The Business of Fashion
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NEW YORK, United States — Some of the luxury market's biggest competitors are teaming up in a bid to dominate China's booming online market for high-end watches, jewellery and fashion.
On Thursday, Farfetch announced that it will form a new joint venture in China with tech-giant Alibaba. As part of the deal, Alibaba and Swiss luxury group Richemont have invested $300 million each in Farfetch, plus $250 million each in a new joint venture, Farfetch China. They'll own a combined 25 percent stake in the new unit, valued at $2 billion, with the option to acquire another 24 percent. The Pinault family, owner of French luxury conglomerate Kering, has also upped its current stake in Farfetch by an additional $50 million through its investment vehicle Artémis, which first invested in the company at its 2018 IPO.
The deal is a major sign of support for Farfetch, cementing the marketplace's status as the leading player in the online luxury market. It also could mark the start of a long-awaited consolidation in the space, where numerous small and mid-sized websites compete for the same pool of wealthy consumers. The biggest loser in the deal could be Yoox Net-a-Porter Group, which has seen its owner (Richemont) and Chinese partner (Alibaba) invest in its biggest rival.
On a call with reporters Friday morning, Richemont’s chairman, the South African billionaire Johann Rupert, said he had long hoped the luxury sector would move to a neutral, shared e-commerce platform where brands could maintain control of how their products are presented.
“This is not some land grab or power grab. This is trying to set up a hybrid platform that will be attractive for all partners,” Rupert said.
Farfetch, which operates a marketplace model, has seen sales soar during the pandemic, reporting $721 million in gross merchandise volume in the second quarter, a 48 percent increase from the same period last year (the platform takes a commission on these sales).
Farfetch stock hit an all-time high this week after media reports on the impending investment on Monday, as investors interpreted the deal as a vote of confidence in the platform, which has yet to turn a profit. On Friday, Chief Financial Officer Elliot Jordan said the company remains on track to become profitable in 2021.
"This is without a doubt excellent news for Farfetch," Bernstein analyst Luca Solca wrote in a note, highlighting that Farfetch now has the backing of two Chinese internet giants, Alibaba and Tencent, and two luxury giants, the Pinaults' Artemis and Richemont.
As part of the new investment, Farfetch will open shops on Alibaba’s luxury platform Tmall Luxury Pavilion, its luxury outlet platform Luxury Soho and its cross-border marketplace Tmall Global — quickly expanding its reach in Asia, the world’s fastest-growing luxury market. While 400 luxury brands already have stores on Tmall, Farfetch argues the overlap will be insignificant as it will be onboarding global inventory, while luxury brands mainly offer local inventory on the platform.
Farfetch previously gained inroads with Alibaba rivals Tencent and JD.com, an early investor.
As a result, Farfetch will close its storefront on JD.com, which opened about 18 months ago. “It did not ramp us as we expected,” Neves told analysts on Friday. The Farfetch teams that were dedicated to its business on JD.com will shift their focus to Tmall. But Farfetch will retain its relationships with Tencent via its presence on WeChat, where it works with 90 luxury brands via its subsidiary, the marketing firm Curiosity China. Neves said the platform remains key to building brand awareness in China.
In addition to a major leg up in China, Farfetch will also benefit from a closer partnership with Richemont and Kering (via Artemis) as luxury brands continue to invest more in mono-brand e-commerce to better control their client relationships and brand equity.
Before this investment, Farfetch had no relationships with Richemont or any of its brands, in contrast to the range of partnerships it has developed with Kering and LVMH brands in recent years, as well as with Burberry and Prada.
Farfetch also offers white label services (supporting brands with technology and logistics on the back-end). The deal sets it up as the go-to technology provider for luxury brands, a role Yoox previously held. Kering formed a joint venture with Yoox in 2013, and the company, which later merged with Net-a-Porter, operated its mono-brand websites until the group started to unwind that partnership in 2018. Moncler also exited a similar deal in July.
“The biggest opportunity for the next ten years in luxury is powering the conversion of physical and digital retail,” said Neves in the analyst call on Friday, explaining that Alibaba agreed that there are more opportunities in their partnership than just e-commerce.
To that point, Farfetch plans to expand its "store of the future" product, an 'operating system' for physical retail, after its exclusive partnership with Chanel ended in September. The technology will next be applied at Browns, the London department store Farfetch acquired in 2015.
The investment also brings together two luxury rivals, Richemont Chairman Johann Rupert and Kering Chairman and Chief Executive François-Henri Pinault, who will join Neves and Alibaba as representatives on a committee that will aim to "[lead] the digitisation of the global luxury retail industry," according to a release from Farfetch, and explore new ways to integrate digital technology into luxury retail.
Both Richemont and Kering are substantial in size but nowhere near the scale of LVMH. Analysts have speculated about the advantages of closer ties — or even a merger — for years. While Kering has seen exceptional growth in recent years through Gucci and Saint Laurent, the group has also been on the hunt for new growth opportunities.
While Richemont and Kering’s shared interest in Farfetch’s new initiative could suggest more conversations to come between the two rivals, the Swiss company said it would not go so far as a sale or merger.
“Richemont is not for sale,” Rupert said in a call with reporters Friday morning.
The company would continue, however, to form partnerships in specific areas as it has for e-commerce and eyewear manufacturing. “We’re not interested in mergers. But we’re prepared to do deals as long as they make commercial sense. We don’t have, like some of our competitors, mortal enemies in the sector,” he said, in a thinly veiled reference to LVMH.
Friday morning, Richemont reported that sales had improved over the summer, with its jewellery division growing 7 percent year-on-year (excluding currency shifts) from July through September. Overall sales remained down 2 percent.
Richemont has underperformed Kering and LVMH in recent years. The company's stock has dropped 15 percent over the last five years, while shares of LVMH and Kering have increased by 197 percent and 260 percent respectively.
The Swiss company’s problems stem from its YNAP unit, its portfolio of fashion brands and its exposure to luxury watches.
Its stable of jewellery brands, including Cartier and Van Cleef & Arpels, now drive more than half of revenue as well as the vast majority of its profit. But that category dominance is now being threatened by LVMH, which has seen success with its 2011 Bulgari acquisition and will further establish its position in the space with its pending acquisition of Tiffany.
In addition to being a challenger in jewellery, LVMH could be a key wild-card in the luxury e-commerce race. Its own multi-brand e-tailer, 24S, has gained little traction since launching three years ago.
“We haven’t found a way to make it profitable,” said LVMH Chairman Bernard Arnault at the group’s 2019 results presentation in January, referring to 24S. “All of them are losing money,” he said of competitors. “The bigger they are, the more money they lose.”
Instead, the group has mostly been reducing its brands' exposure to multi-brand sites. Its massive Dior and Louis Vuitton brands do not sell on multi-brand sites at all, and even smaller labels like Celine have ramped up the focus on their online flagships. But should the group reverse course on pulling away from multi-brand, its scale would put it in a position to make investments that might dwarf Kering and Richemont's footholds in the space.
Richemont’s investment in a direct competitor of YNAP also calls into question its strategy for that business, which competes with Farfetch for customers. Their business models are different, however: YNAP is a majority wholesale business known for its brand and curation, while Farfetch operates a marketplace model that connects luxury brands, boutiques and customers, and offers a wider product selection.
Rupert said he was attracted by Farfetch’s strength in technology, while he sees YNAP’s strength lying in curation and managing relationships with luxury brands.
“This is not a vote of no confidence in YNAP. I think YNAP will continue to have an important role to play,” Rupert said.
No deal is underway to spin off the e-tailer or combine it with Farfetch at this stage, he said. But he hardly seemed committed to maintaining complete control. “We were never hell-bent on owning 100 percent of YNAP,” he said.
Alibaba and Richemont first formed a joint venture to expand YNAP's reach in China in 2018, the same year Richemont fully acquired the luxury e-tailer. Since then, YNAP has struggled with botched technology investments, high customer acquisition costs and excess inventory. The challenges grew in 2020 when YNAP was forced to temporarily close some of its warehouses due to the pandemic. Losses in Richemont's online distributors group in the year ending March 2020 were €241 million ($285 million).
After a long string of upper management exits, YNAP Chief Executive Federico Marchetti announced his departure in March, but a replacement has yet to be named.
Back in 2015, Net-a-Porter Founder and then-Chief Executive Natalie Massenet proposed a merger with Farfetch to Richemont, according to sources familiar with the discussions, but Richemont partnered with Yoox without first seeking Massenet's approval. The deal resulted in the exit of Massenet, who later joined Farfetch as a co-chairman in 2017. She stepped down from that role in August.
Could a strategic partnership between Farfetch, with its modern model, and Net-a-Porter, with its strong brand identity, be another step in the industry’s consolidation?
“It would be an ideal way out for all parties concerned,” said Solca in an email to BoF.
Additional reporting by Lauren Sherman and Robert Williams.
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