Why Online Luxury Is Broken
Reports of financial strain at Farfetch amid a stalled deal with Richemont have driven confidence in multi-brand e-commerce to all-time lows. With value propositions eroding and investment drying up, a way forward remains unclear.
The crisis at Farfetch has been well-documented over the past week — but its woes are hardly singular in online luxury.
Following a report in The Telegraph that Farfetch chief executive José Neves was in talks to delist the company, BoF reported on Monday that the fashion tech giant was seeking cash to fund operations. Those include tapping existing partners for investment and selling off assets like the brand incubator and distributor New Guards Group (the licensee of Off-White).
The news has put the fate of another under-performing luxury e-tailer in jeopardy: Farfetch had been set to acquire a 47.5 percent stake in competitor Yoox Net-a-Porter, with plans to purchase it entirely within the next three to five years; the deal had received a green light from EU regulators in October. YNAP parent, the Swiss luxury conglomerate Richemont — also an investor in Farfetch — wants the e-commerce site off its own books; in November, it reported YNAP sales fell 10 percent in the first half of 2023 and implied losses of €128 million ($137 million) from YNAP’s operations during that period.
But online luxury’s problems go beyond Farfetch and YNAP. Montréal-based Ssense, which does not disclose revenues, cut its workforce by 7 percent in January, citing slower growth. Last month, MatchesFashion reported 2022 results including widening losses of £33.7 million and a third consecutive year of slipping sales. Meanwhile, Munich-based online destination Mytheresa reported a sales growth slowdown in September. The company’s gross merchandise volume — a measure of goods sold on the platform — rose 3 percent year over year to €204 million, compared to a 13 percent increase in the previous quarter.
Even T Mall-owner Alibaba — which always had an advantage in its powerful network of exclusive logistics partners and integrations with Chinese payment and messaging apps — has shown signs of pressure amid rising competition from scrappier rivals like Pindoudou, Temu and Douyin. The group sought to raise funds by spinning off various units, including its cloud computing division earlier this year (the IPO has since been shelved). The e-commerce giant’s shares have fallen by roughly three quarters since their 2020 peak.
But why are today’s luxury e-commerce players struggling to survive — let alone thrive?
Some of the multi-brand luxury model’s challenges go back to its inception. Customer traffic — a key value add wholesalers offer brands — is expensive to attract online, thanks to rising rates at online ad giants Meta and Google, and nearly impossible to retain. Nearly all the players in the space offer a similar user experience, from their product assortments to sleek, black-and-white branding, leading to rampant comparison shopping. Pricing is often the only way to stand out, forcing a race to the bottom.
Logistics costs have also always been high. For the most expensive, least return-prone items like a $1,400 Prada handbag, offering a high-touch, luxurious experience can be profitable. But margins are slimmer when offering speedy shipping and easy returns for marked-down, end-of-season wardrobe fillers. Whenever websites charge customers for those services, it incentivises people to go shopping in person.
Investors have spent years pouring money into e-commerce darlings, betting that as adoption of e-commerce increased, operating at a bigger scale would ease the challenges of turning a profit. That hasn’t been the case. Even for behemoths like Farfetch, the landscape has only gotten more competitive, as nearly all brands operate their own e-commerce platforms, limiting the need for intermediaries.
In-person shopping is also seeing renewed interest post-pandemic, and luxury houses are investing heavily in rolling out bigger and better stores. Fashion capitals now feature mega-boutiques that are true destinations, offering immersive brand experiences that incorporate restaurants, art exhibitions, events and spa services. Plus, brands like Gucci and Hermès have rolled out new locations in smaller cities in the US such as Austin, Denver or Nashville, further limiting the appeal of ordering online.
For brands, there are upsides to investing in their own digital presence: even if some e-commerce sales are less profitable than they would be in store, being able to showcase their full offering on their own websites is worth it. When customers can do research online ahead of time, they come into stores determined and well-informed. As well, niche items are more likely to find buyers online, and brands are able to acquire heaps of valuable customer data.
The likes of Yoox Net-a-Porter and Farfetch, by contrast, don’t share the opportunity to cash in on their online showrooming activities in the physical realm. After getting out ahead of the e-commerce boom, both companies have tried providing white-label support to brands selling online. But big brands have increasingly chosen to bring those operations in house, while smaller labels often find that ready-made e-commerce platforms, like Shopify, suffice.
The macro-economic environment has also changed: The end of a decade of ultra-low interest rates is hitting the luxury economy hard, particularly among aspirational shoppers. With travel and experiences on hold during the pandemic, customers were able to fall back in love with stuff, shelling out for luxury bags and shoes.
Now, more customers have to choose between a vacation or a handbag — or homeownership. Luxury sales will likely rise 1 to 4 percent next year, compared to 8 percent growth at constant currency in 2023, consultancy Bain forecasts.
E-commerce players are likely to be doubly punished by rising interest rates, as higher yields on safe investments have led markets to become less interested in placing bets on loss-making businesses.
“These platforms that had promised to bring physical multi-brand retail, the grands magasins, online are finding out that online is a completely different world,” e-commerce expert and advisor Michel Campan said. “Ultimately, raising money is the thing these companies were actually good at. But eventually investors’ patience runs out.”