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urning around Yoox-Net-A-Porter (YNAP) is the biggest challenge José Neves faces since launching Farfetch in 2008. The CEO of the luxury marketplace is walking a tightrope. Farfetch’s image and credibility in terms of strategy and execution are at stake. If Neves can’t improve the fortunes of the online fashion and luxury retailer, it may be that no one can.

Five weeks after Farfetch announced the long-awaited deal to take on YNAP, the 48-year-old Portuguese entrepreneur is already working on preparing its integration. Farfetch has agreed to buy 47.5 percent of YNAP from luxury group Richemont and committed to buying a further majority stake if the online fashion and luxury retailer becomes profitable in three to five years from now.

Turning the business into a profitable venture is not easy. For Neves and his teams, the plan is to focus on the technology aspects of the deal first and worry about changing YNAP’s business model and corporate culture later. The transaction still needs to get regulatory clearance too, which could take five to eight months.

Right now, Neves’ teams are working on re-platforming YNAP’s online businesses with Farfetch’s e-commerce technology. This alone is not a straightforward task. YNAP is made up of four companies: the online fashion wholesalers Net-A-Porter and Mr Porter and discount retailers Yoox, based in Italy. Then there’s the Outnet which operates out of the UK.

Online luxury retail is one of the most vibrant segments of the global luxury goods industry, with annual sales growing at 15-20 percent a year on average since the pandemic. The technology needed to make it work is complex, but Farfetch appears to have won the race on that front, competing head-on with giants such as Amazon. Farfetch has invested a lot of money into artificial intelligence, stock management software and cross-border shipping as has its arch-rival. Neves’ technology is considered best-in-class in the online fashion industry by specialists. That is why Richemont Chairman Johann Rupert chose Farfetch to fix YNAP. The company’s problems have stemmed in part from having failed to crack the technology aspects of e-commerce, as Miss Tweed was first to report in October 2020.

BUSINESS MODEL

Once YNAP’s re-platforming is on track – a delicate process likely to last more than a year senior Farfetch sources say – the next thing Farfetch will have to work on is YNAP’s business model and profitability. Farfetch needs to figure out how to make Net-A-Porter (NAP) and Mr Porter evolve from a wholesale to an e-concession model. How long this process will take is a top concern for Farfetch investors. “We have very little visibility on that front,” one long-term investor told Miss Tweed on condition of anonymity.

E-concession means that the online fashion retailer holds a brand’s stock in its own warehouse, but at the same time the brand still owns that stock and controls image and the price of its products. Wholesale, on the other hand, is when a multi-brand retailer such as NAP buys stock from a brand and sells it online. The online retailer owns the stock and can do whatever it wants with it, such as selling the stock at big discounts, something brands often fear because it can harm their exclusive image.

For example, when a collection becomes out of season a few months later, items not sold at full price are offloaded at a discount via The Outnet and other discount retailers. This is the business model NAP has been using ever since Natalie Massenet founded the company in 2000. However, in the past three years, NAP started letting brands sell handbags and shoes on its website on an e-concession model. It’s a good move. It is also what big brands like Gucci want as they work to tighten control over their pricing and brand image and cut the number of wholesalers they work with.

Still, for NAP, that means it needs to downsize the number of wholesale buyers it employs and invest in people excellent at building relationship with brands and promoting their goods.

Since the beginning of the year, Kering has demanded online wholesale websites such as NAP, Mytheresa and MatchesFashion only sell its brands through e-concessions, a senior industry source told Miss Tweed. This applies to Gucci but also to sister brands Balenciaga, Saint Laurent and Alexander McQueen. Another major brand expected to demand the same is Moncler, the source said. Prada and others could follow suit. Kering and Moncler refuse to comment on such internal online policies.

On an e-concession model, the margin the online fashion retailer makes is much smaller than wholesale, around 30-35 percent versus 40-45 percent on a wholesale model. That is why NAP’s cost base will have to come down if it wants to become profitable again since revenues from wholesale will decline. Comparatively Farfetch’s marketplace model takes a commission estimated at around 20-25 percent. In a marketplace model, the brand or the multi-brand retailer puts online its digital catalogue but it generally ships the product to the customer unless it has agreed to put its stock with Farfetch. Farfetch now makes more revenue from brands on an e-concession basis than from boutiques using the marketplace model, the company said.

CREATIVE TALENT

The only problem is that to increase sales, NAP will have to make significant investments, not only in brand marketeers but also in creative talents who can write beautiful and inspiring stories and publish relevant videos that will make consumers want to spend time on the Net-A-Porter website and pull out their credit card. The problem is that editorial content is not Farfetch’s forte. The good news is that Farfetch knows that, company insiders say.

When you look at the originality and richness of the content on rival wholesalers such as Germany’s Mytheresa and Canada’s Ssense, you understand why NAP is trailing behind and has become a shadow of its former self. The landing page of NAP looks quite bland compared to theirs. The website quickly goes into long lists of products while MyTheresa offers more curated looks and different ways of wearing things while Ssense publishes off-the-wall, zany stories about personalities, art and social trends on top of looks people can shop.

Smaller rivals can provide inspiration for Farfetch. In 2021, Californian private equity firm Sequoia Capital took a minority stake in Canada’s Ssense in a deal that valued the Montreal-based online retailer at more than CA $5 billion. As part of the deal, it hired Angelica Cheung, Vogue China’s former editor, to help expand in the Middle Kingdom and invade Farfetch’s and YNAP’s turf where the two companies have big ambitions. Asia represents around 30 percent of turnover for Farfetch.

While Farfetch will help NAP expand its e-concession deals with brands, the retailer will no doubt retain a wholesale business, albeit smaller than before. That’s because small brands prefer to work on a wholesale basis than on e-concession basis. The latter allows them to turn collections into cash quickly while on an e-concession basis, they only get paid once a product is sold.

The fashion and luxury industry is closely watching what Farfetch does with NAP. Industry observers wonder what will happen to British online retailer MatchesFashion. The business has been lossmaking for nearly three years now. Its controlling shareholder, the private equity firm Apax, has been losing patience and changing CEO every other year to try to reverse its fortunes without much success. Apax bought MatchesFashion in 2017 for $1 billion after a fierce bidding war against rival private equity firms. Now it is trying to figure how to sell it as no one is hurrying to buy it. Comparatively, Mytheresa is profitable and upgraded its guidance earlier this year. Since its New York flotation in January 2021, the company’s share price has lost around one third of its value. However, it is a less spectacular drop than Farfetch’s share price which went from $73 in 2021 to below $10 where it still lingering today. Mytheresa’s growth prospects remain strong and the company signed this year a series of smart partnerships with second-hand specialist Vestiaire Collective that will widen the customer base of both companies.

RETAIL ENTERTAINMENT

When Natalie Massenet founded Net-A-Porter she created a concept called “retail entertainment.” She made it fun to shop online. Customers discovered new brands and looks and loved learning about fashion’s movers and shakers and reading about fascinating personalities.

NAP helped young-up-and-coming brands get noticed and the website grew into a fashion authority. When Richemont, NAP’s main investor for many years, sold control of the company in 2015 to Italy’s Yoox, NAP embarked on a downward spiral. Massenet, who was not informed of the transaction nor consulted about it, jumped ship. Rapidly, the people she had hired who had made the company a success also walked out. The center of power moved to Italy and employees who remained at NAP became depressed after having lost their inspiring leader and her lieutenants. People often forget that what’s important is not the company you work for but the person who is going to be your boss. That is what makes all the difference. Richemont did not think about the human aspect of Yoox-NAP deal.

Yoox thought NAP’s editorial creativity was not that important. It killed Porter magazine which published portraits of inspiring and free-spirited women and helped strengthen NAP’s image and credibility as a fashion curator and barometer.

Adding to its woes, NAP adopted Yoox’s technology which turned out to be a disaster. Farfetch is going to fix the company’s technology problems but it will also need to help the website regain its editorial strength. That means it will have to spend quite a bit of money recruiting people who can bring back some of NAP’s lost magic. But who’s going to apply to work for a company that has suffered so much and where moral is low? That is one of the many issues Jose Neves will have to think about.

The same goes for Mr Porter whose editorial is also no longer what it was. Today, the website carries long articles with “words by” and no description about the author. Men don’t visit Mr Porter to read long articles but to find out about what’s new and exciting in menswear. Farfetch also knows that too, senior managers at the company say.

YOOX AND THE OUTNET

Another item on Farfetch’s long to-do list is fixing Yoox and The Outnet. The two online retailers sell out-of-season stock at heavily discounted prices. Farfetch CEO José Neves thinks that “outlet” has become a dirty word for brands as discounts harm their image.

Neves plans to rebrand Yoox and turn it into a destination for circular fashion. He wants it to become a website selling vintage and pre-owned items, a senior Farfetch executive told Miss Tweed. Yoox will become an "end-of-cycle and circular fashion” online retailer, the executive explained. Farfetch wants to relaunch the Yoox brand with a new logo, aesthetics, and ethos. It is also considering injecting in it some stock from The Outnet as well as some of Farfetch’s catalogue of pre-owned goods. It is still early days but that is the plan, the senior Farfetch executive said. But as to whether Yoox and The Outnet could eventually be merged, it’s not clear yet.

WHY A GOOD DEAL?

As part of the agreement with Richemont, Farfetch will re-platform most of the Swiss luxury group’s 20 brands from Cartier and Van Cleef & Arpels to Chloé, IWC and Vacheron Constantin. That represents another major construction site on which execution will have to be irreproachable.

Richemont’s brand will also have to agree to sell on the Farfetch marketplace. Some jewelers such as Van Cleef & Arpels are not very fond of e-commerce to begin with and are not particularly keen on selling their Alhambra sautoirs and necklaces that can cost €2,000 to €7,000 next to other brands, managers at VCA have told Miss Tweed. But the French brand does not have much of a choice. “The deal is not complete until all the maisons sign a contract with FPS (Farfetch Platform Solutions) and the marketplace agreement and commit to a launch date before the deal is completed. So right now, there are negotiations,” a person close to Farfetch told Miss Tweed.

With YNAP, Farfetch will double in size in terms of gross merchandise value (GMV). Investors and analysts estimate that it will inherit around €2.5 billion in GMV from YNAP itself and another €1 billion in turnover from Richemont’s brands selling online.

Once they do the maths, investors understand that Farfetch is actually paying very little for YNAP since it will receive in incremental business and profits an amount roughly equivalent over time to what it will pay for the company in shares once the deal closes and once it acquires the remaining controlling stake in YNAP.

Farfetch will also inherit a business with no debt, with €290 million of cash on its balance sheet and it will be able to draw on a 10-year €450 million credit facility to fund YNAP’s losses should there be any in the future. The deal is an excellent one for both Farfetch and Richemont. It aligns the interests of both companies. The priority now is ensuring a smooth transition from a technological point of view and putting back some enthusiasm into YNAP’s teams. That may take some time but José Neves is confident he can pull it off.