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German online fashion retailer Mytheresa announced this week it was acquiring Yoox-Net-A-Porter (YNAP) from Cartier owner Richemont. The long-awaited deal removes a major thorn in the side of Richemont and puts an end to more than 14 years of having to disburse hundreds of millions of euros on botched IT projects and on covering YNAP’s losses every year.

Richemont, which acquired a controlling stake in Net-A-Porter in 2010, lost more than €5 billion on that company hoping it would have a state-of-the art e-commerce service for its brands. Now it has to start all over again. It’s been an expensive distraction for Richemont Chairman Johann Rupert. You wonder if its cash would not have been better spent if Richemont had concentrated on its core business.

The Swiss luxury group is great at making and marketing watches and jewelry. Cartier is far and away the world’s leading jewellery brand by revenues. Rupert got badly burnt trying to figure out how technology and luxury goods go together.

Richemont could have bought a brand like U.S. jeweler Harry Winston – which Swatch Group acquired in 2013 for €1 billion and has severely damaged as Miss Tweed reported in 2021. Richemont would have been a much better parent for Harry Winston. It would also have allowed Rupert to better rival LVMH which is now gaining global clout in watches and jewellery since Bernard Arnault’s purchase of US jeweller Tiffany in 2020. LVMH’s market cap today now worth €325 billion, dwarfing Richemont’s €70.7 billion.

As part of the agreement with Mytheresa, Richemont will get a 33 percent stake in New York-listed Mytheresa, which prior to the deal had a market capitalization of around €350 million. Richemont will also inject €555 million into YNAP, making it debt-free, and the Swiss luxury group will provide a one-year €100 million credit facility. The news which came out on Monday pushed up Mytheresa’s share price by nearly 40 per cent. The stock price has doubled in the past month, closing at $7.95 and valuing the company at $678 million.

It looks like Richemont is giving away much more than it’s getting.

SETBACK

Richemont must finance YNAP’s losses until the deal closes in the first half of next year. That means that it will need to disburse another €250 million – at least. It will also have to pay for the re-platforming of several of its brands including Chloé, Alaïa and Dunhill which were using YNAP’s e-commerce software solutions. That’s one more major expense on which by past form there will likely be little communication.

In all, it is a setback for the Swiss luxury group. Richemont spent vast amounts on YNAP’s new e-commerce platform after its failed attempt to development of its “Next Era” software project four years ago as Miss Tweed reported in 2020.

Now it will have to disburse roughly another €1 billion in cash to get rid of YNAP if you add up the cash injected into the business, the funding of losses and the e-commerce platform switch of its brands, industry insiders estimate. If you talk about just YNAP, Richemont said the write-down of its net assets would amount to approximately €1.3 billion and the final figure would depend on Mytheresa’s share price when the deal closes.

It's unfortunate since Rupert strongly believes in the future on online retail – which he continues to call “New Retail” even though the Internet has been around for 25 years. The problem is that he never hired the right talents to succeed in that field nor does he understand that technology was a fast-moving world. It requires agility and is incompatible with the slow-moving, risk-averse and excessively hierarchical corporate culture he instilled in the group.

By contrast, LVMH owner-boss Bernard Arnault hired Apple executive Ian Rogers in 2015 to head up its digital business. He helped guide the world’s biggest luxury group to ride the disruptive Internet era, allowing LVMH to emerge as by far the biggest luxury player of the new age. Rogers then put LVMH front and centre at Europe’s biggest tech conference Viva Tech. Since 2020, Rogers remains an adviser to Europe’s richest man. Smaller luxury groups have sought to link tech and luxury in other ways. Remo Ruffini, Moncler owner-boss last month launched a collection designed by Apple’s former design supremo Jony Ive.

Richemont has been through several technology chiefs in the past ten years. The group takes a long time to make decisions. This was one of the many symptoms of how dysfunctional the group’s corporate structure was until the appointment of Nicolas Bos as CEO earlier this year.

MIGRATION

Mytheresa said that all the YNAP companies would migrate to the new e-commerce platform developed in-house which the German firm started using in April. “We have a technology platform that fulfills absolutely the requirements of Mr Porter and Net-A-Porter and it’s working,” Mytheresa CEO Michael Kliger told reporters in a conference call after the deal was announced.

Kliger said he believed the newly combined entity had the potential for annual growth of 15-20 percent. In the last five years, the top line average yearly growth rate was 19 percent, he noted.

“We expect that the integration will be a multi-year process,” Kliger said.

One question is what will happen to the fancy tech and logistical hub in Bologna on which YNAP spent tens of millions of euros. Mytheresa opened a new 55,000 square meter warehouse near Leipzig airport in September. It’s one of the many questions the company will need to address.

ONLY ONE

The Richemont-YNAP deal signals welcome consolidation in what was a very competitive and overcrowded market. It comes after the demise of MatchesFashion earlier this year and the implosion of Farfetch. The firm has been forced to sell many of its businesses since it was acquired by South Korea’s Coupang in December last year. In August, Farfetch discontinued FPS, its white label e-commerce service used by dozens of brands and retailers including Harrods.

Matches’ website now reroutes to Flannels, the online fashion retail business of Frasers Group, which bought MatchesFashion in December and refused to pay many brands for their stock after the company was placed into administration in March, as Miss Tweed reported at the time.

Like in the film Highlander, in the end, “there can be only one” with the last immortal standing being all powerful and getting “the prize.” It looks like Mytheresa will end up being the only online fashion operator still operating in a year or two as rivals fall by the wayside.

There are still a few players out there. There’s Canada’s Ssense whose future is looking uncertain due to its high losses. It has had to lay off a lot of staff in the past two years. Then there is Italy’s Luisaviaroma which got another capital injection of tens of millions of euros from Style Capital this year but it’s not clear how long it will be able to continue trading.

By acquiring YNAP, Mytheresa takes out a competitor. The plan could be for Mytheresa to continue focusing on Europe where it is now the dominant platform and for Net-A-Porter and Mr Porter to concentrate on the United States, one person close to the deal said. Mytheresa denied that was the case. “There is no plan to reduce the geographic reach of these brands,” a spokeswoman for the company said. Time will tell.

But what will happen is that Mytheresa will service the ultra-high end with its curated offering and NAP and Mr Porter will offer more accessible fashion and luxury brands. Mytheresa will gain access to NAP and Mr Porter’s base of affluent customers. That’s precious when you know how expensive it is to acquire and retain customers. Having bought out such a big competitor such as YNAP also means that Mytheresa will be able to corner the market in terms of price, particularly in Europe and the United States.

SEPARATION

Mytheresa said it was going to separate from YNAP the online platforms Yoox and the Outnet which sell collections from past seasons at discounts of up to 80 percent. The expectation is these will then be sold. Still, disentangling the e-commerce platforms of the two companies as well as the back-office, HR, finance, logistics and other functions is going to a long, painful and expensive process. That’s what the €550 million from Richemont will be partly spent on.

Kliger already hinted at significant job cuts when he said that they were going to be much “leaner” businesses. Several industry sources said the plan was to sell on Yoox and YNAP to a venture capital fund or another online business operator or shut them down if no one wants them. It’s clear that this was a pre-condition for Mytheresa to accept to acquire YNAP. The German company wants to focus on selling fashion and luxury at full price. It is essential to preserve those crucial good relationships with brands. Flannels owner has learned that the hard way too with its takeover of MatchesFashion.

Interestingly, Mytheresa said the off-price businesses were lossmaking but NAP and Mr Porter were profitable. It declined to give details about that or disclose what were YNAP’s total losses. We will find this out once the transaction is closed next year since Richemont will have to say how much it spent on financing the company’s losses.

Last month, Mytheresa said it was investing in China – a smart move considering the super competitive Chinese market will pick up eventually. It’s also timely considering YNAP pulled out in June. YNAP also closed its joint venture with Alibaba which was called Feng Mao.

Online luxury failures are mounting up for Richemont.

CRUCIAL CHINESE CLIENTS

Mytheresa said it had launched a WeChat Mini Program for Chinese clients. It offers a “curated selection of more than 180 of the most coveted luxury brands across the womenswear, menswear and kidswear categories.”

“The Mini Program will leverage all the famous service elements of Mytheresa with fast shipping directly from Europe, a constant offer of exclusive products and capsules, highly luxurious packaging and personal shopping services for the top customers,” the company said last month.

The success of the Mytheresa and YNAP deal will very much depend on how well it is executed. Investors hope that it will not be too much of a distraction for Mytheresa’s management. Online sales are down compared to those in boutiques. After being trapped inside their houses during the pandemic people prefer the “live” experience of shopping on the high street than on the Internet these days. Battling a severe downturn in luxury spending and handling a complex merger is going to be a challenge.