Last week marked not but two major fashion e-commerce deals, in which FarFetch and Matches found new owners. FarFetch was bought by Coupang, aka the Amazon of South Korea, and Matches was bought by Frasers, a large British mass market retailer. Both deals were an embarrassment for the luxury e-tailers, valuing them at a fraction of what they were worth not so long ago. In essence, they were rescue operations. This prompted a slew of reflections from the fashion commentariat about the death of luxury e-commerce. This is wishful thinking, of course, but the two deals mark a good time to reflect on what’s going on in the retail segment of the fashion industry.
First, the details. FarFetch, whose stock price was less than $1 as of late, down from $71 two years ago, was bought for an undisclosed sum (I’m assuming it was a symbolic $1), but the point is that it is injecting $500 million into the company, which would otherwise go bankrupt. Believe it or not, this is not that much considering how much money FarFetch has been hemorrhaging – $1 billion in the last couple of years, according to Bloomberg – but it should tie FarFetch over for the foreseeable future. Matches was bought for $63 million from Apax Partners, which in 2017 bought it from the company’s founders for – ready? – a cool billion.
Both deals screwed with my prediction about a year ago about the coming wave of falling e-commerce dominoes. My money was on Matches, though FarFetch beat me by one day. Why I chose Matches – well, any time you see a big company quiet about its earnings, there is your sign – and Matches has been quiet for a long time.
Of course neither has technically fallen, although by market logic they should. But luxury fashion is a funny industry. Just like that unreasonable amount you are willing to spend on a designer handbag, many of these companies that operate in the luxury segment are covered in that trophy property sheen. Coupang and Frasers have no experience in the luxury segment, and the fact that each brought in a private equity partner along for this ride confirms that. But, just like in life, in business the desire to trade up is irresistible. Still, the two luxury lemons now in their possession will need a lot of fixing to do.
FarFetch is an easier lemon to squeeze. Everyone who has followed the company on the business side knows that they had no business expanding outside of their core competency, e-commerce. Usually, when a company begins growing horizontally, it means that it has lost at least some faith in its ability to scale its core competency. Jose Neves, FarFetch’s founder, has clearly imbibed the Silicon Valley’s growth-at-all-costs Kool-Aid and ended up with Browns (what on earth for?), Stadium Goods (actually, OK), and the New Guards Group, for which he paid through the nose just before it nosedived. This is not entirely his fault – many tech(y) industries chased the Amazon model, forgetting that there is only one Amazon. The solution to realigning FarFetch is also a fairly standard investment industry practice – it will be chopped into those bits that will be sold off at a steep loss so it can concentrate on e-commerce. But will this strategy work when FarFetch charges a ridiculous 27% commission, forcing independent stores to raise prices on its platform, and thus essentially making itself uncompetitive? In the time of zero customer loyalty (see below), this is highly doubtful.
Matches is a trickier one to examine. No one has really followed what happened there, except that it has been burning through cash like the great 1666 fire through the wooden shacks of London. Last year, even though it had a revenue of nearly a billion dollars, it still managed to lose nearly $50 million. All I can say is that looking at Matches over the years, I found it increasingly, utterly, mind-numbingly boring. It was a store that had no point of view, a generic luxury mall a la La Samaritaine, but without the pretty building and the LVMH heft. I imagine Frasers bought Matches “on the cheap” for its brand recognition and established brand relationships. After all, not every shop can get Gucci, Bottega, and Saint-Laurent. But I find it hard to believe that Frasers is capable of turning Matches around without spending mind-boggling amounts of money on marketing, which is one of the things that sank FarFetch.
FarFetch and Matches are not alone in the luxury e-commerce pit of woe – the malaise is general. Net-a-Porter hasn’t made money in ages. From what I’ve been told, Ssense is constantly teetering on the edge. Though Ssense does have a point of view and an esthetic, it does not bode well for a store to have its sale become industry lore. Even the well-run MyTheresa reported a significant slowdown in revenue growth, and its stock price is trading at a 70% discount from its IPO day. Luisa via Roma seems to be chugging along, but they do have a physical store in Florence, and it is supposedly opening one in New York (good luck with that).
What’s going on here and what does it bode for the future? Well, one thing is that the luxury e-commerce industry has shot itself in the foot by chasing growth at all costs. It offered free shipping and free returns, and customers pounced on it, with return rates sometimes reaching 50%. It overspent on online marketing, enriching Google and Meta in the process, and incurring heavy losses. It dove headlong into the industry that has become impersonal, resulting in the customer loyalty rate close to zero. It vastly underestimated the luxury shopping experience.
And luxury shopping is an experience. It’s an experience of walking into a store, often on vacation, of browsing, of trying on, of chatting with a salesperson, of getting a coffee or a water, of walking out with a nice shopping bag and strolling with it in the streets to the glances of passersby. Have you ever bought a $70 lipstick at Hermés and got that lovely, crisp, orange bag that has drawn stares in the street? If you haven’t, try it. I bet it feels good.
What you get from a website is inevitably the same thing – a box and an envelope that comes to your house (sure, you can post it on Instagram, but in the age of simulacra and simulation, do people still care?). And no matter how nice the box is, it just doesn’t measure up to the IRL experience (granted, there are plenty of crap luxury IRL shopping experiences to be had). E-luxury websites increasingly look interchangeable. Who, then, can expect customers to remain loyal to them? The only thing the e-tailers have become good for is comparison shopping to get the best deal.
What will be the end result of the industry’s reshuffling? First and foremost, the nature of online shopping will have to change. There is just no way any but the biggest of luxury e-commerce can continue eating the profit-killing costs of returns. The free shipping party may end as well, and there will be many more “final sale” notices. Of course this will make the luxury consumer more cautious, and will most likely drive her further towards brick-and-mortar. Which may result in a good scenario and a bad scenario.
The good, though less likely, is that the lack of interest in e-giants is a signal that when it comes to luxury people still prefer brick-and-mortar shopping, and that maybe we will see the return of the local multi-brand boutique where the owners know what they are doing. We have seen this with bookshops, so maybe there is a chance for fashion, too. The bad scenario is that these falling dominoes are just another sign of how hard the grip of corporate fashion is on the industry. Maybe e-tailers have suffered not because they are not selling enough, but because they are barred from selling a handful of the most premium brands, the only ones that seem to be doing well, online and off. Sadly, I think it’s the latter.
