tailers are evolving their approach to cope with cash shortages and competition from brands’ direct channels. While top-line revenues from commissions are lower for each sale, profitability can be higher as e-tailers dodge inventory risk.
The e-concession approach also allows e-tailers to focus their own investments on driving traffic and making their websites and apps more appealing for shoppers: in a world where nearly all brands sell directly online, multi-brand player’s ability to drive web traffic and engage consumers remains their main value-added, Campan said.
Taste can be hard to scale. But despite the challenges currently facing smaller online players, differentiating themselves through their unique fashion edit remains a key strategy, Solca says. “This can be a viable business, especially if driven with a goal to stand out on curation and fashion viewpoint.”
Further consolidation is likely following the Farfetch-YNAP tie-up last year. And yet, “this is not going to be a ‘winner takes all’ environment,” Solca said.
E-commerce sales are set to grow by double-digits annually between 2022 to 2025, according to BoF and McKinsey’s State of Fashion report. Multi-brand players still have a chance to secure their piece of that growing pie. But as e-tailers increasingly go head-to-head with trusted luxury brands, it’s unclear how big that slice will be.