The Business of Fashion
Agenda-setting intelligence, analysis and advice for the global fashion community.
Agenda-setting intelligence, analysis and advice for the global fashion community.
LONDON, United Kingdom — Fashion e-commerce is a tricky business. Online luxury sales grew by double digits in 2019. By 2025, e-commerce will account for 30 percent of the luxury goods market, according to Bain. But despite the momentum, both digital heavyweights like Yoox Net-a-Porter and Farfetch, and luxury goliaths like LVMH, have struggled to make multi-brand e-commerce profitable.
"We haven't found a way to make it profitable," admitted LVMH Chairman Bernard Arnault at the group's 2019 results presentation in January, referring to its e-tailer 24S. "All of them are losing money," he said of competitors. "The bigger they are, the more money they lose."
And yet German luxury e-tailer Mytheresa has been profitable since its inception, when Susanne and Christoph Botschen took their Munich-based fashion boutique Theresa online in 2006. Now part of the troubled Neiman Marcus Group, Mytheresa generated €377 million in revenue in the year ending in June 2019, up 24.7 percent year-on-year, while growing EBITDA — or earnings before interest, taxes, depreciation, and amortisation, a measure of operating profit — by 50 percent.
Along with the inventory risk inherent in the traditional wholesale model, online players like Mytheresa must contend with several challenges. There's the logistical friction and cost of managing shipping and returns. And because most luxury e-tailers sell similar products, offer similar experiences and operate in a saturated market where competitors are just a click away and price comparison is common, they are often forced to engage in competitive discounting to drive sales. But the greatest challenge is poor return on high customer acquisition cost.
"Customer acquisition cost is the biggest element in your P&L and you can spend a lot of money without getting results," said Mytheresa Chief Executive and President Michael Kliger, a former McKinsey & Company consultant turned eBay executive who joined the business in 2015.
A big part of Mytheresa’s success comes down to discipline and scale. The company hasn’t pursued the rapid, marketing-fuelled growth that has derailed competitors. But as the e-tailer eyes expansion in Asia and the US, it will need to spend more money to acquire new customers. Can Mytheresa take things to the next level and stay profitable?
Customer focus and a golden metric
Mytheresa’s 'secret sauce' starts with solving the customer acquisition conundrum by better understanding how and where to invest marketing spend. The company has a singular focus on acquiring the right customers and has built sophisticated attribution models to understand as early as possible exactly which customers are worth engaging and which aren’t.
Competitors have similar techniques for evaluating the value of the traffic they acquire. But while many fashion e-commerce players optimise their marketing to deliver immediate sales revenue, Mytheresa is sharply focused on a different metric: customer lifetime value, or the net profit a company believes it will generate from its entire future relationship with a customer.
Mytheresa is not targeting aspirational shoppers who purchase a trendy piece and never come back. It’s after wealthy fashion lovers who have a high propensity to become valuable long-term clients. Typically, they are cash-rich but time-poor, and value curation and convenience.
We have tried to understand which traffic brings what type of customer.
To identify these people, Mytheresa has spent significant time analysing clues to predict future behaviour, like how a customer came to its website, as well as early interactions with certain product categories and brands, initial purchases, payment method and home address.
“We have tried to understand which traffic brings what type of customer, because there is a customer that buys a pair of sneakers who then continues spending a lot over the next couple of years and there's another type of customer who buys that same pair of sneakers and nothing happens — that's probably the only luxury piece they will buy for some time,” explained Kliger.
“What ad did that person click to get to our website? What are the first three products? Already the probability machine starts saying: what’s the fourth product and is that good or bad?”
Machines that can find patterns, establish correlations and infer probabilities from large data sets are extremely powerful. But trend-driven markets like fashion are dynamic and complex, and Mytheresa’s models need constant fine-tuning to keep working.
“It’s really not finding the one algorithm; it's the ability to constantly work on this,” said Kliger. “Ten years ago, a person who looked at sneakers would have perhaps not been a luxury customer. Five years ago, someone that looked at a certain brand would have said, ‘That's too classic.’ And now the same brand is extremely fashion-forward. So, the clues are not constant.”
Less is more, small is beautiful
Like competitors, Mytheresa relies on expert buyers such as Tiffany Hsu, the company’s fashion buying director, to know what’s likely to ignite desire next season. “They're not following suggestions on spreadsheets,” said Kliger. “They’re going into the showroom and trying to understand: Is this an exciting product? Will that product sell?”
But the company’s laser focus on serving a specific, high-value customer has resulted in a clearly defined, high-end positioning and tightly curated, highly productive buys. “Sixty-five percent of the business is based on 30 top brands,” said retail consultant Robert Burke.
“In e-commerce, the other big trap is the endless aisle,” explained Kliger. “You have no physical walls to otherwise force you to think hard about what you buy. This may work for Amazon, but in luxury fashion, the belief that ten more products mean more revenue is a fallacy.” Fewer SKUs also drive operational efficiencies like lower photography requirements.
“We don't want another group of customers; we want this customer,” said Kliger. “What can we offer to this customer that she will also like? What are the key brands? What are the right features on our website? With this kind of ruthless thinking, you decomplicate the whole thing.”
For the wealthy shoppers Mytheresa is targeting, time is perhaps the most valuable currency of all and its customer experience is primarily focused on convenience. The company has forgone the more editorialised approach adopted by competitors like Net-a-Porter and was early to go mobile-first. “Everything we do caters to the fact that she has no time,” said Isabel May, Mytheresa’s chief customer experience officer and managing director.
By virtue of its high-end clientele, Mytheresa has developed close relationships with top luxury brands and regularly secures exclusive capsule collections from sought-after labels. "Brands have a very positive view of them, so they get a lot of exclusive product," said Burke.
But perhaps most critically, Mytheresa has been disciplined about growth. The company has not chased the rapid, marketing-fuelled expansion that has hurt profitability at larger competitors.
“They have a very clear point of view; a very strong positioning compared to the larger players,” explained Burke. “And because of their size, they are able to stay focused. They haven’t tried to grow beyond their ability. They have been very nimble, specific and thorough.”
The pandemic and a post-Neiman future
Like competitors, Mytheresa has been hit hard by the Covid-19 pandemic, which has crushed consumer demand and disrupted operations across the luxury industry. But the e-tailer was lucky to be a digital business based in Germany, where its warehouses kept running even as competitors like Net-a-Porter were forced to shut facilities.
Kliger reports “a big, big negative” in the US, but sees “clear green shoots” in China and South Korea, as well as positive momentum in Europe — especially in Austria, Switzerland, Germany and the Netherlands — where the company generates more than half its revenue.
At the same time, luxury brands are doubling down on their own direct-to-consumer sales channels and pulling back from wholesale. But Kliger is unperturbed. “Our customer is not the customer that goes to 50 boutiques on one street, nor will she go to 50 dot coms,” he said. “In a €50 billion online luxury market, I do not believe there's one model. Consumers want choice.”
Consumer spending is likely to lag a rebound in wider economic activity as the pandemic takes a psychological toll on shoppers, with serious implications for fashion, which depends on optimism to drive discretionary purchases. And yet, the pandemic may also deepen economic inequality and tip the fashion market towards e-commerce, playing to Mytheresa’s strengths.
If you think about customer relationships, revenue will follow.
The company is significantly underpenetrated in China and the US, the world's largest consumer markets, and only launched childrenswear in early 2019 and menswear this January, giving it significant scope for future growth.
And yet there are hurdles ahead. “They have very little brand awareness in the US and will need to really spend on customer acquisition to compete against larger players,” noted Burke.
Then, there's the issue of Mytheresa's owner. The debt-laden Neiman Marcus Group, which also owns Bergdorf Goodman, filed for bankruptcy in early May. Mytheresa is controlled by a corporate shell and is not part of the Chapter 11 proceedings, though the e-tailer's ownership has been contested by two lenders which filed separate lawsuits, in 2018 and 2019, claiming Neiman Marcus, at the direction of private-equity owner Ares Management, inappropriately transferred Mytheresa to its corporate parent, beyond the reach of debtholders.
The first lawsuit was dismissed in early 2019; the second has been stayed for the duration of the bankruptcy process. But issues surrounding the transfer were recently the topic of a six-hour hearing in bankruptcy court and seem unlikely to disappear.
According to a filing with the US Securities and Exchange Commission, Neiman Marcus began exploring strategic options for Mytheresa in April 2019, soon after an estimate by Goldman Sachs valued the business at $1 billion, a figure that analysts said was justified by the company’s high-luxury positioning and growth potential.
LVMH has signalled its disinterest in multi-brand e-commerce, while Richemont has its hands full with Yoox Net-a-Porter. But Mytheresa could be a compelling target for a tech giant lacking a presence in the luxury market, a physical retailer that has struggled to develop its own online operations or a private equity firm, said luxury adviser Mario Ortelli.
A deal has yet to materialise, however.
“Our owners were looking for strategic alternatives from IPO to selling the company,” confirmed Kliger. However, the economic and financial gloom brought about by the pandemic has put things on pause, he said. “We won't do anything at the moment.”
Neiman Marcus Group Inc, which owns Mytheresa, remains untouched by the Chapter 11 proceedings. But theoretically that could change, triggering a change in shareholding. “What happens at the moment in the US may be a catalyst for change or may not be,” said Kliger.
For now, the company remains focused on assembling “the largest list of active luxury customers and relationships around the world,” he said. “If you think about revenue, you are already in the danger zone. But if you think about customer relationships, revenue will follow.”